Payroll, PF, ESI, and labour compliance are among the most essential statutory responsibilities that every employer in India must follow. These compliances ensure transparency in salary processing, provide financial security and social-welfare benefits to employees, and protect businesses from penalties, disputes, and regulatory risks. As workplaces grow more regulated, compliance with these frameworks has become a crucial part of maintaining ethical and legally sound employment practices across all industries.

With the introduction of the four new Labour Codes, the landscape of payroll and statutory compliance has changed significantly. The new wage definitions, revised contribution structures, mandatory digital registers, and updated employer obligations require organizations to restructure salary systems and strengthen compliance mechanisms. For beginners, understanding payroll processes, Provident Fund, Employees’ State Insurance, wage rules, gratuity, bonus, and statutory filings along with the 2024–2025 reforms is vital for smooth business operations and long-term legal security.

In this article, CA Manish Mishra talks about The Beginner’s Guide to Payroll, PF, ESI & Labour Compliance.

Payroll Compliance in India

Meaning of Payroll Compliance

Payroll compliance refers to the legally correct method of calculating salaries, making statutory deductions, depositing contributions, maintaining registers, and issuing documents like payslips and appointment letters. Payroll must follow state minimum wages, the Payment of Wages Act, the Code on Wages, and new labour code requirements. In practice, it ensures that employees receive the right salary at the right time with full statutory protection.

Correct Salary Structure

Payroll requires a compliant salary structure. The employer must ensure that “Basic Salary” remains at least 50% of the total salary as mandated by the new wage definition. Allowances such as HRA, conveyance, special allowances and incentives cannot collectively exceed 50% of the total compensation. If they do, the extra amount is added back to “wages” for the purpose of PF, ESI, Bonus and Gratuity calculations.

Monthly Salary Processing

Monthly payroll processing involves recording employee attendance, calculating leave, computing gross salary, deducting PF and ESI, deducting TDS, adjusting bonuses or incentives, and issuing a detailed salary slip. Salary must be credited through bank transfer or digital mode to meet compliance requirements.

Provident Fund (PF) Compliance

Overview of PF

Provident Fund is governed by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. It provides financial security and retirement savings for employees. Any establishment employing 20 or more persons must mandatorily register with EPFO. PF contributions are compulsory for eligible employees unless specific exemption is granted.

PF Applicability

PF applies to every employee from the date of joining if the establishment is covered. Employees earning any salary amount are eligible. Employees drawing more than the statutory ceiling may limit contribution based on employer policy, but PF applicability itself continues.

Contribution Structure

PF contributions are shared equally by employer and employee at 12% each of basic wages, dearness allowance and retaining allowance. The employer’s share is divided between the EPF (Provident Fund), EPS (Pension Scheme) and EDLI (Insurance Scheme). This contribution must be deposited on time every month, and delays invite interest and penalties.

Employees’ State Insurance (ESI) Compliance

Overview of ESI

ESI is governed by the Employees’ State Insurance Act, 1948. It provides medical, sickness, maternity, disability and dependent benefits. Any establishment employing ten or more persons must register for ESI if employees earn wages within the applicable threshold.

ESI Wage Eligibility

Employees earning wages up to ₹21,000 per month (₹25,000 for persons with disabilities) fall under ESI coverage. Once covered, they remain covered till the end of the contribution period even if their wage increases.

Contribution Rates

The employer contributes 3.25% of wages while the employee contributes 0.75%. These contributions must be deposited on time and half-yearly returns must be filed. ESIC also requires timely uploading of employee details and updating insurance numbers.

Wage Compliance Under the Code on Wages

Uniform Definition of Wages

The Code on Wages, 2019 introduces a uniform definition of “wages” applicable across labour laws. Under this rule, allowances cannot exceed 50% of total CTC. If they do, the excess is added back to wages for statutory calculations. This new definition impacts PF, ESI, Bonus, Gratuity and Minimum Wages compliance for employers.

