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Statutory Compliance in HR & Payroll in 2025

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Statutory Compliance with rules and regulations in payroll and HRMS is a grave legal matter for both employees and the organization’s social security. The Indian Government has declared various regulations and acts to process employee payments. Every company is liable to follow these rules to avoid legal consequences. Whether to follow it or not might be a company’s individual decision, but it may have some severe implications.

What is Statutory Compliance?

The word statutory can be defined as ‘enacted by statute’ or ‘regulations’, and compliance means ‘agreement’. Combining Statutory Compliance forms an agreement to follow regulations.

Statutory compliance adherence provides a great deal of security, starting from employees’ minimum wages to the company’s business existence. Every country develops its own set of rules for organizations to follow, which add up every year. Organizations put a lot of effort and money into adhering to these laws. However, it is not possible for every organization, especially SMEs, to invest a lot of money in this.

Why is Statutory Compliance Important?

Statutory compliance in HR refers to the legal framework that organizations must adhere to regarding employee rights, workplace safety, and fair compensation.

The government mandates these regulations, which are essential for every organization that employs staff, ensuring statutory compliance in India

Key Statutory Acts

• Provident Fund (PF)
• Employees’ State Insurance (ESI)
• Minimum Wages Act
• Professional Tax
• Gratuity, Bonus, and Maternity Benefits
• Industrial Relations and Trade Union Acts

Note: The specific acts and their provisions may vary by state and are subject to periodic updates.

Why is Statutory Compliance Important?

• Employee Protection: Ensures that employees receive fair wages, social security benefits, and a safe working environment.
• Employer Safeguard: Shields organizations from legal and statutory compliance disputes, financial penalties, and reputational harm.
• Business Continuity: Non-compliance can lead to severe consequences, including fines, business disruptions, and challenges during statutory audits.
• Audit Readiness: Statutory audits are mandatory and verify that an organization’s payroll and HR practices align with legal requirements.

Best Practices for Compliance

• Stay informed about changes in statutory and compliance laws at both the federal and state levels.
• Implement robust payroll and HR systems to ensure timely and accurate compliance.
• Conduct regular internal audits to identify and address compliance gaps.

Statutory Benefits Applicable

For Employee’ S

• Ensures minimum wages and equal remuneration to men and women
• Fair treatment of employees and betterment of industrial relations
• Help avoid inhuman conditions of work and guarantee workplace health and security
• Provides social security through compensation and incentives

For the Employer’ S

• Protection of the organization’s existence
• Protection against illegal wage demands from trade unions and employees
• Maintains the organization’s reputation and client engagement
• No risk of fines and penalties

Disadvantages to Non-Adherence

• Financial threat and losses
• Arouses employee conflicts and trust issues
• A warning to the organization’s existence
• Client’s trust issues with the organization

The Government Deployed Rules and Regulations

Take a look at some of the central government-deployed rules for organizations that employ workers. If you find these rules are overwhelming, you can consider using factoHR payroll software, which will help you streamline and automate all of the payroll and statutory compliance processes.

Labour laws in India for private companies are the same throughout and don’t change for a specific company.

Rules regarding HR compliance are distributed to specific sectors:

• Industrial Relations
• Women Benefits
• Social & medical security
• Wages

Industrial Relations Guide for Statutory Compliance

The Industrial Disputes Act, 1947

The Industrial Disputes Act, enacted in 1947, makes provisions for investigating and settling disputes between employees and employers. The main objective of this Act is to ‘maintain peace and harmony in work culture in Indian Establishments.’

This Act applies to the whole Indian nation, including establishments for business, trade, manufacture, and distribution. However, it does not encircle persons in the managerial or administrative field and persons subject to the Army, Air Force, and Navy.

Women Benefits

Equal Remuneration Act, 1976

As the name suggests, the Equal Remuneration Act encloses a gender-based payment equality policy in the industrial sector. It ensures uniform payment to the employees irrespective of men or women to avoid gender bias. It came into the picture because the payment given to women was lower than that of men, though the work amount was the same. Non-compliance with this Act can result in serious fines and penalties.

Provisions under this Act include 1. Not to reduce employees’ salaries to adhere to the Act 2. For the same nature and amount of work, no discrimination is allowed for women. 3. During the formation of an advisory committee that works to increase employment opportunities for women, work hours and their nature shall consist of half women members.

Maternity Benefit Act, 1961

The Maternity Benefit Act was passed in 1961. Therefore, an appropriate leave management system helps HR ensure compliance with such laws. It also provides them with certain months of paid leave during their maternity leave to take care of the child. After maternity, she can continue with her job without any disturbance due to the leaves.

