Statutory Compliance in Payroll

What is Statutory Compliance?

The word statutory means “of or related to statues”- rules and regulations. Compliance means adherence. Thus,
Statutory Compliance means adhering to rules and regulations.

Statutory Compliance in HR refers to the legal framework that an organization should adhere to in dealing with its
employees.

Why is it important?

Advantages of Statutory Compliance

The advantage of statutory compliance for employees:-

Ensures Fair Treatment Of Employees.

Ensure They Are Paid Fairly For The Work They Have Done And Their Company Complies With The Minimum Wage Rate.

Prevents Employees From Working For Long Hours Or Inhuman Condition.

The advantage of statutory compliance to organizations:-
AVOID PENALTY OR FINES BECAUSE OF THEIR TIMELY PAYMENTS

PROTECTS THE ORGANIZATION FROM UNREASONABLE WAGE OR BENEFIT DEMANDS FROM TRADE UNIONS

PREVENTS LEGAL TROUBLES AS THE COMPANY IS FULLY COMPLIANT

MITIGATE RISKS AND INCREASES AWARENESS ABOUT COMPLIANCE

WITH COMPLIANCE IN PLACE, THERE IS A LOWER RISK OF AN ADVERSE INCIDENT

Risk of non-compliance:-
If a company does not conform to rules and regulations it will risk:

Penal Actions And Financial Losses To The Organization

Loss Of Reputation And Business Integrity

Customer Loyalty Will Be Impacted Severely

The Various Statutory Compliances Required For Indian Payroll

Payment of Wages Act, 1936
The Payment of Wages Act, 1936 regulates the payment of wages to direct and indirect employees. The act
warrants payments of wages on time and without any deductions except those authorized under the Act.
According to this act, the payment should be made before 7th of every month where the no. of workers are less
than 1000 and on the 10th day if greater than 1000.
The Payment of Wages Act, 1936 regulates the payment of wages to employees (direct and indirect). The Payment
of Wages Act regulates the payment of wages to certain classes of persons employed in industry, and its
importance cannot be underestimated. The Act guarantees payment of wages on time and without any deductions
except those authorized under the Act. The wage period shall not exceed 1 month.
The Payment of Wages Act does not apply to employees whose wage is Rs. 10000 or more per month. The Act also
provides to the effect that a worker cannot contract out of any right conferred upon him under the Act.
Under the act, the payment has to be made in cash. Cheque payment or crediting wages to a bank account is
allowed with the consent of employee in writing. The deduction made by the employer should be made by this act
only.
Under the act, payment has to be made in currency notes or coins. Cheque payment or crediting to bank account is
allowed with the consent in writing by the employee. (Section 6)
This Act includes fines for (Section 8), absence from duty (Section 9), Damages or loss (Section 10), deduction for
services (amenities) given by employer (Section 11) recovery of advances and loans (Section 12, 13) and payment
to cooperative society and insurance (Section 13).

Minimum Wages Act, 1948

Minimum wages rates in India are fixed under the Minimum wages Act, 1948 and is determined both by the
Central Government and the Provincial governments. Minimum wages rates may be established for any region,
occupation, and sector and declared at the national, state, sectoral and occupational levels. The minimum wages is
determined by considering cost of living.
While fixing the minimum wages rate, it may be set for different work classes in the same scheduled employment
or set for different scheduled employment. It may also be fixed by hour, day, month or any other wage period.
Under the Minimum Wages Act, both the Central and State Governments may notify the scheduled employments
and fix/revise minimum wage rates for these scheduled employments.
There are two methods for fixing/revising minimum wages:

1. Under the committee method, the government sets up committees and subcommittees to hold inquiries
and recommendations for fixing and changing minimum wages.
2. In the notification method, government proposals get published in the Official Gazette for persons who
are likely to be affected and specifies a date (not less than two months from the time of the notification)
where the proposals are taken into consideration.

