Principal employer - Definitions & compliances required under various act

Ask the Community Statutory Compliance
1

We are in on going proprietary business with less than 7 employees having outsourcing business.

  1. What are the statutory labour compliances applicable under various statutes?
  2. Are there any benefits for new registrations for employer or employees?
  3. If the entities to whom we provide services are considered as Principal Employer & whether they are obliged to statutory labour compliances if we fail to do so?
  4. Would appreciate your advise on above queries with references as appropriate under specific acts.
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Hi @sneham95 ,

To answer your questions regarding statutory labor compliances applicable to your proprietary business, which has less than seven employees and is involved in outsourcing.

1. Statutory Labour Compliances Applicable

Even though you have fewer than seven employees, you are still subject to certain statutory labor laws depending on the nature of your business, regardless of its size. Here are some key laws and compliances you need to be aware of:

  • Shops and Establishments Act (State-Specific): Since you’re running an outsourcing business, this Act regulates working conditions, working hours, overtime, and employee rights. Registration under this act is mandatory for any business.
  • The Payment of Wages Act, 1936: Although this Act primarily applies to businesses with a larger workforce, you are still expected to comply with provisions regarding timely wage payments to employees.
  • The Minimum Wages Act, 1948: Regardless of the size of the company, it is mandatory to pay employees no less than the minimum wages set by the state government for their respective categories of work.
  • The Employees’ Provident Fund (EPF) Act, 1952: This Act applies when you have 20 or more employees. Since you have fewer than 20 employees, you are not required to provide EPF benefits unless you voluntarily opt for coverage.
  • The Employees’ State Insurance (ESI) Act, 1948: ESI applies to establishments with 10 or more employees (with wages under a specific limit). Since you have fewer than 10 employees, you are not mandated to register under ESI.
  • The Payment of Bonus Act, 1965: This Act applies to establishments with 20 or more employees; thus, it’s not applicable to your business yet.
  • The Maternity Benefit Act, 1961: Applicable to establishments with 10 or more employees. Since your employee count is less than this threshold, it does not apply.

2. Benefits for New Registrations (For Employer and Employees)

If you’re registering a new business, there are some benefits you could explore:

  • Startup Benefits: India has special policies for new businesses and startups that could offer exemptions or simplified compliance for the first few years. This includes benefits under the Startup India initiative, though they may not directly relate to labor law but could be useful for compliance ease.
  • Employee Benefits under EPF/ESI: Opting for voluntary registration under the EPF or ESI could provide your employees with social security benefits such as health insurance and a retirement corpus, which can help with employee retention. These benefits are not mandatory for your business size, but registration could improve employee satisfaction and offer security.

3. Principal Employer’s Obligations if You Fail to Comply

When you provide services to another entity, that entity may be considered a Principal Employer under certain labor laws. Here’s what happens if your business does not comply with statutory requirements:

  • The Contract Labour (Regulation and Abolition) Act, 1970: This law mandates that the principal employer is responsible for ensuring that contractors comply with labor laws. If your company, acting as a contractor, fails to comply, the principal employer might be held responsible and can be penalized under this Act.
  • Vicarious Liability: If you fail to comply with EPF or ESI provisions (in cases where it applies), the principal employer may be obligated to ensure that workers engaged in their premises receive the benefits under these laws. Thus, they may be legally obliged to make contributions or payments in case of your default.

Hope this helps.

Community Manager.

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Hi Hemant,

Regarding your questions:
1. What are the statutory labour compliances applicable under various statutes? &
4. Would appreciate your advise on above queries with references as appropriate under specific acts.

In India, the term “Principal Employer” is used primarily in the context of labor laws, especially regarding contract labor, employee benefits, and other regulatory compliances. It generally refers to an entity (person or organization) that engages contractors or subcontractors for the execution of certain work. This entity is responsible for ensuring that all legal requirements concerning labor rights and benefits are fulfilled, even if the actual workers are employed by the contractor.

Principal Employer Definition under Key Laws:

  1. The Contract Labour (Regulation and Abolition) Act, 1970:

    • The term “Principal Employer” under this act refers to the establishment’s owner or occupier and includes the head of the department or any authorized person in government offices, factories, or other establishments.
    • The Principal Employer is liable for ensuring the welfare of contract labor, including payment of wages, adherence to working conditions, and providing benefits like Provident Fund (PF) and Employee State Insurance (ESI).

  2. The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952:

    • The employer (including the principal employer) has the responsibility to ensure that the provident fund contributions for contract workers are deducted and deposited in accordance with the law.

  3. The Employees’ State Insurance Act, 1948:

    • The Principal Employer must ensure that workers employed through contractors are provided with social security benefits such as ESI (Employee State Insurance) coverage.

