Navigating Statutory Compliance In Payroll: A Comprehensive Guide
An Introduction to Statutory Compliance in Payroll
In this post, we will discuss statutory compliance and its advantages and briefly look into the significant compliances you have to follow. Here is what we will be discussing in this post:
What is statutory compliance?
In India, the government creates rules that businesses must follow, known as statutory compliance. These laws differ between the national and state levels. Companies that don’t follow these rules could face legal consequences, such as penalties and fines. Therefore, companies must maintain statutory compliance in HR.
Compliance requires adhering to a legal framework to ensure the welfare of employees. The Minimum Wage Act, Employee Provident Fund (EPF), Employee State Insurance (ESI), and Professional Tax (PT) are among the most important laws. All of these and other restrictions will be discussed in the following sections.
Why is statutory compliance important?
Due to many laws and regulations, both employers and employees must comply with statutory requirements. Companies that follow these laws can avoid legal troubles, penalties, and fines. This is why organisations must prioritise compliance and understanding of the many workplace laws.
Laws are dynamic and change over time. Due to the pandemic, many new regulations have been introduced by the government. In this blog, we provide a brief introduction to this topic. Many laws are explained in detail in their blogs, so feel free to follow the links to read more about them.
What are the advantages of statutory compliance?
Advantages of statutory compliance for employees are:
- Protect employees from unreasonable working hours, exploitation, or harassment.
- Ensure employees are paid for their job, and employers follow the minimum wage rate.
- Ensure that the employees are getting fair treatment in the workplace or not.
Advantages of statutory compliance for companies are:
- Avoid legal issues
- Predetermined rules make collecting revenue and taxes easier for the government.
- We should be aware of compliance measures that can help to reduce risk. Statutory compliance minimises the probability of prejudicial incidents.
- We are preserving the companies from unreasonable compensation from the court of law.
Risk of Non-compliance
If a company does not comply with rules and regulations, it will face:
1.Penal actions and financial losses to the organisation
Companies that do not obey the rules and regulations may suffer fines, penalties, and legal action. This can result in considerable financial losses, including legal fees and penalties.
2.Loss of reputation and business integrity
Noncompliance can harm a company’s reputation. When a company is famous for breaking rules, it may be considered untrustworthy. This lack of integrity may make attracting new consumers, partners, and investors easier.
3.Customer loyalty will be impacted severely
Customers want companies to act legally and ethically. If a company is proven to be non-compliant, customers may lose faith and go elsewhere. This can decrease sales and revenue as loyal clients choose to support more trustworthy and compliant companies.
Does it vary depending on the organisation?
The statutory compliance requirements for a partnership business, private limited company, LLP, or any other type of organisation remain unchanged. Every organisation that hires and pays employees must follow labour laws.
List of statutory requirements for the company:
There is a list of statutory compliance that every Indian company follows.
As the company grows, a vast range of PF, PT, Leave, Attendance, TDS, ESI, Labour regulations, and other statutory compliance follow.
Some of these laws are more applicable to payroll purposes than others. In the next section, we will discuss payroll statutory compliance in much more detail.
Important Payroll Statutory Compliance
Minimum wages act, 1948 –
The Minimum Wages Act of 1948 was established to ensure that fixed minimum wages were payable to different working class sections. Expenses for the medical, educational, and basic living needs of the workers are taken into account while fixing the minimum rate. Minimum wages are set at both State and central levels. In private companies, minimum wages are fixed based on working hours, classification, and place of work.
Employee state insurance (ESI) Act, 1948 –
This act is a type of social security scheme for employees and their families. It aims to provide medical benefits for injuries, disabilities, or sickness for both insurers and their dependents, as well as maternity benefits for women. It applies to all employees earning Rs.21,000 or less per month as wages. The employer contributes 3.25%, and the employee contributes 0.75% of the total share of 4%. This act is also applicable to non-seasonal workers.
Employees' Provident Fund Act (EPF), 1952 –
A Provident Fund, or PF, is a type of social security benefit in which the benefits are paid in a lump-sum amount at the time of retirement.
In India, it is known as the Employees’ Provident Fund (EPF) and is administered by the Employees’ Provident Fund Organization (EPFO).
