While outsourcing of payroll can be a convenient and cost saving process for you, it is important that you select a professional services company that is well versed with the statutory compliance and the regulatory framework to be adhered to while processing the payroll function as per prevalent laws in India. This is so that along with the payroll, the statutory compliance is also outsourced.
Non-compliance can result in the levy of penalties and fines and even legal suits and union agitation, which imposes a huge financial burden on small businesses. Further, statutory compliance ensures that employees are fairly paid. Research proves that happy employees translate into better quality work and improved business performance.
The following are the statutory compliances required for payroll outsourcing in the Indian context:
Payment of Wages Act, 1936:
This act oversees the payment of wages to direct and indirect employees. The provisions stipulate timely wage payment. The payment should be made before 7th of every month in case the no. of workers are less than 1000 and on the 10th day if over 1000. The Act does not cover employees whose wage is Rs. 10000 or more per month. The employer can only make deductions that are authorized under the Act.
Minimum Wages Act, 1948:
The minimum wages are fixed by considering the cost of living. Minimum wages rates may be determined for any region, occupation, industry group and declared at the national, state, sectoral and occupational levels. It mandatory for the employer to comply with the Act and ensure wages are paid regularly on a daily, weekly or monthly basis.
The Payment of Bonus Act, 1965:
This act facilitates annual bonus to employees. The bonus is calculated based on the employee’s salary and the profits of the business establishment. The bonus should range between a minimum and a maximum of 8.33%-20% respectively. It should be paid out within 8 months from the close of the accounting year.
It is mandatory to deduct Tax at source to the salary payments made by the employer to the employee above a threshold limit as per the tax slabs. The employer must deposit the TDS amount with the tax authorities and issue form 16 to the employee.
This amount of Rs 2500 per annum is levied by the state governments and deducted from the employee’s salary. Failure to deduct and deposit the professional tax results in penalties.
Amendments to Maternity Benefit Act, 1961:
This provides for maternity leave and related benefits.
Equal Remuneration Act, 1976:
This mandates equal payment irrespective of gender for the same nature and scope of work, without discrimination.
Shops & Establishments Act:
This aims to regulate the working condition of workers in shops and establishments. This includes provisions related to the duration of work hours, rest intervals, overtime, holidays, termination of service etc
The Employees' State Insurance Act, 1948:
This allows for benefits to employees in case of sickness, maternity and injury sustained in the course of employment. The act applies to both non-seasonal factories using power and employing more than 10 employees, and non-power using factories employing 20 or more employees. The benefits are to be availed in ESIC hospitals, clinics and approved medical practitioners. The wage ceiling has been hiked to Rs. 10000 per month. In the case of a business enterprise falling under the ambit of this Act, the employees’ CTC needs to be restructured to reflect the employer and employee ESIC contributions.
Employees Provident Fund (PF) and Miscellaneous Provisions Act, 1952:
This is a popular social welfare scheme, whereby the employee and the employer contribute a certain monetary amount towards a pool of funds that are to be accumulated for the employee as retirement corpus. The PF contribution per cent is computed on the basic wages and the dearness allowance. It excludes food allowance, House Rent allowance, overtime allowance, bonus, commission, etc. There is an option for the employee to contribute a higher per cent under voluntary PF. There are tax benefits under the IT Act as well. It is mandatory to comply with EPFO rule. Thus, a company of the size of 20 or more employees should get registered for Provident Fund else face severe penalties.
The Payment of Gratuity Act, 1972:
This act covers every shop or establishment in which 10 or more persons are employed or have been employed on any day of the preceding 12 months. Gratuity depends on the following factors i.e. the last drawn salary of the employee and the years of service. Gratuity helps provide pension post-retirement. It must be remembered that since gratuity is a fixed contribution by the company, it should reflect in the employee’s CTC.
Labour Welfare Fund Act, 1965:
This Act focuses on workers’ welfare and stipulates services and facilities to be provided to the workers to improve their standard of living, working environment and provide social security.
Payroll outsourcing and conversely statutory outsourcing as a part of payroll outsourcing can be a huge help for a small business so they/you can completely focus on establishing and running the business, while experts who are aware of the legal provisions of payroll rules and regulations manage the payroll function. A win-win situation for both!