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Risks of Non-Compliance and How to Avoid Compliance Penalties?

Compliance is a generalized term that indicates adherence to varying rules and laws passed by the Government. Statutory Compliance is complying with or adhering to rules and laws about labour and human resource.

Organizations that employ people are required to follow a set of guidelines that fall under statutory compliance. Penalties include fines and in some cases imprisonment if companies fail to fully comply with these rules and regulations. Following these rules and laws is, therefore, very important for the organization if it needs to function smoothly. In this article, we will discuss how companies can avoid compliance penalties.

What are the risks of non-compliance?

Statutory compliance is vital for any company and their HR teams have to be on their toes to frequently update the new regulations and see that the company is fully compliant. Let us first understand the consequences of failing to comply with the rules and regulations.

Fines

The first risk of non-compliance is the possibility of fines.  Governing bodies have put in place stringent penalties to compel companies to comply with the rules and regulations, and fines are their first line of penalties.  Thousands of rupees are collected as fines for non-compliance and the amounts would vary based on the seriousness of the offense. This entails that you not only have to pay the fines but will also have to spend for legal costs.

Imprisonment

For very serious lapses in complying with the Statutory Compliance rules and regulations, imprisonment of up to 6 months with or without fines is enforced.

Loss of Reputation

One of the serious outcomes of non-compliance is the loss of reputation suffered by the company and this, in turn, will amount to a loss of customers.

Dissatisfaction of Employees

When penal action is taken against a company for non-compliance it also brings in dissatisfaction within the employees as non-compliance of any degree would also affect them. This would in turn bring about unwanted tension and would provide enough fodder for potential employees to stay away from joining the company. Employee retention would suffer and it also curtails the entry of new employees. Overall this would harm the company’s working.

Loss of Productivity

Non-compliance would also result in loss of production due to the stoppage of production brought about by unscheduled inspections and audits by the authorities. This would lead to a waste of time and money. In cases where non-compliance is serious, the authorities can even order companies to suspend operations.

What are the Acts businesses have to comply with?

Before we venture into the penalties of non-compliance with Statutory Compliance rules and regulations, let’s have a look at what these Acts are that all businesses have to comply with.  We can divide these Acts into 5 sections.  They are:

  1. Acts that control Wages
  2. Acts that provide for Social Security
  3. Acts that control Industrial Relations
  4. Acts to benefit Women and
  5. Acts that control other aspects of the employees

1.  Acts that control Wages

1.1  Payment of Wages Act, 1936

1.2  Minimum Wages Act, 1948

1.3  Payment of Bonus Act, 1965

1.4  Equal Remuneration Act, 1976

2.  Acts that provide for Social Security

2.1  Employees’ Provident Fund Act, 1952

2.2  Employees’ State Insurance Act, 1948

2.3  Payment of Gratuity Act, 1972

2.4  Labour Welfare Fund Act, 1965

3.  Acts that control Industrial Relations

3.1  Industrial Disputes Act, 1947

3.2  Industrial Employment (Standing Orders) Act, 1946

3.3  Trade Unions Act, 1926

3.4  Factories Act, 1948

3.5  Shops and Establishment Act, 1947

3.6  The Industrial Establishment Act, 1963

4.  Acts for the benefit of Women

4.1  Equal Remuneration Act, 1976

4.2  Maternity Benefit Act, 1961

4.3  Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013

5.  Other Acts

Apart from these a group of Acts is in force to take care of other aspects of the employee that does not find representation in the above mentioned Acts. They are:

5.1  The Professional Tax Act, 1975

5.2  The Child Labour (Prohibition & Regulation Act, 1986

5.3  The Contract Labour (Regulation and Abolition) Act, 1970

5.4  The Employment Exchange (Compulsory Notification of Vacancies) Act, 1959

5.5  The Apprentice Act, 19651

5.6  The Employees Compensation Act, 1923

5.7  The Interstate  Migrant Workmen (Regulation and Conditions of Services) Act, 1979

What are the penalties for non-compliance?

Statutory Compliance is a critical aspect of any business or organization. Failure to comply with these statutory requirements can pose immense problems. These include penalties in the form of fines and imprisonment when the non-compliance issue is serious. We shall briefly discuss the penalties under the various important Acts pertaining to Payment of Wages and Social Security in the following paragraphs.

1.  Penalty for non-compliance with the EPF Act, 1952

Any person who fails to pay the contribution towards EPF or makes false statements or representation is liable to be punished with imprisonment for a period that may extend up to 1 year or with a fine of ₹5000/- or with both. The Act also enforces penalties for non-payment of inspection charges or administrative charges. The penalty for such non-compliance is punishable with imprisonment for a period that is not less than 6 months and may extend up to 1 year and a fine of ₹5000/-.

However, if the employee contribution is also not paid then the punishment may extend to a term of 3 years but not less than 1 year and a fine of ₹10000/-.

The filing date for the Monthly EPF returns is 25th of each month, and for the Annual Return under Form 3A and 6A it is on or before the 30th of April every year. The Act also requires the filing of Form 2, Form 5, and Form 10 as and when required.

2.  Penalty for non-compliance with the ESI Act, 1948

Penalties for non-payment, delayed payment, or falsifying payments and returns include imprisonment for a period extending up to 2 years and a fine of ₹5,000/-. For non-payment, simple interest @ 12% per annum for each day of delay is collected.

Filing of return for the half-year from April to September is on or before 12th November, and for  the period October to March is on or before 12 May.

3.  Penalty for non-payment of Gratuity under the Payment of Gratuity Act, 1972

Failure to make the gratuity payment or providing false statement or giving false representation is punishable with imprisonment for a term which may extend to six months or with a fine of ₹1000/- or with both. As soon as the Gratuity is due, the employer shall determine the amount due to the employee. The amount has to be paid to the employee within 30 days from the date it becomes payable.

