How Can I Start PF & ESI Deductions for a Company with No Prior Compliance?

Guidance Needed for PF & ESI Compliance

I have recently joined a company in the money marketing sector. The company has been in business for the past four years but has not registered under the PF or ESIC Act. Employees receive their salaries in cash, and as a result, no payslips are provided, and no statutory deductions are made.

In my role as an HR professional, I have been tasked with preparing offer letters for all employees and initiating PF & ESI deductions for the staff. I kindly request guidance from my seniors on how to commence the PF & ESI deduction procedures to ensure compliance with statutory requirements.

Regards,
Prachi Desai

If your company/factory comprises more than 20 employees, then the PF Act becomes applicable. For the registration of PF and ESI, it's better to contact your local ESI office and PF authority to get the complete details. Offer letters are issued to candidates who are about to join the organization. Instead, you can proceed with appointment letters for the employees who have not received the same.

Regards,
Rajeev Dixit

Thank you for your reply. Could you please inform me that until today, the employees have been receiving their salaries in cash, so no PF & ESI deductions have been made? If I register the company with PF & ESI, what should be my next step to regularize the statutory procedures?

Regards,
Prachi Desai

You have to get it registered even if your strength is 10. It's a good sign you started regularizing some legal issues. Somewhere you have to start. When you file your registration papers, they may ask you for some documents, including the balance sheet/ACS, IT return, etc. These can all be managed nicely. The best thing is to contact the officer in charge of your office area/business for EPF/ESIC. Are you in Kolkata? I am told in Kolkata and Mumbai anything is possible, am I correct? Ask them what to do; they will guide you with everything. You have to spend some money also. Are you prepared to spend? There is no option; one day or another, all of these have to be faced. Don't panic; like you, there are lakhs and lakhs of firms in India. You will get it done.

Regards, Kumar.S.

It's good that your company has started regularizing its affairs. As an HR professional, you have a lot of activities to undertake. Ensure that the offer letter/appointment letter you issue is appropriate so that registration and other activities under the EPF & MP Act 1952 are complied with.

Accordingly, you can start processing payroll as well. Up to now, you may have only worked with the net pay concept, as all payments are in cash. Going forward, you will need to consider other components too. Ideally, you should establish pay bands for all employees based on their designations/job roles, qualifications, experience, seniority in the company, and the actual salary they receive.

Feel free to seek further help as you establish a regular HR department and HR functions. It would be beneficial if you could also share your academic qualifications and experience to enable others to provide appropriate guidance to you.

Warm regards.

Thank you for your valuable suggestions. Please note that I am an MBA in HR from Symbiosis with five years of experience in HR. I would like to ask you about the following points. Could you please provide me with a reply?

1. What is the standard number of days for monthly salary calculation?
2. Currently, the company is providing only offer letters and not appointment letters. In this case, is the company bound by any statutory non-compliance?
3. The company's main business is selling debentures in the market and reinvesting the money in other sectors. In this scenario, is the company also liable for PF and ESI for those employees working in other sectors?

Regards,
Prachi Desai

It is good that your company has started taking steps to regularize the statutory obligations.

Regards,
B. Saikumar
Mumbai

Dear Sir, Thanks for your valuable suggestions. Please note that I am an MBA in HR from Symbiosis with 5 years of experience in HR. I would like to ask you about the following points, and I would appreciate it if you could provide me with a reply:

1. What is the standard number of days for monthly salary calculation?

2. Currently, the company only provides offer letters and not appointment letters. In this case, is the company bound by any statutory non-compliance?

3. The company's primary business is selling debentures in the market and reinvesting the money in other sectors. In this scenario, is the company also liable for PF and ESI for employees working in other sectors?

Regards, Prachi Desai

Dear friend,

1. Average salary is calculated for 30 days (including paid holidays). If you have to pay proportionately, for example, for 10, 15 days, etc., calculate the average salary per day (divided by 30 days) and pay accordingly. Some firms consider the actual number of working days in a month (e.g., 25, 26 days) to determine per day salary. Some use total calendar days, such as 28, 29, 30, or 31 days. This practice varies among firms.

