Statutory Compliance in HR and Payroll: A Comprehensive Guide

Every organization operating in India has many rules and regulations to comply with. There is central law; in addition to that, there are different laws implied by the state government of every state. Payroll and statutory compliance mean rules and regulations framed and imposed on organizations for the company’s smooth functioning and employees’ betterment. It must be mandatorily complied with.

Many employers are unaware of payroll statutory compliance or find it daunting. Compliance with these statutory laws will save the employer and organization loads of penalties and lawsuits from aggrieved employees, trade unions, etc. Even a petty blunder with the compliance of the stated laws might lead the company into many legal issues that will hamper the growth of the business considerably. Research conducted by KPMG in 2019 states that 80% of companies in India believe that complying with the statutory law positively impacts their business of companies in India believe that complying with the statutory law positively impacts their business.

Expert Advice

Carrying out business activities and keeping the employees satisfied with statutory compliance is a tough task. So, to effectively comply with the laws, appropriate software must be chosen that aligns with the organizations' requirements. This will assist organizations in avoiding unnecessary hassles and streamlining HR compliance.

This blog emphasizes the list of statutory compliance in HR and Payroll, statutory compliance definition, importance, benefits, essential statutory compliance requirements in India, etc. Let’s understand the meaning of statutory compliance before we delve deeper.

What Is Statutory Compliance?

The meaning of Statutory Compliance is in the name itself, wherein Statutory means ‘enacted by statutes. In layman’s terms, it means ‘rules and regulations that are imposed,’ and Compliance means ‘the act of obeying or following.’

Hence, Statutory Compliance means following the rules and regulations enacted by the central and the state government. It is a legal structure formulated by the government within which the organizations must carry out their operations.

Abiding by these rules and regulations is essential for any company, regardless of size; otherwise, the companies will face punishments and heavy fines. Now let’s understand the importance of statutory compliance for companies.

What Is the Importance of Statutory Compliance? 

Whether a startup or a business giant, all companies must compulsorily adhere to statutory compliances to avoid legal hassle. The HR department or employer must have in-depth and operating knowledge about these rules and regulations to avoid the risk associated with non-compliance with these laws.

Companies must adhere to the laws imposed by central and state governments. The labor laws keep on amending every year. The companies need to stay updated with all the latest amendments and ensure compliance.

Statutory compliance is imposed to benefit employees, companies, and employers. The main motto of these laws is to streamline and automate the workflow and reduce the rate of disputes by keeping all the entities satisfied.

Hand handling the process of complying with a plethora of laws is practically not feasible. As a result, several companies provide software for HR departments so that companies can effectively comply with the relevant laws.

Therefore, Statutory Compliance is paramount for companies to effectively conduct operations, as its non-compliance will result in major legal issues. The government can also put a hold on the company’s legal existence in such a scenario.

 Let’s understand the benefits of statutory compliance in HR and payroll processes.

Benefits of Statutory Compliance in HR and Payroll

HR department attracts the highest number of statutory compliances as the HR is responsible for sourcing, recruiting, selecting, onboarding, retaining, handling payroll, etc. All these processes attract compulsory compliance with several laws for companies like offering provident fund (PF), House Rent Allowance (HRA), Bonus, Dearness Allowance (DA), etc. 

Apart from that, several deductions are included in payroll and hr statutory compliance, like Tax Deducted at Source (TDS), Professional Tax (PT), Provident Fund (PF), etc. This is just a gist; there are multiple sub-clauses that apply based on the employee’s salary slab based on which the calculations are made.

These are some of the compliances that are related to the employees, and there are other statutory compliances that HR has to keep in mind, which are related to a company, i.e., Corporate Social Responsibility (CSR), framing internal policies and procedures that are in adherence to the government laws, taxation, etc.

Nowadays, plenty of software are available for tasks related to HR and payroll that are developed with all the relevant laws and regulations to comply with. With amendments in the regulations, these software are also updated, so there is no hassle with regard to compliance. Adopting HR and Payroll software will streamline the process and make compliance effective leaving little to no room for errors.

Hence the statutory compliances are for the benefit of both employees and companies. Let’s look at the benefits of statutory compliance from the perspective of employees and organizations or employers.

1. Benefits of Statutory Compliance for Employees

Every employee of every organization wants certain assurances for their security. Earlier, there were no such rules and regulations that would benefit the employees or protect them. Due to this, the organizations made their own rules and regulations, which were only favorable to them. People faced various issues like workplace discrimination, no fixed working hours, no surety of wages, and little to no social or workplace security.

When these issues rose exponentially then, the government started framing rules for the benefit of employees in the name of labor laws and made it compulsory for companies to follow those rules to save the employee’s interests.

