A Complete Guide to Statutory Compliance in HR & Payroll in India
Every company in India spends a lot of money, effort and time to ensure that its payroll is compliant through a proper audit. Companies often worry about facing legal issues that are related to compliance such as aggressive employees, demands of unreasonable wage, and demands from trade unions. Even if a company doesn’t have any intention to break laws, it may face legal troubles if it doesn’t have proper protection. This protection comes in the form of statutory compliance which helps the companies to avoid the risk of non-compliance. With increasing non-compliance risks, it becomes necessary for the companies in India to have statutory compliance in HR in India.
What is Statutory Compliance in HR?
To know the exact meaning of statutory compliance in HR, you should first grasp the meaning of the words’ statutory’ and ‘compliance’. Statutory means ‘related to rules and regulations’ while compliance means ‘commitment’. Statutory Compliance in HR refers to a company’s legal framework used to deal with its employees professionally and ethically.
What is the importance of statutory compliance for payroll?
If a company in India does not comply with the set of central and state labour laws, it can land into serious trouble which can make its growth stagnant. The following are some of the common risks of statutory non-compliance:
1) Work stoppage
2) Loss of the company’s integrity, reputation, and goodwill
3) Cancellation and suspension of operational licenses
4) Loss of faith in the company’s stakeholders and investors
5) Imposition of fines
6) Loss of customer loyalty
7) Civil and criminal liabilities
8) Negative impact on the company’s productivity
9) Penal liabilities against the Directors or officers of the company
10) Withdrawal of fiscal benefits
11) A shutdown of the company, if the case goes on an extreme level.
Statutory compliance in HR helps a company to manage a demanding regulatory environment and avoid non-compliance risks.
All the labour and taxation laws of India come under statutory compliance. Every company in India has to mandatorily obey these laws which change on a National and State level. If a company is non-compliant with these regulations, it can face legal troubles like fines, penalties or even complete shutdown. To avoid such risks, a company should spend a good amount of resources to ensure statutory compliance in HR. Companies must understand all the labour and taxation laws of India to stay updated about any changes they need to incorporate in their organizations. The rules keep evolving from time to time, and the laws are quite dynamic.
The following Labour Acts in India require statutory compliance:
1) The Child Labour (Prohibition & Regulation Act), 1986
2) Inter-State Migrant Workmen( Regulation Of Employment & conditions Of Service ) Act, 1979
3) The Equal Remuneration Act, 1976
4) The Payment Of Gratuity Act, 1972
5) The Contract Labour (Regulation & Abolition) Act, 1970
6) The Payment Of Bonus Act, 1965
7) The Apprentices Act, 1961
8) The Employment Exchanges(Compulsory Notification Of Vacancies) Act, 1959
9) The Employees Provident Fund & Miscellaneous Provisions Act, 1952
10) The Factories Act, 1948
11) The Minimum Wages Act, 1948
12) The Employees’ State Insurance Act, 1948
13) The Industrial Disputes Act, 1946
14) The Industrial Employment Standing Orders Act, 1946
15) The Payment Of Wages Act, 1936
16) The Trade Unions Act, 1926
17) The Workmen’s Compensation Act, 1923
Minimum Wages Act, 1948
The Minimum wages Act fixes the minimum wages rates in any Indian company, where both the Provincial Governments and the Central Government determine these rates. The minimum wage rates get declared at the occupational, sectoral, state, and national levels. These wages may get established for any sector, occupation, or region. The cost of living determines the minimum wage. The minimum wages may get set for different scheduled employment or various work classes of the same scheduled employment. Frequency of the salaries ranges from monthly, hourly, or daily. The State Governments and Central Government notifies the scheduled employment about the revision of minimum wage rates.
The two methods for fixing or revising minimum wages are:
1) Committee method
In this method, the government changes minimum wages after setting up committees and subcommittees for holding recommendations and inquiries.
2) Notification method
In this method, the Official Gazette publishes proposals of the government regarding people who are likely to be affected by changes in minimum wages. The recommendations get taken into consideration at a specified date.
The government fixes or revises the minimum wage of particular scheduled employment after taking the advice of all the representations and committees into account. The final decision gets implemented after 3 months from the date of its declaration.