2. Yes, an offer letter should not be considered an appointment letter because an offer does not include the complete terms and conditions. An appointment letter is necessary as it outlines the specific terms of employment. Statutorily, an appointment letter is a document that forms part of statutory records. An offer letter becomes binding only when accepted by the recipient; otherwise, it holds no legal significance.

3. Is your firm registered under NBFC or operates solely as an investment company? Do you engage in lending or borrowing money, or collect deposits from the public? The classification of your operations will determine the requirements. In any case, there is no exemption from PF/ESI unless you are a banking company, in which case separate provisions apply.

Regards, Kumar S.

I agree with the comments posted by Kumar S. on your queries, and further, I would like to add the following:

1. Standard Number of Days

The standard number of days taken is either 30 or the actual days in that month (from 28 to 31), depending on the legacy practices of the company. For monthly salary, this includes Sundays/Weekly Off and Closed Holidays. For per day absence in case of Leave Without Pay, the monthly salary is divided by the number of days taken in the "standard number of days in a month" to arrive at a day's salary.

2. Offer and Appointment Letters

It is safer to start with an "Offer Letter" as it's not legally binding; the next step is the Appointment Letter, which implies a commitment to employment. The formal Date of Joining is crucial as it signals the application and compliance with statutory provisions like PF, ESI, etc. In other words, once the Appointment Letter is issued and the employee has "joined" on roll, there is no escape from legal compliances.

3. Shops and Establishment Act

Your company would be covered under the Shops and Establishment Act, as evident from your description of its activities. Accordingly, all the related/applicable labor legislations like PF, ESI, etc., shall apply.

Thanks for informing that you are an MBA with 5 years of HR experience—it will make communication easier and unambiguous.

Warm regards.

Dear Sirs, I am thankful to both of my seniors for the guidance that has been provided to me. Further, I would request you to kindly guide me with my following queries:

1. If currently, I issue only the offer letters and after getting registered under PF & ESI issue the appointment letters to the employees, will this be okay?

2. Can a company issue any number of offer letters without any binding?

3. Should the salary of an employee who is under the payroll of the company be above the Minimum Wages Act of that particular state?

4. Is it compulsory that the salary should have components of Basic, HRA, Bonus, etc.? If not, then please mention the statutory components of monthly salary for an employee.

5. For the payment of bonus, are there any rules to be followed?

6. Is it mandatory for a company to disburse the salary through the bank only, or are there any other alternatives to pay the salary as well?

Regards, Prachi Desai

1. If you have decided to appoint someone, you need not wait until the registration for PF/ESI, which may be done in the normal course. It's better administrative practice to issue the appointment letter either just before joining or immediately after joining.

2. The number (quantum) of offer letters is limited to the vacancies available and the number of candidates selected for the respective posts. Don't make the mistake of issuing more than one offer letter per post to be filled. The second offer can be issued only after deciding the fate of the first offer letter issued to the selected candidate. This means the second offer can be processed for a particular post only when the person offered declines to join or does not accept the post you offered, ensuring that the very first offer letter is duly canceled/invalidated properly. This is very important to avoid any confusion or litigation.

3. Any appointment cannot be made for a salary/wages less than the minimum wages notified by the state/central government.

4. You could either split the salary into basic, DA, HRA, CCA, conveyance, and other allowances or show a consolidated salary all merged into one. But to satisfy certain legal provisions, it should be split into basic and other components. This will also help you to properly streamline certain expenses, IT, PR/ESI, Bonus, gratuity, etc.

5. All Acts/Rules including Bonus are applicable and must be complied with.

6. Initially, you may disburse in cash. However, it is not appropriate to continue this practice. Crediting to the bank accounts of employees is always the best and most convenient option.

Regards,
Kumar S.

I am thankful to both of my seniors for the guidance that has been provided to me. Further, I would request you to kindly guide me with my following queries:

1. If currently I issue only the offer letters and after getting registered under PF & ESI issue the appointment letters to the employees, will this be okay?