  4. The Payment of Wages Act, 1936:

    • Under this act, the Principal Employer is responsible for ensuring that workers are paid timely wages, even if they are hired through a contractor.

  5. The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996:

    • The Principal Employer is accountable for the welfare and safety of construction workers, including their registration, providing amenities, and adhering to safety norms.

Key Compliances Required for Principal Employers under Indian Labor Laws:

  1. Contract Labor License:

    • The Principal Employer must obtain a license if 20 or more contract workers are employed in the organization. This is mandated under the Contract Labour (Regulation and Abolition) Act, 1970. It is also necessary for the contractor to obtain a separate license to supply contract labor.

  2. Wage Compliance:

    • The Principal Employer is responsible for ensuring that workers, including those hired through contractors, are paid the minimum wages as per the Minimum Wages Act, 1948. They should also ensure timely payment of wages.

  3. Provident Fund (PF) Compliance:

    • Contributions to the Employees’ Provident Fund (EPF) for contract labor must be ensured by the Principal Employer. They are required to make sure that the contractor is deducting and depositing contributions. In the case of failure by the contractor, the Principal Employer becomes liable for the same.

  4. Employees’ State Insurance (ESI):

    • If the establishment is covered under the ESI Act, the Principal Employer must ensure that ESI contributions are made for contract labor as well. Any lapses in this can lead to the Principal Employer being held responsible.

  5. Payment of Bonus:

    • Under the Payment of Bonus Act, 1965, the Principal Employer is liable to ensure that contract workers receive bonuses, provided they meet the eligibility criteria.

  6. Gratuity Compliance:

    • If applicable, the Principal Employer must ensure compliance with the Payment of Gratuity Act, 1972, where contract workers with continuous service of five years or more are entitled to gratuity upon termination of employment.

  7. Workplace Safety and Welfare Measures:

    • Principal Employers must ensure that all safety measures and welfare provisions, such as medical facilities, drinking water, sanitation, and safety equipment, are provided to contract workers. Non-compliance can lead to penalties under the Factories Act, 1948, and other industry-specific regulations.

  8. Muster Roll and Registers:

    • Maintenance of registers like the register of workers, wage registers, and attendance records for contract labor is mandatory for the Principal Employer. These records must be available for inspection by authorities under labor laws.

  9. Discharge of Workmen:

    • Under labor laws, the Principal Employer must ensure that termination or discharge of contract workers follows legal procedures. Arbitrary terminations can lead to legal disputes, and the Principal Employer may be held accountable.

  10. Compliance Audits:

    • It is advisable for Principal Employers to conduct regular internal audits to ensure that contractors comply with labor laws, as failure to comply can attract penalties and legal action.

Principal Employer’s Liabilities:

If the contractor fails to comply with legal obligations regarding wages, social security, or working conditions, the Principal Employer is held liable to fulfill these obligations. Therefore, regular monitoring and due diligence of contractors are essential for avoiding legal complications.

By ensuring proper compliance with these labor laws, the Principal Employer can avoid potential legal issues and foster a fair and safe working environment for all employees, including contract labor.

2. Are there any benefits for new registrations for employer or employees?

In India, registering as an employer under various labor laws offers several benefits, both in terms of compliance and operations. These benefits not only ensure legal compliance but also provide protection to the employer and employees. Here are the key benefits of new registrations for employers under labor laws:

1. Legal Compliance and Avoidance of Penalties:

  • Prevention of Penalties: By registering under applicable labor laws, employers avoid legal penalties, which can include fines or imprisonment for non-compliance. Compliance ensures that you meet statutory requirements such as wages, benefits, and working conditions for employees.
  • Smooth Business Operations: Proper registration under labor laws helps in avoiding disruptions due to inspections, complaints, or legal challenges from authorities.

2. Enhanced Employee Trust and Morale:

  • Employee Confidence: Registration with labor authorities builds trust among employees as it ensures that their rights are protected. It assures employees that the organization is legally compliant with regard to wages, safety, and benefits.
  • Retention and Recruitment: Being a legally registered entity makes the company more attractive to potential employees, helping with recruitment and retention.

3. Access to Government Schemes and Incentives:

  • Incentives for Employers: The Indian government periodically offers incentives for employers who comply with labor regulations, such as tax benefits, subsidies, and other financial assistance for businesses that employ a certain number of workers.
  • Ease of Doing Business Initiatives: Certain states and central government schemes provide benefits to employers under the “Ease of Doing Business” initiative, reducing red tape and providing streamlined processes for compliance.

4. Social Security for Employees:

  • Employees’ Provident Fund (EPF): Registration under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 allows employers to provide their employees with social security benefits like EPF, pension, and insurance. This is particularly attractive to employees and adds to the organization’s goodwill.
  • Employees’ State Insurance (ESI): Employers registered under the Employees’ State Insurance Act, 1948 can provide their employees with health insurance, medical benefits, maternity benefits, and disability benefits.

