Overview of Labour Audit Process
A labour audit in Nepal is a systematic review of an employer’s compliance with labor laws, including employment contracts, wage structures, workplace policies, and employee rights. It is conducted to verify that businesses adhere to the Labour Act, 2074 (2017) and Labour Rules, 2075 (2018). The audit evaluates the employer’s practices against statutory requirements, such as minimum wages, work hours, leave policies, and occupational health and safety. Labour audits help ensure fair labor practices and prepare businesses for inspections or future disputes. It is generally done internally or with the help of external consultants or auditors specializing in employment law compliance. Medha Law and Partners Is a leading law firm in Nepal.
Eligibility for Labour Audit Procedure
All employers who fall under the scope of the Labour Act, 2074 are eligible for a labour audit. This includes private companies, non-governmental organizations, and institutions with ten or more employees. According to Section 100 of the Labour Act, organizations are encouraged to regularly assess their internal labor practices through structured audits. While not legally mandatory for all organizations, it is considered a best practice to identify non-compliance risks and rectify issues before regulatory scrutiny. Employers operating in high-risk or heavily regulated sectors such as manufacturing, construction, or export industries often undergo labor audits more frequently.
Step-by-Step Labour Audit Timeline
A standard labour audit procedure follows a structured timeline. The process typically spans across 2 to 4 weeks, depending on company size and documentation readiness:
- Week 1: Appointment of audit consultant and planning
- Week 2: Review of employment records and internal policies
- Week 3: Interviews with HR and departmental heads
- Week 4: Compilation of findings and reporting
Delays may occur if records are incomplete or cooperation from departments is limited. A defined audit plan ensures timely execution and minimizes workplace disruption.
Appointment of Auditor or Consultant
Employers may appoint a certified labor law consultant, legal advisor, or firm to conduct the labour audit. The appointed auditor should have in-depth knowledge of the Labour Act, Social Security Act, and employment regulations. Companies may also form an internal audit committee, although third-party auditors offer objective assessments. The appointment must be confirmed in writing, including the auditor’s scope of work, timeframe, confidentiality clause, and reporting obligations. It is advisable to select auditors who have experience in labour compliance, payroll systems, workplace health and safety, and contract management.
Key Areas Audited During Review
Labour audits in Nepal typically focus on the following key areas:
- Employment contracts and terms of service
- Minimum wage and overtime compliance
- Leave records (sick, annual, maternity)
- Payment of social security contributions
- Occupational health and safety practices
- Internal grievance redressal mechanism
- Records of hiring, termination, and severance
- Workplace harassment policies
Labour Audit Checklist for Employers
Employers should use the following checklist to prepare for a labour audit:
- Updated employment agreements for all staff
- Salary sheets and pay slips
- PAN and SSF registration records
- Attendance and leave register
- Workplace safety policies
- Employment policies and procedures manual
- Grievance handling procedures
- Labour record book maintained under Rule 4 of the Labour Rules
- Social Security Fund deposit proof
This checklist ensures readiness for audit review and compliance confirmation.
Labour Act Guidelines to Follow
During an audit, the employer’s practices are evaluated in accordance with these Labour Act guidelines:
- Section 10: Employment agreement requirements
- Section 32–33: Working hours and overtime
- Section 41–49: Leave entitlements
- Section 56–60: Occupational health and safety standards
- Section 72–77: Social Security obligations
- Section 94–95: Settlement of labor disputes
- Section 100: Labour inspection and record-keeping
Following these guidelines protects the employer from potential legal exposure and promotes employee welfare.
Required Reports and Documentation
Specific reports and documents are required for labor audit verification. These include:
- Monthly payroll summaries
- SSF contribution receipts and employee register
- Tax deduction and deposit records
- Appointment and resignation letters
- Annual leave and sick leave tracking sheets
- Health and safety incident reports
- Internal audit or HR reports
- Employee feedback or grievance records
Auditors use these documents to validate practices and ensure regulatory compliance.
Internal Review Before Final Audit
Before the formal labour audit, employers may conduct an internal review. This helps identify issues and prepare documentation. The internal review should be coordinated by the HR department and may include:
- Verifying the accuracy of salary and attendance records
- Ensuring contract validity and signatures
- Reviewing health and safety compliance logs
- Confirming timely SSF deposits
- Inspecting disciplinary action records and policy implementation
This proactive step allows employers to address irregularities before external scrutiny.
Labour Audit Reporting Standards
Labour audit reports must be comprehensive and formatted clearly. A standard audit report includes:
- Executive summary of findings
- Summary of applicable legal standards
- Assessment of each audit area
- List of non-compliances and recommended corrections
- Supporting evidence and documents
- Auditor’s conclusion and certification
These serve as a compliance record for future labor inspections.
Cost Involved in Audit Process
The cost of conducting a labour audit in Nepal varies depending on the complexity of the organization. Estimated costs include:
- Consultant/auditor fees: NPR 15,000 – NPR 50,000
- Document preparation or legal drafting: NPR 5,000 – NPR 15,000
- HR or administrative support: NPR 5,000 – NPR 10,000 (internal cost)
Small businesses may manage audits for under NPR 25,000, while medium to large firms may incur costs of NPR 50,000 to NPR 100,000 depending on scope and corrections needed.
Applicable Government Charges
Government charges related to the labor audit process are minimal, as labor audits are often conducted internally or by third-party advisors. However, charges may apply if the audit is requested or enforced by a government authority:
- Labour Office inspection processing: No fixed fee (administrative costs may apply)
- SSF late submission penalties: As per SSF Act
- Stamp duty on revised contracts: Nominal
Employers must ensure their records are up-to-date to avoid penalties during government reviews.
Submission Process to Labour Office
If an audit report is prepared for submission, especially during inspections or license renewal, the submission process involves:
- Preparing an official audit report
- Attaching all supporting documents
- Preparing a cover letter addressed to the Labor Office
- Submitting documents via physical copy or authorized online platforms (if available)
- Receiving acknowledgment of receipt
Employers must retain a signed and stamped copy of the report submission for record-keeping.
Finalization and Certification Procedure
Once the audit report is reviewed, the auditor finalizes the document with:
- A summary of findings
- Certification statement by the auditor
- A compliance grading or risk assessment (if applicable)
- Employer acknowledgment of receipt
Responsibilities of Employers During Audit
During the labour audit, employers must:
- Provide access to relevant documents and systems
- Ensure cooperation from HR and department heads
- Maintain confidentiality and data protection
- Respond to queries and provide clarifications
- Review preliminary findings and approve final report
Failure to cooperate or provide documents may result in incomplete audits or potential non-compliance reports.
FAQs
What is the audit process?
It involves reviewing employment practices, contracts, and records to ensure compliance with the Labour Act.
Who does the audit work?
A labor law consultant, legal advisor, or internal HR team may perform the audit.
How do we prepare?
Gather employment records, payroll sheets, leave logs, and HR policies.
Is pre-audit review needed?
Yes, it helps identify and fix issues before the final audit.
Are there standard forms?
No official forms, but auditors use structured formats based on legal standards.
Do we submit to the government?
Only if required for inspection, licensing, or compliance verification.
What documents are essential?
Contracts, salary slips, SSF receipts, leave records, and policy manuals.
Who checks the reports?
The appointed auditor or labor authorities if submitted during inspection.
For legal audit support, contact Medha Law and Partners
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