Payroll Compliances in India

Payroll Compliances in India

Payroll compliances form an important part of statutory labour compliances that organisations eligible under their provisions are bound to follow for the protection and benefit of their employees. An organisation has to follow the necessary labour compliances spread over many labour legislations failing which may lead to consequences such as hefty penalties, suspension of operation licenses, withdrawals of benefits given by the government, damage to organisation’s goodwill, piling litigation costs etc. Therefore, in order to continue seamless operations every eligible organisation must fulfil all the necessary compliances mentioned under the statutes.

Package inclusions:
  • Advisory on Payroll compliances
  • Liaising with the department till the registrations are obtained.
Payroll Compliances in India

Overview of Statutory Compliances related to Human Resource

Every business entity that has been giving pecuniary remunerations to its employees or workers must have come across the term of statutory compliance related to human resource. It is nothing but a legal framework which includes a broad set of regulations that govern the relationship of employer and employee in the matters related to salary and wages, benefits, leaves, social security, tax liabilities of the employees, industrial relations etc.

This piece of information relates to mainly the payroll compliances that specific eligible business entities need to follow at the time of payment f salaries and extending benefits to their employees among other necessary things.

What do you mean by Payroll Compliances?

The payroll compliances are actually a subset of large set of statutory compliances that an organisation is bound to comply. These compliances are generally related to the Human Resource management that have been formulated by the government of India and respective states for the welfare and benefit of the workforce. These are statutory compliances that need to be strictly followed by all the eligible entities running their business failing which government can impose penalties, suspension and termination of operations etc. which can be harmful for the smooth operations of any business. On the other hand complying with the provisions mentioned in the act actually benefits the organisations in terms of high employee retention rate, better stability, attraction from the view point of investors among others.

Why should an organisation fulfil statutory payroll compliances

There are twin benefits of keeping all the compliances updated according to the statutory compliances related to Human Resource management. These include:

  1. Maintain the dignity of labour by ensuring giving employees their due
  2. Keeping the entity out of unnecessary litigation

Following are some of the benefits that can be enjoyed by the company if they comply with all the prescribed statutory compliances:

  1. Low employee attrition rate: The statutory compliances are meant for the betterment and benefit of the employees. If the employer follows all the prescribed beneficiary provisions, the employees are happy that their interests are being taken care of. As a result, the employees get a sense of security and do not want to leave the organisation. This results in companies’ employee attrition rate coming down which means companies do not have to expend more resources in hiring and training of the new employee.
  2. Protection from unnecessary litigation: If the organisation fulfils the necessary legal prescriptions in managing its employees, then it can save itself from the dangers like penalties, cancellation of operation license, closing down of operations and committing offences under various statutes which may give rise to both civil and criminal litigation.
  3. Prevents entity’s resources from getting wasted: If the organisation does not invest in keeping all the compliances in check, it may lead the organisation into legal pitfalls which are not only a financial burden on the company but also wastes the resources and energies of the company which could have been used to expand the business of the organisation. Therefore, in order to increase the productivity of the employees and channelize the resources of the organisation into productive tasks, it is necessary that the organisations fulfil all the prescribed compliances.
  4. Increased stakeholders’ and investors’ confidence: When an organisation is found to be statutorily compliant, it generates confidence amongst the stakeholders of the company regarding the business and financial hygiene of the company. This is further responsible for attracting external investments when the investors feel that the organisation is statutorily compliant. The investors feel that the investments made by them in the entity are protected.

List of payroll compliances for the business entities

Payment of Wages Act, 1936

This act was brought into force to ensure that the employees belonging to certain industries are paid by their employers on time after every month. Recently, after the amendments made in the year of 2017, the salary threshold has been increased from Rs 18,000 to Rs 24,000 per month for the employees to be given benefits under this act. The act states that the organisations employing less than 1000 employees are mandated to disburse their employees salary before the 7th day of every month and in case of organisations employing more than 1000 employees, the last day of disbursal of salary is 10th day of every month. It must be understood that this act covers employees who are paid less than or upto Rupees 24,000 per month only and not more.

The payments according to this statute must be made either by cash or by cheque. The employer can make bank transfers but only with the consent of the employee.

Minimum Wages Act, 1948: This act was passed by the Central Government keeping in view the exploitation of labour done by the employers. This act makes it mandatory for the employers to give minimum wages to the employee by fixing a minimum wage rate.

The minimum wage rate is not a universal phenomenon for the whole of India. It varies from state to state and sector to sector and the state governments get to decide the minimum wage rate. The minimum wage is determined on the basis of type of job, the wage period and the cost of living in a particular state. The minimum wage rate for Delhi will vary from the minimum wage rate of West Bengal.

Payment of Bonus Act, 1965: This act is made by the government in order to instil a sense of ownership among the employees when the profits made by the organisation are distributed among the employees. This act makes a provision of payment of bonus for annual bonus for those organisations and factories who employee more than 20 employees at any time during an accounting year.

There are certain limitations as to the category of employees who will be available to the bonus under the act. If an employees’ salary is less than Rs. 21,000 and he/she has served a period of more than thirty days, then he/she becomes eligible for statutory bonus payment.

Registration under Employees Provident Fund Act, 1952: The organisations that are employing more than 20 employees in the last accounting year are mandated by the act to open an EPF account in the name of those employees and those who employers who are employing less than 20 employees can get the registration done voluntarily.