5. Ensures Workplace Safety and Standards:

  • Occupational Safety, Health, and Working Conditions Code (OSH Code): Registration under relevant safety regulations ensures that employers are meeting workplace safety standards, protecting themselves from liability in the event of accidents, and safeguarding the health and welfare of their workers.
  • Factory License and Inspection Compliance: Employers running manufacturing units are required to register under the Factories Act, 1948. Compliance with this Act ensures safety, health, and welfare measures are in place, reducing the risk of accidents and enhancing productivity.

6. Dispute Resolution and Legal Protection:

  • Protection in Legal Disputes: Registered employers are better protected in legal disputes with employees, trade unions, or labor authorities. Compliance with labor laws provides a legal framework to address disputes related to wages, working conditions, and benefits.
  • Dispute Resolution Mechanisms: Employers registered under labor laws can access formal channels for dispute resolution, such as labor courts or industrial tribunals, thereby reducing the risk of strikes or work stoppages.

7. Financial and Employment Record Keeping:

  • Ease of Record Keeping: Registration under labor laws often comes with requirements for systematic record-keeping, such as attendance records, wage registers, and bonus details. This helps in organizing employee information efficiently and supports audit processes.
  • Tax Benefits and Deductibility: Some expenses, such as contributions to EPF, ESI, or employee gratuities, are tax-deductible, helping to reduce the overall tax burden of the business.

8. Compliance with Gratuity and Bonus Payments:

  • Gratuity Payments: Employers registered under the Payment of Gratuity Act, 1972 are obliged to provide gratuity to employees who have completed five years of continuous service. Proper registration ensures smooth payments and avoids disputes.
  • Bonus Compliance: By registering under the Payment of Bonus Act, 1965, employers can legally determine and pay bonuses to eligible employees. It helps avoid penalties for non-payment or incorrect calculation of bonuses.

9. Corporate Reputation and Market Access:

  • Positive Corporate Image: Registered employers enjoy an enhanced corporate reputation, as it reflects a responsible approach to employee welfare and legal compliance. This can also boost the company’s profile with investors, clients, and suppliers.
  • Access to Government Contracts: Many government contracts require compliance with labor laws as a prerequisite. Employers registered under relevant labor regulations can qualify for public tenders and contracts, opening up new business opportunities.

10. Simplified Employment Compliance under Codes:

  • New Labor Codes (2020): With the new labor codes consolidating various laws (e.g., wages, social security, occupational safety), registration under these codes ensures that employers comply with streamlined regulations. The new codes simplify processes like hiring, retrenchment, and dispute management.

By registering under relevant labor laws, employers not only ensure compliance but also benefit from a structured approach to managing their workforce, improving employee relations, and gaining access to incentives. This is crucial for maintaining a sustainable, legally compliant, and productive work environment.

3. 1. If the entities to whom we provide services are considered as Principal Employer & whether they are obliged to statutory labour compliances if we fail to do so?
Where an entity comes under the ambit of ‘Principal Employer’, they are subject to statutory labour compliances. They should ensure their service providers and contractors are compliant as required under the specific laws that depends upon the nature of services.

Legal Advice Disclaimer:
The information provided here is for general informational purposes only and does not constitute legal advice. It is not intended to replace professional legal consultation, nor should it be relied upon as legal guidance. Laws and regulations may vary depending on the jurisdiction, and they can be subject to change. For specific legal advice regarding your particular situation or compliance with applicable laws, you should consult a licensed legal professional or attorney.

Regards,
Bhuvana Anand

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In addition, there are some general categories of entities and individuals that are typically exempted from labor laws in India:

1. Small Enterprises and Startups

  • Small Establishments: Some labor laws have specific thresholds based on the number of employees. For example:
    • The Factories Act, 1948: It typically applies to factories employing 10 or more workers with power, or 20 or more workers without power. Smaller entities with fewer workers may be exempted.
    • The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952: Establishments with fewer than 20 employees are generally exempt from registering and contributing to the EPF.
  • Micro and Small Enterprises (MSEs): Often, smaller enterprises are given temporary exemptions or compliance relaxations in labor laws to encourage their growth, as part of initiatives like “Ease of Doing Business.”

2. Specific Sectors

  • Agriculture Workers: Many labor laws, like the Factories Act, do not apply to agricultural operations, unless they involve a manufacturing process with more than the specified number of workers.
  • Educational Institutions: Certain labor laws like the Industrial Disputes Act may not apply to educational institutions, though they are generally governed by separate rules laid down by the education boards or state laws.
  • Charitable and Religious Institutions: Many labor laws exempt religious and charitable organizations, especially those not engaged in commercial activities. This exemption, however, may vary by state or by the nature of the organization’s activities.
  • Public Sector and Government Employees: Many labor laws, such as the Payment of Wages Act, the Industrial Employment (Standing Orders) Act, etc., do not apply to employees of the central or state government, as these employees are covered by separate rules governing civil services.