Under the EPF scheme, both employers and employees contribute towards the PF. This contribution from both the employer and the employee will be deposited in the EPF account. Both Domestic and International workers can benefit from this scheme.
As per the PF Act, employers and employees must contribute 12% towards the EPF fund. The whole 12% of employees will go into PF, whereas only 3.67% of the employer’s share goes into PF, and the rest goes into pension schemes up to a limit of ₹1250.
Professional tax (PT) Act, 1975 -
Profession tax is a type of tax that we pay to the state government. It is deducted based on your income slab, which differs for different states. It is handled by the payroll manager or payroll system of a company.
Tax deducted at Source -
Tax deducted at Source (TDS) is a direct income tax. The government collects tax from various sources of income, such as salary, interest income, rental tax, commission, and others. This is governed by the Income Tax Act of 1961.
Under TDS, the person making the payment is responsible for deducting the tax and depositing it with the government. These people are known as Deductor. Generally, Companies act as Deductors since they have to deduct TDS from their employees.
The Payment Bonus Act, 1965 -
The Payment of Bonus Act, 1965, is a statutory bonus payment that is payable to the employee by the employer whose Basic + DA is equal to or less than 21,000/-. The minimum bonus will pay between 8.33% and 20%, as already decided by the company. This act will pay the employee within 8 months from the closing books of the accounting year.
The Payment Gratuity Act, 1972 -
The Payment of Gratuity Act of 1972 established a system for companies to pay a one-time gratuity to employees upon retirement.
This act will apply to railway employees, factories, coal mining, companies, and shops, but it can also be adopted in any private or public company. It is applicable to employees who have completed their five years in one company if they retire or resign.
The formula for the calculation of gratuity is:-
Gratuity = (Last Drawn Salary × 15÷26) × No. Of Years of Service.
Maternity Benefits Act, 1961 -
The Maternity Benefits Act refers to the legal frameworks for female employees’ rights. This includes compensation, pay, and certain privileges for pregnant employees from the employer.
This applies to every sector of the female employee, including mines, factories, plantations, and establishments engaged in the exhibition of equestrian, acrobatic, and other performances, irrespective of the number of employees.
As per the latest Maternity Benefit Act 2017 amendments, maternity leave is increased from 12 weeks to 26 weeks. Prenatal leave is extended from 6 weeks to 8 weeks and 18 weeks post-childbirth.
You can read our blog to learn more about the details of the Maternity Benefits Act and special maternity benefits.
Equal Remuneration Act, 1976 -
This act provides equal remuneration to female and male employees for the same work at the same workplace and prevents gender discrimination in recruitment, wages, female employment, and other cases.
Shop and Establishment Act -
It regulates the employment conditions of workers in shops and establishments, including working hours, overtime, leaves, service, terminations, intervals, and others.
For this, an employer needs to get registered under this act, and registration must be done within 30 days from the commencement of business. The registration certificate will be valid for five years after that certificate needs to be renewed.
Labour Welfare Fund Act, 1965 -
The Labour Welfare Fund Act refers to all the facilities and benefits provided to labourers to provide them with social security, improve their standard of living, and improve their working conditions. Labour welfare funds vary between states and union territories and are contributed by both the employer and employee.
Some more important compliance is -
- The Payment of Wages Act, 1936
- The Industrial Disputes Act, 1946
- The Apprentices Act, 1961
- The Contract Labour Act, 1970
- The Industrial Employment Standing Order Act, 1946
- The Workmen’s Compensation Act, 1923
- The Trade Union Act, 1926
- The Factories Act, 1948
- Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
- The Child Labour (Prohibition & Regulation Act), 1986.
This concludes our discussion of statutory compliance. Please mention your other questions and opinions on this topic below in the comment box.
FAQs
1.What is HR's role in statutory compliance?
Ans: HR in a company serves to control the work environment and guarantees that the country’s labour laws are followed. Statutory compliance encompasses all labour laws and tax rules.
2.How do you handle statutory compliance?
Ans: The HR department is often in charge of statutory compliance, which ensures that the company follows labour and tax rules.
3.What are the advantages of statutory compliance?
Ans: The main advantage of statutory compliance is the avoidance of government penalties. It reduces the dangers of non-compliance. This increases the organisation’s productivity and efficiency.
