Labour Compliance
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Services we provide under Labour Compliance
- Provident Fund (PF) Registration
- ESI Registration
- Professional Tax Registration
- Shops and Establishments License
- Employee Stock Option Plan [ESOP]
- POSH Compliance
Online PF Registration – An Overview
Employees’ Provident Fund is a social security scheme that helps employees save a small portion of their salary for future benefits.
Every company has to offer its employees an EPF online or Employees Provident Fund which is akin to a retirement fund. Provident fund registration comes under the purview of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. EPF registration process is mandatory for organizations with total employee strength more than 20. Such employers can opt for online PF registration from Spinach Laws . Companies can register for employee provident fund, in 3 easy steps:
- Free consultation and form filling
- Connect with a dedicated affiliate for data validation
- Receipt of PF online number
What Is the PF Number Format?
The first two letters of the PF account number are the region code, the following three letters are the office code, the next seven digits are the establishment registration code, the next three zeroes are the establishment extension, and the final seven digits are the PF member id of the employee. So, PF account number is a 22 digit number.
What Is the Meaning of Employee Under the Employee Provident Fund Registration?
According to section 2(f) of the Employees Provident Funds & Miscellaneous Provisions Act, 1952, a person who performs any task with the intention of obtaining compensation is considered an employee. This would also apply to everyone who is regarded as a worker and receives compensation, either directly or indirectly.
Below is a list of those who are regarded as employees:
Full-Time Workers
Any person with a history of consistent employment with the organisation qualifies as a full-time employee. Depending on the relationship that already exists between the employer and the employee, this will be decided. The appointment letter may be taken into account while confirming the employment guarantee.
Part-Time Workers
Any worker who does part-time labour for any establishment is categorised as a part-time worker and must register with the EPFO. Compared to a full-time employee, a part-time worker works less hours per week.
Work-From-Home Workers
The company may also consider registering any employee who works remotely for a set amount of time for the employee provident fund registration
Contractors
Contractors are specific personnel hired to carry out certain projects in accordance with the needs of the organisation.For organisations that hire independent contractors, provident fund registration registration is required.
Consultants
Consultants are people who are classified based on their level of experience. They are neither a contractor nor a part-time employee; instead, they are providing consulting services to an establishment for a set period of time.
Freelancers
The Government of India has added those who are freelancers to be regarded under the definition of an employee in the latest revision to the Social Security Code introduced in September 2020. The services offered under the employee provident fund registration are also available to independent contractors.
Eligibility for Provident Fund Registration for Indian Employers
To be eligible for PF Registration, an organisation has to fulfil the following criteria:
- A factory with a total employee strength of 20 or more
- An establishment that employs more than 20 persons. Here, the Central Government defines the class of such firms
- An establishment that has less than 20 workers and has been notified of compulsory registration for not less than 2 months
Companies with less than 20 employees (Note: Such companies must issue a notice to the Employees’ Provident Fund Organization in 2 months or less than that)
The employer and the employees of an establishment must mutually agree to apply for PF to the Central PF Commissioner. A notification has to be sent to the Official Gazette from the date of the agreement.
Every employee is eligible for PF right from the beginning of his employment. The responsibility of PF contribution and deduction is the employer’s.
What Details Do I Need to Give for PF Registration?
- Name & address of your company
- Head office & branch details
- Date of company incorporation
- Total employee strength
- Type of business activity
- Nature of business
- Director/partners’ details
- Employee’s Basic details
- Employees’ salary details
- Bank account details of the company
- PAN card.
Benefits of PF Apply Online
Pension Coverage
Besides the contribution of the employee to EPF, the employer adds an equal amount which is inclusive of Employee Pension Scheme (EPS). Therefore, EPF online saves you a robust pension.
Cover of Risk
In case of instances like illness, demise or retirement, Provident Fund registration helps the dependents of the employee by covering the financial risks they face in such situations.
Single Account/one EPF Account
The PF online account can be transferred while switching jobs. Universal Account Number(UAN) linked to the Aadhar will start to facilitate the linking of the previous accounts. It can be carried forward to the new employer instead of being closed down. This uniformity ensures that the rate of return is compounded over the years.
Emergency Fund
Emergencies are bound to happen at any point of time in life. EPF amount can be of great help during mishaps, illnesses, weddings and educational expenses. Employees can make claims online.
Employee Deposit Linked Insurance Scheme
Any person who has PF online account is eligible for this insurance scheme that requires only 0.5 % of the salary deduction as premium.
Extended Goals
The PF account can be extremely helpful for long-term goals like buying a property or setting up a fund for children.