Some major rules are as follows:

• Companies must ensure that employees receive assured minimum wage as stated by the government, and competitive wages must be provided to qualified employees.
• Providing effective work conditions to employees that don’t impact their health negatively.
• Working hours must be fixed and set so that an employee can maintain the work-life balance.
• The employment must be such that it won’t hamper an individual’s social security.
• No discrimination must be made between male and female employees by employers with regard to wages, treatments, promotions, etc.

The laws framed and imposed by the government are marked as statutory compliance for the companies and cover all the abovementioned aspects for the employees’ benefit. With changing times, necessary amendments are brought in these statutes to make it easy for employees.

Hence these were the benefits of statutory compliance for employees. Now let’s have a quick look at the benefits for companies.

2. Benefits of Statutory Compliance for a Company

The benefits of statutory compliance are not one-sided. It is equally beneficial for companies as well. The main motto of these compliances is to keep the workforce satisfied and make them feel secure. All companies have to comply with these rules. This will streamline the process and legal issues will be reduced, and operational efficiency can be gained.

Benefits are such that

• Effective statutory compliance will assist the company or employer in eluding fines and lawsuits.
• Suppose the workforce is unsatisfied for any reason, like low wages, inappropriate treatment, security, discrimination, etc. Companies will have to deal with angry employees, trade unions, etc. With effective compliance, all these issues can be avoided.
• If any dispute arises even after statutory compliance, the issues can be solved legally, and effective resolution can be gained.
• The most important benefit is that it will assist the companies in maintaining an effective work environment that will boost their progress.
• A satisfied workforce and appropriate compliance will enhance the business reputation effectively, which will be beneficial for business.

Hence, the rules are framed considering the well-being of both employees and companies. Being partial to any one entity is not fair by law and will cause unnecessary issues between the parties and the filing of cases for action.

These were the benefits of statutory compliance for the companies. But what are the consequences if the rules and regulations are not complied with? Let’s have a look at those consequences.

Consequences in the Case of Non-Compliance

There are some serious actions that companies will have to face in case they don’t comply with the laws imposed. They are as follows:

1.   Business integrity takes a major hit. With such complaints and cases towards the company, the brand value decreases, and reputation gets hampered.
2.   Government levies heavy fines and penalties. In some cases, the employer can face imprisonment.
3.   Companies will have to face ample lawsuits and legal issues from several entities like dissatisfied employees, trade unions, government bodies, etc. This will adversely affect the growth of the company.
4.   With all these legal issues and loss of reputation clientele of the company will be severely impacted.
5.   As government bodies get involved, they will conduct audits on other aspects of the company to find any other legal irregularities.

All these are severe circumstances that, if they occur, will cause a negative impact on the functioning of the business and stop its progress. So, compliance with all the relevant rules and regulation is important for a company of any kind and size.

There are specific laws that are included in the list of statutory compliance that all organizations must comply with. Let’s have a look.

List of Statutory Compliance in HR

Below mentioned are some of the important government laws for statutory compliance. They are categorized into 5 topics. These topics include the laws enacted by the government for the well-being of employees and have to be compulsorily complied with by the companies. They are as follows:

1. Industrial Relations
2. Wages
3. Social Security
4. Women’s Benefit
5. Tax Liabilities

Now, let’s look at the acts that fall under the above-mentioned topics.

1. Industrial Relations

• Industrial Disputes Acts, 1947
• Industrial Employment (Standing Orders) Act, 1946
• Trade Unions Act, 1926
• Factories Act, 1948
• Shops and Establishments Act

2. Wages

• The Payment of Wages Act, 1936
• The Payment of Bonus Act, 1965
• Minimum Wages Act, 1948

3. Social Security

• The Payment of Gratuity Act, 1972
• The Workmen Compensation Act, 1923
• The Employees Provident Fund and Miscellaneous Provisions Act, 1952
• The Employees State Insurance Act, 1948
• Labour Welfare Fund Act, 1965

4. Women’s Benefit

• Equal Remuneration Act, 1976
• Maternity Benefit Act, 1961

5. Tax Liabilities

• Tax Deducted at Source (TDS)

Hence this is the list of the laws that are enacted for businesses that operate in India. But not all of these laws apply to every company; there are some major or common laws that apply to almost every organization in India that will be discussed in the next section.

Now we are about to discuss those acts that are considered essential statutory requirements in India.

What are the Major Statutory Requirements in India?

Major acts included in the statutory requirements are as follows:

1. Payment of Wages Act, 1936

This act incorporates provisions for paying appropriate wages to direct and indirect employees. No unauthorized deductions must be made from those wages, and payments are to be made promptly.

Some important provisions of the act are as follows:

• If the employee strength of an organization is less than 1000 employees, then wages must be paid on or before the 7th of the month.
• Similarly, if there are more than 1000 employees, the payment must be cleared before the 10th of the month.
•  Maximum limit of the wage period is one month.
• Cash payments off wages can only be made if the employee gives express consent. Otherwise, all the wages must be paid through bank transfer.