The government after considering the advice of committees and all the representations received by the specified
date, fixes /revises the minimum wage of the concerned scheduled employment which comes into force after
three months from the date of its issue.
The Payment of Bonus Act, 1965
The Payment of Bonus Act provides an annual bonus to the employee in the certain establishment- including
factories and establishments employing 20 or more persons Under the Act, The bonus is calculated by the
employee’s salary and the profits of the establishment.
Employees drawing ₹21000 per month or less (basic + DA, excluding other allowances) and have completed 30
working days in that financial year are eligible for the bonus payment.
Salary or wages include only basic and DA for the bonus payment, and the rest of the allowances (e.g., HRA,
overtime, etc.) are excluded. Bonus should be paid at a minimum rate of 8.33% and maximum rate of 20%. It needs
to be paid within 8 months from the close of the accounting year.
Employees can be disqualified from bonus payments if they are dismissed by fraud, misconduct, or even
absenteeism. The employer needs to ensure that on dismissal, the procedures of domestic inquiry, proper
documentation and employee acceptance of the misconduct are all carried out as per the standing orders before
disqualifying the bonus payment.

Tax Deduction at Source (TDS)

TDS is deducted from the payments made by the individuals as per Income Tax Act. It is managed by the Central
Board of Direct Taxes (CBDT), which comes under the Indian Revenue Services (IRS).
Under TDS, when an assessee gets his income, there will be a TDS deduction by the person (deductor) paying the
assessee and is submitted to the income tax department.
The assessee then files the TDS return and the tax calculated from his income will be deducted and the final
amount will be refunded.
TDS is exempted in the following 2 cases:

1. If the receiver gives a self-declaration saying that he had made the required investments in FORM
15G/15H
2. If there is a certificate of exemption provided by the Assessing Officer
3. Income tax slab for individual tax payers & HUF
(less than 60 years old) (both men & women)
Amendments to Maternity Benefit Act, 1961
The Maternity Benefit (Amendment) Act 2016, was passed by the Rajya Sabha in August 2016 and Lok
Sabha in March 2017.
Under the law:

 The maternity leave is increased to 26 weeks, and the prenatal leaves are also extended from 6
to 8 weeks.
 A woman is entitled to 12 weeks of maternity leave if she already has 2 or more children and in
this case, the prenatal leaves remain 6 weeks.
 The act also provides adoption leave of 12 weeks for a woman who adopts a child below 3
months.
 Female civil servants are entitled to maternity leave for 180 days for their first two live-born
children.
 Also, a commissioning mother gets about 12 weeks of leave when the child is handed over to her.

The act also further requires an employer to inform women about her rights under this act during her
appointment day. This must be given to her in writing and also in the email.
Only on completion of at least 80 days in an establishment in the 12 months before her delivery date, the
maternity leave is awarded full pay. Apart from 12 weeks of salary, a female worker is entitled to a
medical bonus of 3,500 Indian rupees.

Equal Remuneration Act, 1976

The Equal Remuneration Act, 1976 provides for the payment of equal remuneration to men and women workers
for the same work and prevents discrimination, on the ground of sex, against women in the matter of
employment, recruitment and for matters connected in addition to the that or incidental to it. This Act applies to
virtually every kind of establishment.

Shops & Establishments Act

The Shop and Establishment Act is to regulate the employment condition of workers in shops and establishments.
This includes work hours, rest intervals, overtime, holidays, termination of service, etc.
Registration needs to be done within 30 days from the date of commencement of business. Even if there is no
employee, the entity has to get registered under this act.
An application has to be submitted along with the fee and the scanned documents online. Within 15 days of
successful document submission, the department approves the registration. The registration certificate can be
downloaded from the portal.
A registration certificate is valid for 5 years and should be renewed after that.
In case of a change in address, status, partners intimation has to be given to the department within 30 days of
change through an online application.
The registration fee depends on the number of employees hired by the entity. Additional fee has to be paid
through filing an online application when there is an increase in headcount, pay, etc.
The annual return should be filed online in Form U on or before 31st January of the subsequent year.
The Employees' State Insurance Act, 1948
The ESI Act provides certain benefits to employees in case of sickness, maternity and employment injury. The act
applies to non-seasonal factories using power and employing more than 10 employees, and non-power using
factories and certain other establishments employing 20 or more employees.
All benefits are provided in ESIC hospitals, clinics and approved independent medical practitioners. The wage
ceiling under this act has been enhanced from Rs. 7500 to Rs. 10000 per month.
The act provides period payments to women in case of confinement, miscarriage or related sickness. This is
applicable only to the insured women. They can also claim maternity benefits of about 70% of their salary .