4.  Penalty under Labour Welfare Fund Act, 1965

In Tamilnadu, if any person who willfully fails to produce any document required by the Board or fails to furnish any information called for by the Board or fails to comply with any directions issued by the Board is liable to be imprisoned for a term or 3 months or with fine of five hundred rupees or with both.

The rules vary from state to state. The Labour Welfare Fund requires the filing of an annual return and the dates vary from state to state. In Tamil Nadu, the due date is 31st January of every year.

5.  Penalty for non-payment of wages under the Payment of Wages Act, 1936

Wages have to be disbursed to the employees on the dates mentioned in the state’s Payment of Wages Act. For non-payment of wages on time by the employer a penalty in the form of a fine not less than ₹1000/- that may extend to ₹5000 is enforced.  For subsequent convictions the fine will not be less than ₹5000/- and may extend up to ₹10000/-.

Similarly, for failing to maintain the register or not furnishing the required information or giving false information, the fine shall not be less than ₹1000/- and may extend up to ₹5000/-. For repeat conviction of non-payment of wages, imprisonment not less than one month which may extend up to 6 months, and fine not less than ₹2000/- and extendable up to ₹15000/- may be collected. There is also provision for collecting additional fine up to ₹100/- per day.

This is a state subject and therefore varies from state to state. In Tamil Nadu, an Annual Return in Form IV has to be filed with the Inspector within the jurisdiction of the factory or industrial establishment not later than 31st January of each year.

6.  Penalty for non-payment of minimum wages under the Minimum Wages Act, 1948

Non-payment of minimum wages as per the Minimum Wages Act, 1948 is punishable under section 22 of the Act by imprisonment up to 6 months or fine or both. This may differ from state to state. Incidentally, the Delhi Government has increased the fine from ₹500/- to ₹50000/- for non-payment of Minimum wages and the imprisonment has been increased from 6 months to 3 years.

This is state-specific and varies from state to state. In Tamil Nadu, filing of an Annual return in Form III is mandatory, and the Government will notify the dates.

7.  Penalty for non-compliance with the Payment of Bonus Act, 1965

If any person does not comply with the provisions of the Bonus Act 1965 or any rule made thereunder or fails to meet the direction or requisition, shall be punishable for a term which may extend up to 6 months or with a fine of ₹1000/- or with both. However, if there is a dispute and the employer and employees are not in agreement with the terms, then the issue comes under the purview of the Industrial Disputes Act.

The annual return under Form D for payment under the Bonus Act has to be filed for every calendar year before 1st February of the following year irrespective of the financial year that an employer follows.

8.  Penalty for non-compliance with the Equal Remuneration Act, 1976

If an employee contravenes the provisions of the Act by not paying equal remuneration to men and women workers for the same work or work of similar nature, or discriminates between men and women, he shall be punishable with a fine which shall not be less than ₹1000/- which may extend to ₹ 20000/- or with imprisonment for a term which shall be not less than 3 months but which may extend for 1 year or with both. For subsequent offenses, the imprisonment may extend to two years.

If the employer omits or fails to maintain any registers or other documents, or fails to produce when called for, or refuses to produce the same, he will be punishable with simple imprisonment for a term which may extend to one month or with a fine which may extend to ₹ 10000/- or with both.

The Act does not require the submission of any return. However, the employer has to maintain a Register of employed in Form D that has to be produced before the Inspector appointed under the Act.

How do you avoid the risks of non-compliance?

Payroll is a vital part of any organization that employs people. Businesses generally maintain their payroll function in-house either manually or by relying on a do-it-yourself payroll application. Whether you perform this task manually using a desktop with customized software or an online solution, there are serious issues especially when it comes to statutory compliance. Doing it in-house may not be able to keep you fully updated on the changes and this would pose serious problems in the working of the business.

Payroll and Statutory Compliance tasks are time-consuming and complicated. Any mistakes in payslip generation or filing the compliance reports would have serious consequences. The best option is to outsource this task to a reputed concern whose payroll module and expertise in statutory compliance would help to drastically reduce the burden and the risks.

The present crop of high-tech firms offers a lasting solution to this vexing problem. This would not only help to reduce the in-house workload but also help to generate the regular reports more accurately and in full compliance with the rules and regulations. The present-day payroll packages using cloud technology provide the ideal solution.

Outsourcing to a company like GetifyHR helps the organization to mitigate risks and lessens the in-house workload. This can help the company to regularly identify compliance obligations and act accordingly. GetifyH, with its vast experience in managing Payroll and Statutory Compliance issues, has the right tools and trained professionals to handle this task with ease. This will enable the company to focus fully on developing the business.

Conclusion

Statutory Compliance is a highly complicated function and companies should be on their toes to keep themselves fully updated on the changes in rules and regulations. When you get the assistance of professional service providers, you get the required expertise to guide you and keep you fully updated. You will not only be able to mitigate the risks but would also be able to:

  • Identify the compliance obligations and keep abreast of the changes.
  • Meet all compliance rules and regulations.
  • Ensure filing of returns, and remittance of dues to the department on time, without any mistakes.
  • Ensure that the employees get their share of remittances regularly under prevailing rates.
  • Streamline the workflow and help the HR team to focus more on managing the staff and employees.
  • Storing the information in an organized manner for future use by the accounts department.
  • Providing adequate security to vital data.

Failure to comply with government rules and regulations can endanger your profitability. As an employer, you are duty-bound to comply with these rules and regulations and the best option is to outsource these operations to a company like GetifyHR. You not only reduce your stress levels but will also be able to free time for your HR teams in particular. This will help you to focus more on business development.

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