List of Statutory Compliance Documents by Startuphroolkit
1. Introduction to Statutories
2. Payment of Wages Act, 1936
3. Minimum Wages Act, 1948
4. The Payment of Bonus Act, 1965
5. Tax Deduction at Source (TDS)
6. Professional Tax
7. Amendments to Maternity Benefit Act, 1961
8. Equal Remuneration Act, 1976
9. Shops & Establishments Act
10.The Employees’ State Insurance Act, 1948 (ESIC)
11. The Payment of Gratuity Act, 1972
12. Employees Provident Fund (PF) and Miscellaneous Provisions Act, 1952
13. Labour Welfare Fund Act, 1965
14. Labour Law Annual Leave and Holidays
15. Labour Law Compensation
16. Labour law Fair Treatment
17. Labour law health and safety
18. Labour Law Trade Union
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What is the need for Statutory Compliance in HR in India?
It has become more complicated to do business in India. Companies in India also face the challenge to go hand in hand with the operational aspect of its core business. All the companies operating in India have to ensure the following categories of statutory regulations and mandates:
1) Employment laws
2) Tax laws
3) Labour laws
4) Competition and antitrust laws
5) Environmental regulations
6) Financial and Corporate laws
7) Industry-specific laws
8) Advertising laws
9) Data privacy
10) Intellectual property rights
11) Foreign Exchange laws
As per the Companies Act, 2013, Directors should certify in their annual Director’s Report about how they have devised proper and effective systems for ensuring the compliance of applicable laws. The report should also clarify if the systems were successful in operation.
Thus, all Indian companies need professionals who can bring about statutory compliance in HR to be compliant with the ever-changing environment of regulations.
Sample Documents of The Minimum Wages Act, 1948 & The Payment of Wages Act, 1936 By Startuphrtoolkit
Benefits of Statutory Compliance in HR for a Company
A company will save itself from the majority of serious legal troubles if it is statutorily compliant. This will also lead to the sustained growth of the company, as when the employees get treated well, they work with more ownership. The following are some of the benefits of statutory compliances for a company:
1) Improved business opportunities
If a company invests in significant compliance management systems, it can promote and preserve its goodwill with ease. Due to this, the company can get a higher bargaining position during negotiations and thus, it can secure the much-needed business contracts. The companies which invest in advanced compliance regime can attract more investments for improving opportunities and business prospects.
2) Higher employee retention
If a company has statutory compliance in HR department, the employees have an assurance that they will get a professional, fair, and safe working environment in the company. Statutory compliance in HR department indicates that the company will provide a just and employee-friendly working environment, and the company can resolve any law issues related to labour or employment. A company must comply with all its labour and employment law requirements for instilling confidence among their employees that the company cares about their welfare and well-being. This will blossom a healthy work environment which will result in enthusiastic and satisfied employees. Such employees are highly likely to stay with the company, making the rate of employee retention higher.
3) Prevention of legal penalties
Compliance with necessary statutory requirements will help a company to prevent the inevitable consequences of non-compliance like lawsuits, work stoppages, revocation or suspension of licenses, disqualification of its officers or directors, payment of penalties, imprisonment of officers or directors, and complete shutdown.
4) Improvement in quality
If a company adheres to statutory compliance, it will eventually improve the quality of its products and services. Statutory compliance will enable the company to focus on its main business activities instead of unnecessarily spending resources and time on paying penalties, effecting the compounding of offences, penal liabilities against its officers or directors, retaining the valuable and talented employees or defending the imprisonment or litigation. With statutory compliance, a company can prevent apparent risks that can emerge due to non-compliance. It will help the company to detect or avoid failures at the early stages. All of this will lead to greater efficiency in business operations.
5) Improvement in business operations
After a company is successful in complying with all the applicable statutory compliance requirements, it frees up resources and time for focusing on its core business activities and R&D, which paves the path to improved business operations. With secure business operations, the company achieves fabulous growth in its business.
6) Brand loyalty
The principal investors and stakeholders of a company will get assured that the company places statutory compliance as one of its top priorities if the company has efficient compliance management programs and tools for achieving compliance with essential statutory requirements. The proper agreement reflects a company’s awareness and expertise regarding relevant regulatory mandates along with its commitment to high ethical standards. It shows that the company intends to operate its business fairly and transparently. As a result, the employees, vendors, and customers begin to trust the company more, and it will eventually strengthen brand equity and loyalty.
7) Boosting employee morale
If a company observes statutory compliance, it significantly boosts its goodwill and likeable reputation. Such a company succeeds in positively influencing the performance of its employees. Non-compliant companies are unable to prove their commitment to proper business ethics.