2. Can a company issue any number of offer letters without any binding?

3. The salary of an employee who is under the payroll of the company should be above the minimum wages act of that particular state.

4. Is it compulsory that the salary should have components of Basic, HRA, Bonus, etc.? If not, then please mention the statutory components of the monthly salary for an employee.

5. For the payment of bonus, is there any rule to be followed?

6. Is it mandatory for a company to disburse the salary through a bank only, or is there any other alternative to pay the salary as well?

Regards,
Prachi Desai

Thanks for disclosing your qualifications and experience. It helps in conveying the response appropriately. I shall briefly reiterate the recommended steps for your queries:

1. Yes; perfectly okay; in fact, it is strongly recommended.
2. Yes; subject to its manpower requirements.
3. Yes, definitely.
4. Yes, Basic, DA is a must. HRA.
5. Yes, Payment of Bonus Act. Minimum one month's salary.
6. Cash or Bank.

Hope the above helps.

Warm regards.

Mandatory Registrations for a Limited Company

1. What are the mandatory registrations for a limited company, such as PF, ESI, Bonus Act, etc.?

2. If the basic salary of the employees is more than Rs 6500/-, is it mandatory to register for PF?

3. Under the ESIC Act, when an employee is covered, what are the company's obligations towards the employees apart from statutory deductions?

4. In the salary, is it compulsory to include the DA component? If yes, do we need to follow specific DA points/rates, or can the company decide based on convenience?

5. For a company selling its debentures in the market, is it mandatory to have a NOC from RBI, even if the company is registered with the Ministry of Corporate Affairs?

Regards,
Prachi Desai

Dear PD, For points 1-2: Attached are some lessons on EPF. Please go through them.

3. Attached Notes

See the attached notes. Please use these attachments duly updated.

4. DA (Dearness Allowance)

Also, refer to my earlier post on this. If you're dealing with unionized employees, it is advisable to have Basic, Fixed DA, and Variable DA (linked to Wholesale Price Index/Consumer Price Index indices published by the Central Govt. for every quarter). Accordingly, FDA/VDA keeps changing every quarter or half-yearly based on these indices. It all depends on the general practice followed in your line of business. For example, many IT-related firms follow the CTC model, which comprises components like basic, DA, HRA or house rent/lease, plus other allowances & perquisites. It is prudent to follow the pattern in your line to enable you to fix the salary, etc., for your employees, making it comparable with others in such businesses.

5. Trade in Debentures

I think the matters relating to the trade in debentures should be regulated by SEBI, RBI (FEMA cases), and ROC. You may check with the concerned authorities as the trade is very specialized, and information on your trade has to be kept confidential.

Regards, Kumar.S.

For your queries #1 and #5, please seek the assistance of a legal consultant. PF registration is based on the "number" of employees and not on the quantum of their basic salary. Please go through the ESI Act and its provisions. Please "search" CiteHR, and you will find several threads on it, like the following: https://www.citehr.com/450524-specia...ml#post2024901

Warm regards.

Clarification on PF Registration and Bonus Eligibility

With regard to point No. (1), in my view and as per the P.F. provisions, there is no relationship between issuing appointment letters and registration under P.F. The establishment needs to register itself with P.F. once it employs 20 persons on any day during the preceding 12 months.

With regard to point No. (5), an employee who worked for a minimum of 30 days in the accounting year and earned Rs. 10,000 or less per month as wages is eligible for a bonus, provided your establishment employs 20 persons on any day during the preceding 12 months. However, the bonus needs to be calculated on wages not exceeding Rs. 3,500 per month.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

I'm Prashant R. Deshmukh. Last month, I joined a Facility Management Services industry. I have a query: what are the rules for trainee PF and ESIC? Is it compulsory for trainees or not? Please help me.

Thank you.

Please help me in getting an idea about the PF and ESI registration amount:

1. Does the registration amount differ from state to state?
2. What is the amount for registration of PF and ESIC for West Bengal?

Regards,
Prachi