Impact on Employee Salary Structure

With the new wage rule, the proportion of basic salary has increased, leading to higher PF contributions, higher gratuity liability and revised bonus calculations. Employers can no longer structure salaries artificially to minimize statutory contributions, fostering fairness and transparency.

Minimum Wage Compliance

Minimum wages are now applicable to all industries. Employers must check state-wise minimum wages and revise salaries accordingly. Any payment below minimum wages is illegal and punishable.

Labour Law Compliance and Labour Codes

Overview of the Four Labour Codes

India introduced four Labour Codes: Code on Wages, Code on Social Security, Occupational Safety, Health & Working Conditions (OSH) Code, and Industrial Relations Code. These codes consolidate 29 earlier laws, simplify compliance, and modernize labour regulation.

Enhanced Social Security

The Social Security Code expands PF, ESI and other benefits to gig workers, platform workers, contract workers and fixed-term employees. It also reduces waiting period for gratuity in the case of fixed-term employment.

Workplace Safety and Appointments

Under the OSH Code, written appointment letters are mandatory for all employees. Employers must follow rules related to working hours, safety standards, welfare facilities and statutory holidays.

Industrial Relations and Employment Stability

The Industrial Relations Code raises the threshold for standing orders and government permissions for retrenchment. It encourages negotiation, grievance redressal and industrial harmony through improved communication mechanisms.

Gratuity, Bonus, Leave and Other Statutory Duties

Statutory benefits such as gratuity, bonus, and leave ensure financial protection, welfare, and work–life balance for employees. These duties also help employers maintain legal compliance, enhance workplace trust, and reduce employee disputes. Each component has its own rules, eligibility conditions, calculation methods, and timelines that organizations must follow carefully.

Gratuity Compliance

Gratuity is governed by the Payment of Gratuity Act, which mandates that employees who complete five years of continuous service are eligible to receive gratuity. It is calculated as 15 days’ wages for each completed year of service. The Social Security Code expands this benefit by allowing fixed-term employees to receive proportional gratuity even if they do not complete five full years. This ensures that contract employees are not deprived of long-term benefits merely because of shorter employment contracts.

Timely Payment Requirement

Gratuity becomes payable when an employee retires, resigns, is terminated, or in the case of death or disablement. Employers are legally required to pay gratuity within 30 days of it becoming due. Any delay results in compulsory interest and may lead to penalties. Therefore, employers must maintain accurate service records, joining dates, wage details, and leave information to avoid discrepancies and employee claims.

Bonus Compliance

The Payment of Bonus Act mandates that eligible employees must receive annual statutory bonus within eight months from the end of the financial year. Eligibility is based on wage thresholds, and the bonus applies regardless of whether the establishment has shown high profits, as long as the employee qualifies under the law. This provision ensures that workers share a portion of the organisation’s financial performance and remain motivated throughout the year.

Bonus Calculation

Bonus is calculated between 8.33% (minimum) and 20% (maximum) of the employee’s annual wages, depending on the employer’s allocable surplus and profitability. Employers must maintain proper records of salary, attendance, and bonus registers and ensure that bonus payments are made through reliable digital modes for transparency and compliance.

Leave Compliance

Leave rules in India are governed by individual State Shops and Establishments Acts or, where applicable, by the Occupational Safety, Health and Working Conditions (OSH) Code. Employees are generally entitled to a combination of casual leave, sick leave, and earned leave, although the exact entitlement varies by state. Employers must clearly define their leave policies, maintain accurate leave records, and ensure that leave encashment and carry-forward rules comply with statutory norms.

Leave Accumulation and Encashment

Earned leave accumulates based on the number of days an employee has actually worked in a year, usually calculated on a monthly accrual basis. At the time of separation, employees are entitled to encash their accumulated earned leave, calculated based on statutory wage definitions. Employers must calculate this correctly and release the payment promptly to ensure legal compliance and maintain employee satisfaction.