3. Managerial and Supervisory Employees

  • Managerial and Administrative Employees: Many labor laws, including the Payment of Wages Act, 1936 and the Minimum Wages Act, 1948, exempt employees in managerial, supervisory, or administrative roles. For example, the Industrial Disputes Act, 1947, typically does not apply to employees engaged in managerial or administrative roles who are involved in hiring, firing, or other supervisory duties.
  • Employees Earning Above a Certain Wage Threshold: Some laws exclude employees earning wages above a certain limit. For example, employees earning more than ₹21,000 per month (as of 2023) are generally exempt from the Payment of Bonus Act, 1965.

4. Contract Workers and Temporary Workers

  • Apprentices: Apprentices registered under the Apprentices Act, 1961, are exempt from many labor laws, as they are considered trainees and not employees.
  • Contract Workers: Although contract workers are protected under specific legislation (like the Contract Labour (Regulation and Abolition) Act, 1970), they may be exempt from laws applicable to regular employees of the principal employer. However, employers are still responsible for ensuring compliance with basic labor rights.
  • Seasonal Employees: Some labor laws provide exemptions for seasonal establishments or industries, such as sugar factories or rice mills, which operate only during certain periods of the year.

5. Domestic Workers

  • Domestic workers (such as maids, drivers, cooks) in individual households are exempt from many labor laws that typically apply to workers in formal establishments. However, efforts are underway to bring domestic workers under formal labor protections in some states.

6. Family Businesses

  • Unpaid Family Workers: Certain labor laws, such as the Factories Act, do not apply to family members working in small family-owned businesses where they do not receive regular wages.

7. Specific Employment Contracts

  • Employees with Special Contracts: Some employees with special contracts, particularly in high-skilled jobs like IT professionals or employees in the managerial category, may be exempt from some provisions of labor laws such as the working hours regulations under the Factories Act.
  • Daily Wage or Casual Workers: In many cases, laws like the Payment of Gratuity Act and the Provident Fund Act do not apply to casual or temporary workers, unless they cross certain service thresholds.

8. IT/ITES and Startups Exemptions

  • IT and ITES Sectors: In many states, IT and IT-enabled service (ITES) companies are exempted from the application of certain labor laws such as the Industrial Employment (Standing Orders) Act, the Factories Act, and restrictions on night shifts. However, this varies state by state, and these exemptions are usually provided to encourage the growth of the tech industry.
  • Startups: Startups are often granted exemptions or simplified compliance procedures under labor laws as part of the government’s “Startup India” initiative. These exemptions may relate to laws like the Industrial Disputes Act or the requirement to maintain detailed registers under labor legislation.

9. Exemptions under the New Labor Codes

Under the new labor codes introduced in 2020 (not yet fully implemented as of 2024), certain exemptions and relaxations are provided to specific sectors or categories of workers:

  • Thresholds for Applicability: For example, under the Occupational Safety, Health, and Working Conditions Code, 2020, certain smaller establishments with less than 10 employees are exempt from detailed compliance requirements.
  • Self-Certification for Startups and Small Businesses: The new labor codes propose simplified compliance through self-certification for startups and small businesses, reducing the burden of inspections and reporting.

10. Exemptions for Emergency or Essential Services

  • Defense and Emergency Services: Employees working in essential services like defense, police, and emergency medical services are often exempted from certain labor laws, such as those related to working hours or strikes, under the Essential Services Maintenance Act (ESMA).

While many sectors, roles, and types of establishments may be exempt from one or more labor laws, it is crucial for employers to carefully assess which laws apply to their business based on size, industry, and employee classification. Employers are advised to consult legal experts to ensure proper compliance with labor laws and understand the specific exemptions applicable to their operations.

Regards,
Bhuvana Anand

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Dear Bhuvana

Thanks a lot for your inputs.

Warm regards,
Hemant Karmalkar

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Here’s a course Statutory Compliance for Payroll in India - An Introduction on Udemy by greytHR Academy.

This course would provide a detailed overview with required resources about the statutory compliance requirements pertaining to payroll processing in India. The course focuses on Eight main compliance requirements that the payroll department has to deal with. It includes Monthly returns to be filed with the Provident Fund (PF) and Employees state insurance (ESI) and Income Tax department (IT) as per form 281.
The Payroll executives can refer to the course to get familiar with the minimum details required to be known about each compliance requirement.

Happy Learning!

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