This Act applies to all establishments like factories, shops, private and Government sectors with ten or more employees. During her maternity leave, she will be paid based on average daily wages. But to gain this benefit, she must be working for an organization for at least 80 days within the past 12 months.

Further amendments of this Act in 2017 guarantee

• The amount of paid leaves during maternity leave is increased from the existing 12 weeks to 26 weeks.
• Women who leave for adoption can leave for adopting a child below the age of 3 months, and the commissioning mothers.
• Women who work from home can now continue their work directly from their home with no leave requirements, and are comfortable with it
• A Crèche facility is available for children where an organization is employing more than 50 employees.

Social Security

The Payment of Gratuity Act, 1972

Payment of Gratuity Act guarantees benefits like gratuity and incentives to the employees working in railways, mines, factories, ports, oilfields, shops, and the private sector.

A certain amount is deducted from monthly wages and further provided after an employee’s retirement, offering monetary help, called gratuity. Gratuity is allowed to an employee who has given continuous service for at least five years to a particular organization.

As per section 4(1), gratuity is mandatorily payable for employee death or disablement, even though five years of service is pending. Under section 4(3), the maximum gratuity amount an employee is eligible for is ₹20,00,000, and is liable to tax for gratuity amounts more than stated.

According to section 1 (2), the state of Jammu and Kashmir is not liable for this Act for plantation or ports. As per section 1 (3-A), in case the employee rate somehow drops below 10 for an establishment, the employer must not request a reduction in gratuity. Under section 2 (e), this Act doesn’t apply to apprentices or civil service employees under the Central and State governments.

Gratuity depends on the years of service and the last drawn salary and is calculated according to the formula

Gratuity = Last drawn salary *number of completed service years * 15/26

According to the above formula, the service year with more than six months will be considered one full year, and less than six months will be regarded as zero years.

For example, a service period of seven years and eight months will be eight years, and a service period of six years and four months will be six years.

The Employees’ Compensation (Amendment) Act, 1923

Many services involve hard work, risk of losses, critical injuries, or even death. The Employees’ Compensation Act, enacted in 1923, protects an employee or his/her dependents through compensation under any conditions mentioned above.

According to Section 17A, every employee must be well-informed about their compensation at the time of joining by the employer. Failure of such tasks may result in penalties and fines of ₹5000 to ₹50,000 as imposed by the Government, under section 18A.

The Labour Welfare Fund Act, 1965

The Labour Welfare Fund Act 1965 mandates contributions to a state-level welfare fund aimed at enhancing the quality of life for industrial and factory workers. Governed by individual states, it supports services like healthcare, education, housing, vocational training, and recreational facilities

Why It Matters:

• Fulfills a key social security function, especially for unorganized sectors.
• Central to employer compliance and corporate social responsibility.
• Contributes directly to workforce morale and retention.

The Employees’ Provident Fund & Miscellaneous Provisions (Amendment) Act, 1952

The statutory provident fund act is issued for the social security of the employee. The Employees’ Provident Fund Act is applicable to any establishment employing more than 20 employees. To make this possible, every employee during his/her employment contributes some amount from their salary to the Provident Fund. Even their employer is required to contribute to this fund. Companies can also invest in the provident fund software to manage their employees’ funds. This fund then ensures social security after employees’ termination or retirement. EPF of every corresponding employee must be deducted from his/her salary and filed before the PF return due date, which is the 15th of each month.

Employees’ PF calculation is based on basic salary and DA. Other allowances like HRA, overtime allowance, incentives, etc. ,are not included under this. The basic wage covered in this is ₹15,000 monthly. PF divides into two funds: EPF (Employees’ Provident Fund) & EPS (Employees’ Pension Scheme). Consider the following PF rates declared by the government:

Any failure in this Act may lead to 3 years of imprisonment and a penalty of ₹10,000. Apart from EPF, other provident fund meanings and types include

SPF – Statutory Provident Fund

SPF is only meant for employees who are enrolled in Government and Semi-government enterprises.

UPF – Unrecognized Provident Fund

Started by employers or employees in any organization, UPF is not a government-approved scheme.

PPF – Public Provident Fund

Whether an employer or not, the PPF scheme, which is savings-cum-tax-savings option, is open to every Indian citizen

The Employees’ State Insurance – ESI Act, 1948

Employees’ State Insurance Act ensures absolute medical security, including sickness, maternity, and injuries for employees working in non-seasonal factories, including power with more than ten employees and non-power and other establishments with more than 20 employees.