Employees Provident Fund (PF) and Miscellaneous Provisions Act, 1952

The Employee Provident Fund (PF) and Miscellaneous Provisions Act, 1952 is created for the social welfare of an
employee. When one begins the employment, they are expected to contribute monthly to their PF funds. The
employer is also expected to contribute to its employee retirement fund.
Any factory or establishment having 20 or more employees directly or through contract is liable to be covered
under this act.
The PF contribution is calculated on the basic wages and the dearness allowance. It doesn't include food
allowance, House Rent allowance, overtime allowance, bonus, commision, etc.
The wage limit to be covered under this Act is Rs.15,000/- per month.
The employer contribution is calculated at 3.67% of wage in general prescribed by the Central government. Just
like the employer, the employee should also pay an equal contribution.

Contribution Employee Employer

Provident Fund 12% 3.67%

Employee Pension Fund - 8.33%

-No tax exempt

Exemptions -Eligible for deduction under 80C -Tax exempt
The employer is liable to fines for being a defaulter. However, this can extend up to imprisonment of 3 years and a
fine of Rs.10,000/-
The voluntary contribution is also covered under the Employee Provident Fund and Miscellaneous Provision Act,
1952 for an establishment having less than 20 employees.
The admin charges are highlighted below:

EPF Admin Charges EDLI Admin Charges

1. 0.85% of total employee PF wages 1. 0.01% of total EDLI salary

2. Minimum of Rs. 75 per month in the case of an 2. Minimum of Rs. 25 per month in the case of an
non-functional establishment having no non-functional establishment having no
contributory member contributory member

3. Minimum of Rs. 500 per month for contributory 3. Minimum of Rs. 200 per month for contributory
members members

The Payment of Gratuity Act, 1972

The Payment of Gratuity Act applies to every shop or establishment in which 10 or more persons are employed or
were employed on any day of the preceding 12 months.
There is no percentage set by the act for the gratuity amount an employee is entitled. An employer can use the
formula-based approach or even pay higher than that.

Gratuity depends on 2 factors:

 Last drawn salary

 Years of service

To calculate how much gratuity is payable, the Payment of Gratuity Act, 1972 has
divided non-government employees into two categories:

 Employees covered under the Act

 Employees not covered under the Act
Calculation of gratuity
1. For employees covered under the Act
The amount of gratuity payable is calculated using the below formula. The formula is based on the 15 days of last
drawn salary for each completed year of service or part of thereof more than six months.
The Formula:
(15 X Last Drawn Salary X Tenure of Working) divided by 26
Last Drawn Salary= Basic Salary, Dearness Allowance, and Commissions Received on Sales

2. For employees not covered under the Act

There is no law restricting an employer from paying gratuity to his employees even if the organization is not
covered under the Act. The amount of gratuity payable to the employee can be calculated based on half month's
salary for each completed year.
The Formula:
(15 X Last Drawn Salary X Tenure of Working) divided by 30
Last Drawn Salary= Basic Salary, Dearness Allowance, and Commissions Received on Sales

As per the government pensioners' portal, retirement gratuity is calculated like this: one-fourth of a month's basic
pay plus dearness allowance is drawn before retirement for each completed six monthly periods of qualifying
service.
In case of death of an employee, the gratuity is paid based on the length of service, where the maximum benefit is
restricted to Rs 20 lakh.

Latest Minimum wages for Shops & Establishment in Uttar

Pradesh

Effective from Date: 1st Apr, 2019Updated As On: 27th May, 2019

Class of Basic Per VDA Per Total Per

Employment Month Month Day Total Per Month

Unskilled 5750.00 2262.73 308.18 8012.73

Effective from Date: 1st Apr, 2019Updated As On: 27th May, 2019

Class of Basic Per VDA Per Total Per

Employment Month Month Day Total Per Month

Semi-skilled 6325.00 2489.00 339.00 8814.00

Skilled 7085.00 2788.08 379.73 9873.08