It is meant for those employees whose salary is less than Rs 15,000 per month. For computing salary in case of EPF account, the basic salary plus dearness allowance shall be taken into account while calculating the salary.

Here both the employee and the employer need to deposit 12 % each into the provident fund.  

Registration under ESI Act, 1948: The purpose of this act is to provide security cover to deal with the unforeseen circumstances in the form of injuries, medical emergencies, instances of disability while working at the workplace itself. For every pay check given to the employee, the employer contributes 3.25 percent of the pay check and the employee contributes 0.75 percent.

This contribution is mandatory for those establishments where the employees are working in non-seasonal factories and the salary of the employee is less than Rs. 21,000.

Payment of Gratuity Act, 1972: The payment of Gratuity Act provides welfare to the employees who have rendered not less than five years of continuous service to the organisation. It is the amount that is given by the employer to the employee as an acknowledgement for the work and loyalty shown towards the organisation.

The act does not prescribe a ceiling limit for the extent of gratuity is payable to the employee. The gratuity can be calculated using the formula as:

(15*Last drawn salary*tenure of working in years) / 26 = Gratuity amount payable

Maternity Benefit Act, 1961

This act is specifically drafted to extend maternity benefits to working women during the period of childbirth and also after the child is born. This Act is applicable to every shop and establishment in relation to the laws relating to Shops and Establishment of the concerned state where 10 or more employees have worked in the past twelve months. For any women to be eligible under this act, she should have been working for a minimum of 80 days with the employer in the preceding 12 months before the expected date of her delivery. The law has extended the benefits under Maternity Benefit Act to 26 weeks out of which a maximum of 8 weeks can be claimed before the delivery date.

Benefits under this act also extend to adoptive and commissioning mothers, women undergoing tubectomy operation, medical termination of pregnancy and any illness caused post delivery. The law also mandates establishments with more than 50 workers to establish crèche to take care of the children of their employees.

Tax Deducted at Source (TDS) Deductions: This is a fiscal provision which mandates every business entity to deduct the applicable taxes on the salary of their employees and submit the same to the government. This is the duty of the employer to deduct the applicable taxes from the salary of the employees only at the time when the salary is paid and not at the time when the salary is accrued.

Drawbacks of non-fulfilment of payroll compliances

It is always recommended to the business entities and other employers to fulfil all the necessary payroll compliances in order to avoid the following circumstances:

  1. Suspension of business operations: If any employer fails to fulfil the necessary payroll compliances, it may result in suspension of licenses to operate by the competent authorities, the employees may halt the business operations, the competent authorities may withdraw the benefits and other incentives that may adversely affect the business operations etc. In the worst case scenario, a complete shutdown of the entity.
  2. Adversely affects investors’ confidence: If an employer fails to fulfil all the necessary compliances and gets itself into all the legal troubles, then it has the potential of adversely impacting its goodwill in the market which may further shake the investors’ confidence fearing that their investments will be in danger due to non-compliance by the employer. Further, the lenders will not be comfortable in lending due to similar fears.
  3. Increased Litigation: Non-compliance by the employer may invite legal actions from the regulating departments and disgruntled employees which means that the employer would be perpetually involved in the litigation both civil and criminal in nature. The invaluable resources of the employer would be wasted into a non-productive task of litigation.
  4. Negative impact on employee’s productivity: There is a definite possibility that the employees would be unsure and insecure. They would feel that they are being deprived of their legal dues and due to this insecurity they will not be as productive as they would have been when their legal dues are paid.

Challenges in the fulfilment of payroll compliances

Every company desires to be in compliance of all the prescribed regulatory obligations. However, certain challenges exist in the path of an organisation becoming fully compliant. These are:

  1. Innumerable compliances spread over multiple statutes: Another challenge that the organisations are faced with is the lack of a single code which lists down all the necessary compliances that an organisation is supposed to comply with. Instead, the provisions related to compliances are segregated and spread over a number of statues which makes it difficult for the compliance team to fulfil all the necessary compliances.
  2. Unskilled Human Resources Department: Most organisations want to comply with all the human resource compliances. But they face a big problem in the form of untrained human resource departments where the professionals are unaware of the human resource legal regulatory framework. This results in gaps in compliances which may result in heavy penalties on the organisation.
  3. Constantly improving regulatory framework: Last but not least is the challenge of amendments taking place in the regulatory framework and related compliances. Keeping in view the existing conditions of the workforce and the industry, the nature of compliances keeps evolving from time to time. This makes the task of compliance even more challenging for the organizations that cannot keep highly competent team of lawyers capable of managing their regulatory needs.

In our opinion, compliance of Labour laws by every organisation is very important for the eligible organisations. These legislations have been made with the view to maintain dignity of labour and provide security to the workforce that their interests are being taken care of and that they shall not be exploited. This is a necessary step for maintaining a healthy working environment. Further, it is even more important for the eligible entities to carry out all the compliances to save themselves from the legal troubles and at the same time from the viewpoint of depicting itself as a legally sound business entity to attract investment and generating investor confidence.

Enterslice can give you overall advisory and assistance in application and registration of Payroll Compliances for your organisation as we are a team of highly skilled & dedicated professionals. We specialize in providing legal consultancy services.

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