The wage limit covered under this Act is ₹21,000 per month. This Act applies to all states except Manipur, Sikkim, Arunachal Pradesh, and Mizoram. Benefits can be availed through an ESIC online appointment for hospitals, clinics, and practitioners.

Both the employee and the employer contribute to the ESI scheme on the ESI payment portal, and the ESI Percentage contributions made to the same are

Tax Deducted at Source (TDS)

TDS or Tax Deducted at Source is a certain amount of money deducted from the employee’s payment as an account of income tax to prevent tax evasion afterward. Employees can file a TDS return for the deducted tax, which they can get refunded.

TAX Slabs

Here is the tax liability structure of employees under the latest tax regimes for the financial year 2024-25 (assessment year 2025-26), including professional tax slabs and relevant compliance details:

Income Tax Slabs and Rates for Individuals (below 60 Years)

New Tax Regime (Section 115BAC) – FY 2024-25

Note: The new tax regime is now the default; you must opt for the old regime if you wish to claim deductions and exemptions.

Tax Slabs for Senior Citizens

Senior Citizens (60–79 years):

• Old Regime: Basic exemption up to ₹3,00,000; rest of slabs same as above.
• New Regime: No separate slabs, same as for those below 60 years.

Super Senior Citizens (80+ years):

• Old Regime: Basic exemption up to ₹5,00,000; rest of slabs as above.
• New Regime: No separate slabs, same as for those below 60 years

Wages

The Payment of Wages (Amendment) Act, 2017 (No.1 of 2017)

Payment of wages acts as a guarantee of payment to employees on time without any deductions other than those stated by the government authority. Though this doesn’t apply to employees having a ₹24,000 wage per month.

Under section 4, every person responsible for payment of wages must fix the duration for payment, and that should not exceed a month. Meaning, an employee can be paid daily, weekly, fortnightly, or monthly. Under section 5, for a railway, industry, or other establishments with less than 1000 employees, it must process the payment by the 7th of the subsequent month, which exceeds the 10th of the month for establishments with more than 1000 employees.

According to section 5(2), if an employee resigns or is removed, his/her salary must be paid within two days of termination.

The Payment of Bonus Act (Amendment), 2007

Payment of Bonus Act ensures annual bonuses are paid for employees in establishments, including factories with more than 20 employees. The yearly bonus is calculated based on the employees’ salary and the profit of the establishment. Any employer ensures that the bonus paid must be a minimum of 8.33% and a maximum of 20%. Employees with a salary of ₹21,000 or less are eligible for a bonus after working for 30 days in an establishment.

Bonus payment must be provided within eight months from the financial year’s closing. This bonus must only include basic and DA and should exclude other allowances.

For employees caught up in fraud, misconduct, or absenteeism, the establishment is not liable to pay the bonus.

Minimum Wages Act, 1948

The Minimum Wages Act, enacted in 1948 by the Indian Parliament, states that it provides minimum wages/salaries to skilled and unskilled laborers. The Constitution has defined a specific living wage that includes primary livelihood, including health, food, comfort, education, and dignity.

This Act provides for fixing the wage rate for every establishment. The criteria for following under this Act include

• Working hours for a typical day would consist of 1/2 working hours per day must have one to two break/rest intervals. 1/2 at least one week off to be given to the labor. 1/2 per day wage must not be any less than the given overtime rate.
• For any employee working on a task that includes more than one task, they must be given a salary based on each task’s working hours.
• The employer is permitted to maintain records of the payslips and wage structure of a particular employee.

Under the Act, the Government may notify the employer to revise or fix minimum wages. It includes two methods of fixation/revision

1. Committee Method

The government establishes a committee and a subcommittee to inquire into and recommend minimum wages.

2. Notification Method

The Government publishes an official date in the Official Gazette before all advice and recommendations must be collected.

Shops & Establishments Act

The Shops & Establishments Act is a state-specific legislation that governs the working conditions and rights of employees in shops, commercial establishments, hotels, restaurants, theatres, and other places of public amusement or entertainment across India. Each state and union territory has its version of this Act, but the core objectives remain consistent nationwide.

Who Must Comply?

All shops, offices, warehouses, hotels, restaurants, theatres, and other commercial establishments (except those covered under the Factories Act) must register under the respective state’s Shops & Establishments Act. Registration is typically mandatory for statutory compliance in India, which must be completed within 30 days of commencing business.

Conclusion

Understanding and adhering to India’s complex labor laws and statutory requirements is a significant business challenge. This guide has provided a comprehensive overview of the various Acts and labor laws that impact payroll processing. However, staying updated and ensuring complete compliance can be a continuous effort. Payroll software in India can be a valuable ally in navigating statutory compliance.

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