Record-Keeping and Statutory Registers

Record-keeping is one of the most critical components of labour compliance, as it helps employers maintain transparency, ensure accuracy in payroll processing, and remain prepared for inspections or audits by statutory authorities. Every employer is legally required to maintain updated registers related to employee attendance, wages, leave, overtime, bonuses, PF, ESI, accidents, and other statutory obligations. Proper documentation minimizes legal disputes, prevents penalties, and strengthens overall compliance management within the organisation.

Importance of Registers

Registers serve as the official documentation demonstrating that an employer is following all statutory requirements laid out under the labour laws. Maintaining attendance registers ensures accuracy in salary calculations and leave management. Wage registers record the details of employee payments, deductions, allowances, and statutory contributions, ensuring that salaries are processed in line with minimum wage laws and wage protection requirements. Leave records help employers track entitlements, accruals, and encashment, while PF and ESI registers ensure that statutory deposits and filings are done correctly. Accident registers are equally important, as they document workplace incidents and help authorities verify that safety standards are being maintained.

Digital Register Requirements

With the introduction of the new Labour Codes, the government has encouraged employers to adopt digital record-keeping instead of manual registers. Digital registers improve accuracy, prevent manipulation, and simplify compliance during inspections. Employers must ensure that all records are updated regularly, stored securely, and easily accessible to labour authorities when required. The digital system must also comply with inspection protocols, meaning employers must be able to produce documents instantly upon request, whether physically or through online compliance platforms.

Filing Requirements

Payroll, Provident Fund, and Employees’ State Insurance involve multiple monthly, quarterly, and annual filings that employers must complete without delay. These include depositing PF and ESI contributions every month, filing monthly challans, submitting returns within prescribed timelines, and updating employee details on EPFO and ESIC portals. Payroll filings also include maintaining salary slips, generating TDS reports, and ensuring that digital proof of deposits is available for future validation. Failure to complete filings on time can lead to penalties, non-compliance notices, and even prosecution under labour and social security laws.

Inspection Preparedness

Inspection preparedness is essential because labour authorities, PF officers, or ESI inspectors can conduct compliance inspections at any time. During such inspections, employers must immediately produce statutory registers such as attendance records, wage registers, muster rolls, PF and ESI registers, salary slips, appointment letters, and contribution receipts. Authorities may also request employee master records, employment contracts, and evidence of statutory deductions and deposits. Being prepared not only ensures smooth inspections but also demonstrates the employer’s commitment to legal compliance and employee welfare.

Recent 2024–2025 Updates

The year 2024–2025 brought major reforms in India’s labour compliance landscape, especially with the gradual implementation of the new Labour Codes. These updates have changed how employers structure salaries, manage payroll systems, maintain digital registers, and handle statutory filings. The objective behind these reforms is to bring greater transparency, enhance employee welfare, reduce loopholes, and create a uniform compliance environment across industries and states. Below are the key changes explained in detail.

Wage Structure Standardization

The introduction of a uniform wage definition under the Code on Wages has significantly reshaped salary structures across the country. According to the new rule, allowances cannot exceed 50% of the total compensation. As a result, the basic wage component of salaries has increased for most employees. This automatically raises statutory liabilities such as Provident Fund (PF), Employees’ State Insurance (ESI), Gratuity, and Bonus calculations, since all these contributions are linked to wages. Employers are required to restructure the salary format of existing employees, issue revised appointment letters, and update internal payroll systems. This ensures compliance with the new legal definition and prevents disputes during inspections or audits.

Digital Compliance and Registers

One of the most important updates is the government’s move toward complete digitalisation of labour compliance. Employers are now required to maintain digital registers, upload filings on unified compliance portals, generate online challans, and preserve digital records for inspections. This digital shift ensures transparency, creates verifiable audit trails, and reduces manipulation of statutory records. Digital compliance also simplifies inspections, as officers can review records instantly, reducing the need for physical documentation. Employers must therefore adopt updated HRMS/payroll software and ensure that their digital registers meet inspection standards under the new labour code framework.