Principled and talented employees are highly attracted to fully compliant companies. These companies can effortlessly boost employee morale which leads to better productivity, lower attrition rates, and overall improved efficiency of the business.
8) Improved public relations
If a company is fully compliant, it will benefit from better public relations. Statutory compliance in HR department of a company assures the company’s customers, employees, stakeholders, and investors that the company will always stick to highly ethical business practices.
9) Risk management
Every organization faces significant risks related to strategy, finance, operation, process and reputation, and compliance. Finance and Healthcare are highly regulated industries, and they usually face compliance risks which tend to increase when such companies begin their international operations. A company can prevent several legal troubles if it requisites statutory compliance requirements. Statutory compliance will help companies to avoid and manage compliance risks.
10) Competitive differentiation
Statutory compliance in HR department of a company will prove to be a competitive advantage over rival businesses. It will help the company to produce more excellent outputs and reduce compliance-related risks too.
Benefits of statutory compliance in HR for employees
When a company executes statutory compliance in HR, its employees get better treatment and sufficient benefits. The following are the benefits of statutory compliance in HR for employees:
1) The Payment of Bonus Act, 1965
Employers provide bonuses to their employees under the Payment of Bonus Act. Mostly the establishments and factories with 20 or more employees provide the bonus which gets calculated based on the profits of the establishment and the employee’s salary. If an employee completes 30 working days and draws ₹21,000 or less per month, he/she is eligible for the bonus payment in the on-going financial year. The minimum rate of paying a bonus is 8.33% while the maximum rate is 20%. If any employee gets caught in any misconduct or fraud, he/she can get disqualified from bonus payments.
2) PF (Provident Funds)
Both Provident Funds and HR compliance are significant parts of each other. Provident Fund consists of the money saved throughout the working years of an employee. Provision of the Provident Fund ensures income when the employee retires from his job. If the employee, unfortunately, meets early death, the PF gets passed on to his/her family.
3) TDS (Tax Deduction at Source)
When an individual receives a payment, his/her TDS gets deducted under the Income Tax Act. The CBDT (Central Board of Direct Taxes) manages this deduction. After filing the TDS return, the income tax department deducts the tax calculated from the income. The final amount is further refunded. The following are the cases in which TDS is exempted:
- When the Assessing Officer provides a certificate of exemption
- When the receiver provides a self-declaration which states that he/she has mentioned the required investments in FORM 15G/15H
The following are the elements which also impact the TDS deductions:
1) Medical allowance
4) Travel leave
4) Professional Tax
The State Governments levies the professional tax on every person who earns a living through any medium. This tax, as well as its calculation, vary from state to state. The professional tax is deducted on the basis of state-declared slab. A few states and union territories in India do not charge any professional tax. The annual professional tax gets divided into 12 equals instalments which have to be paid monthly. However, in February, the professional tax is higher than the other months.
Steps to ensure statutory compliance in HR
- The companies in India may take the following steps to ensure statutory compliance in HR:
- Educate professionals about applicable statutory, legal, and regulatory compliance requirements.
- Identify the suitable business spots whose statutory and legal landscapes are required to get complied with.
- Each business location (including international branches) should have statutory compliance requirements.
- Compliance responsibilities should get laid to specific departments or personnel.
- Compliance review should get conducted for identifying gaps in compliance.
Challenges in Statutory Compliances in HR
The companies in India face the following challenges in statutory compliance in HR:
1) Lack of awareness
It is quite common for the professionals in a company to lack expertise and adequate knowledge in statutory compliance requirements. When such a company has multiple locations internationally, its compliance risk increases; therefore, a company must have professionals with proper experience on statutory compliance for a smoother running of the business.
2) Segmented compliance initiatives
In most companies, several departments control various functional activities of the business. Such companies can’t ensure effective compliance in their companies.
3) Dynamic statutory landscape
Statutory requirements continuously evolve and emerge with complexities which makes it difficult for companies to keep up with the dynamic statutory landscape.
Companies who spend enough resources on the requirements statutory compliance in HR will find the investment worth it as they will get numerous benefits from it along with the protection against non-compliant issues. Before joining a company, an employee should also check whether it is statutory compliant or not. All the companies in India must carry out statutory compliance in HR to ensure that they have a professional and employee-friendly working environment.
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