2. Minimum Wages Act, 1948

Both state and the central government are empowered to determine the minimum wage under the purview of this act.

Minimum wages are decided based on region, profession, and the sector in which the business operates.

The cost of living is considered when deciding the minimum wage rates.

There are many aspects on which the minimum wage can be decided. They can be based on hour, day, or month.

The decision on minimum wage is taken by committees or sub-committees and commuted by way of notification.

3. The Payment of Bonus Act, 1965

This act entails provisions related to the payment of bonuses to employees whose salary is less than 21000/- and has worked for at least 30 days in a financial year.

This act applies to every organization with more than 20 employees taking salaries from them.

The bonus rates generally range from 8.33% to 20%

The maximum time limit to clear the bonus amount is within 8 months of the closing of the accounting year.

4. Tax Deducted at Source (TDS)

Employees are subject to TDS unless they submit a Form 15G/15H that is provided to disclose tax-saving investments. The revised TDS slabs are as follows:

It falls under the liability of the HR department to make the necessary deductions when the income tax is being filed.

5. The Maternity Benefits Act of 1961 (Amended in 2017):

This Act is specially framed for pregnant women who are working. The provisions of this act are meant to administer and authorize payment of maternity benefits to pregnancy. Every woman employed in any government sector, shop, or organization where more than ten people are employed is eligible for the maternity benefits stated in the Act.

6. Employee State Insurance Act, 1948

Any establishments with more than 20 employees have to abide by the provisions given in the Act. Employees whose salary is more than Rs 21000/- are covered under this Act. This covers maternity leave as well. According to the amendment of the Act, if free-of-cost care is not provided, then the employer has to pay Rs 3500/- as a medical bonus.

7. Labour Welfare Fund Act, 1965

The Labour Welfare Fund Act applies in 15 states, including the union territories, and the main motto of the Act is providing social security to employees. There are specific provisions for specific states. The welfare fund is identified based on salaries, designation, and the number of employees in the organization.

8. Equal Remuneration Act, 1976

The main motto of this act is to stop gender discrimination in the workplace, especially with women, and govern organizations to pay equal remuneration to employees on the same designation. All the organizations are covered under its ambit regardless of the employee size.

9. Shops and Establishments Act 1953

This Act governs the employment conditions to be maintained by the organizations for its employees. It includes aspects like weekly and regular working hours, overtime compensation, official holidays, and leaves. All businesses have to get registered under this act within 30 days of incorporation, even if there are no employees.

10. Employee Provident Fund and Miscellaneous Provisions Act, 1952

Any organization with more than 20 employees have to adhere to the provision of this Act. In this Act, the employer and the employee must contribute a portion of their salary to this fund. This ensures social security for an employee after their termination or retirement, as these funds are saved under their name in the EPF account, which can be withdrawn.

If the wage is Rs 15000/- or more, the employee is eligible for PF. It is calculated considering the basic salary and dearness allowance, and other aspects like HRA, overtime, bonus, and commissions are not considered. If the employer defaults in the payment, then under this Act, he can get punishment of imprisonment of 3 years and a fine of Rs 10000/-.

11. The Payments of Gratuity Act, 1972

This Act applies to organizations with more than ten employees. When an employee completes 5 years of continuous employment in an organization, the employer is liable to start his/her gratuity account. This amount will be receivable at the time of termination or retirement of the employee.

There are 2 formulas for counting gratuity. They are as follows:

1. Companies registered under this Act:

Gratuity = (15 x latest salary x tenure)/26

2. Companies not registered under this Act

Gratuity = (15 x latest salary x tenure)/30

Hence these are the major acts considered mandatory for payroll and hr statutory compliance by companies or employers.

Nowadays, many payroll software are available that assist organizations in calculating provident funds, gratuity amounts, insurance, etc., for the employees accurately. With this software, employers do not have to worry about the risk of non-compliance with any statutes.

Wrapping Up

To sum it up, statutory compliance is essential for all organizations conducting business in India. To operate seamlessly, the law stated must be complied with, and legal consequences can be avoided. There are too many laws, and adhering to each one of them manually is a complex task.

Thanks to technology, many software are available that assist organizations in complying with the laws effectively as these software are developed, incorporating the relevant law provisions. This makes the tasks of the HR department easy, and they can provide effective working conditions to employees to keep them satisfied.

Priya Naha

Priya is a seasoned writer with expertise in the SaaS industry. With over five years of experience in the field, she deeply understands the requirement of this specific industry, its techniques, and tools. Her articles, whitepapers, and blog posts are known for their clarity, practicality, and actionable insights. Priya also possesses in-depth knowledge of SEO and content marketing, which enables her to develop effective strategies to increase website traffic and improve brand visibility.