Expanded ESI Coverage

Another major reform is the expansion of ESI coverage, which now applies to a larger workforce due to changes in wage criteria and regulatory guidelines. More employees are becoming eligible for ESI benefits because of the revised wage definition, which pushes a greater portion of the salary into “wages” for contribution purposes. Additionally, the extension of ESI to more sectors, geographies, and establishments ensures that employees have access to medical, disability, maternity, and dependent benefits. As coverage widens, employers must update employee records, ensure timely registration under ESIC, and deposit contributions without delay. Failure to update ESI eligibility on time may lead to compliance gaps and penalties.

Stricter Penalties for Non-Compliance

The new labour codes have introduced significantly stricter penalties to encourage employers to maintain accurate records, pay wages on time, and follow social-security obligations. Penalties have increased for delayed PF and ESI payments, filing incorrect or false records, failing to issue appointment letters, and not maintaining statutory registers. Repeat violations can lead to higher fines and, in some cases, prosecution. These rules have been designed to strengthen compliance discipline, protect employee rights, and reduce exploitation. Employers must, therefore, regularly review their HR and payroll processes, update documentation, and conduct internal audits to avoid any compliance lapses.

Conclusion

To sum up, payroll, PF, ESI, and labour compliance are not merely administrative tasks but essential pillars that uphold employee welfare and organisational integrity in India. They ensure timely salary payments, secure retirement benefits, medical protection, and entitlement to statutory rights. For employers, understanding these laws protects the business from penalties, disputes, and operational challenges while building a culture of accountability and trust. A strong compliance framework sets the foundation for a legally secure and ethically aligned workforce.

As India transitions into a unified labour system through the new Labour Codes, employers must adapt to evolving wage structures, digital record-keeping requirements, and expanded social-security coverage. Staying compliant now requires proactive monitoring, accurate documentation, and modernised payroll processes. For beginners, mastering these concepts is crucial for managing people effectively and ensuring long-term organisational stability. Embracing these reforms not only ensures legal compliance but also strengthens the employer–employee relationship and contributes to a more transparent corporate ecosystem.

Frequently Asked Questions (FAQs)

Q1. Is PF mandatory for all employees?

Ans. Yes. Provident Fund (PF) is compulsory for every employee working in an establishment that falls under the PF Act. The applicability does not depend on salary unless a specific exemption has been granted by the EPFO. This ensures that all eligible employees receive long-term retirement benefits and financial security.

Q2. Can employees withdraw PF during employment?

Ans. Employees cannot fully withdraw PF while they are still employed, as PF is intended for retirement savings. However, the law allows partial withdrawals for specific purposes such as purchasing a house, paying for education, marriage expenses, or medical emergencies. These withdrawals have certain eligibility conditions and limits.

Q3. What happens if ESI or PF contributions are not deposited?

Ans. If an employer fails to deposit PF or ESI contributions on time, significant consequences follow. Authorities charge interest and impose penalties for delays. In severe cases, prosecution may also be initiated, and the government can even recover dues directly from the employer’s bank accounts.

Q4. Are appointment letters compulsory?

Ans. Yes. Under the new Labour Codes, issuing appointment letters to every employee at the time of joining is mandatory. This letter must clearly outline job roles, salary structure, working hours, leave entitlements, and statutory benefits. It serves as a legal document protecting both employer and employee.

Q5. Does the new wage definition affect take-home salary?

Ans. The revised wage definition increases the basic wage component, which results in higher contributions to PF, ESI, bonus, and gratuity. While this enhances long-term social-security benefits, it may reduce the employee’s take-home salary. The change ensures greater financial protection for workers.

Q6. What are the consequences of not maintaining statutory registers?

Ans. Failure to maintain statutory registers such as attendance, wage, leave, PF, and ESI registers can result in compliance notices, monetary penalties, and even prosecution. During inspections, employers who lack proper documentation face difficulties proving compliance, which can lead to further legal consequences.

Q7. Are gig workers eligible for social security?

Ans. Yes. Under the Social Security Code, gig workers and platform workers are now recognised and covered under specific welfare schemes. These schemes aim to ensure financial protection, health coverage, and social-security benefits for individuals engaged in digital, freelance, or platform-based work models.