Checking the EPF balance
The members who are registered under the UAN portal can get the details which are available at the Employee Provident Fund Organization (EPFO) by just giving a missed call to 011-22901406 from their registered mobile number. If the member’s UAN is linked with the bank’s account number, PAN card or Aadhar number, then the member can easily get the PF online application and previous contribution details Activated members of the UAN can get to know their previous EPFO balance and PF contribution by sending an SMS to 7738299899 from their registered mobile.
EPF Registration UAN (Universal Account Number)
The organisation updates the KYC documents of its personnel once it has registered in the EPFO portal by creating a Universal Account Number (UAN). Each employee’s UAN number can be used to transfer PF money electronically to a bank account, claim PF benefits, and other things. The following process must be used to activate UAN as the only mandatory step for an employee to take:
- Step 1: Employees can visit the official EPFO website at https://unifiedportal-mem.epfindia.gov.in/memberinterface to activate their UAN online
- Step 2: Fill up all the required fields, including UAN, Member ID, Aadhar number, PAN number, etc
- Step 3: Next, enter your information (name, address, and phone number) and complete the form by typing the captcha that appears on the screen
- Step 4: The employee will receive an OTP on his mobile device after filling up these credentials
- Step 5: Validate the OTP and activate the UAN.
How to Apply PF Online?
The Provident Fund can be a great support, safety and assurance for employees as it offers a sense of financial security to the employees. It is regulated by the Employees’ Provident Fund Organization (EPFO), which is also one of the most well known and biggest Social Security Organisation in India. They handle huge amounts of financial transactions on a daily basis. The process of applying for the provident fund is also not a difficult task as long as you have a professional to help you sort things out.
At Spinach Laws , we guarantee that you do not have to go through the legal complexities of registering for PF online. Once we get the required information and the documents, our experts fill the forms accurately and submit them on time. Our team takes the responsibility of follow-ups and delivers you the PF number at the earliest time as possible.
EPF Online Registration Process for Employers
- Collect relevant employee data and documents
- Establishment Registered with EPFO online Registration
- Register DSC (digital signature certificate) of the employer
- Fill the application with all employer details
- Submit verified form
- Get PF registration certificate & Universal Account Number [UAN]
Our expert will be your advisors and consultants for EPF registration online and help get the PF number in 5 to 10 business days (not factoring processing time). On the very first consultation, which is free of any charge, you will get the gist of our PF process. When we work on your behalf, we ensure that the PF application is submitted for the organisation in the prescribed format without any errors. We pledge easy working at the most economical prices.
The EPFO members will be able to keep a tab of their UAN status using online methods. All you need to do is to provide the EPF number and select your state. You will automatically get the UAN status.
All the individuals will have to activate their UAN if they need access to all the direct/online facilities given by the Employee Provident Fund.
Mandatory Compliances
- Once the establishment has registered with EPFO, it must follow certain lawful requirements on a monthly or annual basis
- Monthly returns are submitted electronically by uploading the ECR sheet using the establishment login
- Online returns are submitted by the 15th of the following month
- Every employee registered with the establishment during the month for which the return is filed is listed by name and UAN on the ECR sheet, which is available for download through EPFO in an XML format
- A file must be created from an XML sheet before it can be uploaded for return filing
- By adding online payment gateways, finish filling the return.
Contribution Rate
Rate of contribution is the amount of contribution varies according to how many employees are working in the establishment:
- For establishment employing personnel aged 20 or over:
A maximum of 12% of the employee’s salary (basic wages plus overtime pay) may be contributed by both the employer and the employee of such an establishment. - For establishments hiring less than 20 workers:
These establishments shall contribute at the rate of 10% of the employee’s basic salary, up to a maximum of 12% - A business with up to 10 employees that registers voluntarily with EPFO
- Any business that lost money the previous year
- Other businesses, including a brick factory, a jute plant, a beedi factory, etc.
Who are all Exempted from the Registration Under EPF Scheme?
Any business or establishment with fewer than twenty employees is exempt from the EPF Act’s requirement that they register. Such businesses can still register under the EPF programme if they so choose. The process will subsequently be known as voluntary provident fund registration.
How Much Penalty Is Prescribed for the Employer’s Delay?
| S.No | Period of Delay | Rate of Penalty Imposed (p.a.) |
|---|---|---|
| 1. | Up to 2 months. | 5 percent |
| 2. | 2 to 4 months | 10 percent |
| 3. | 4 to 6 months | 15 percent |
| 4. | Beyond 6 months | 25 percent |
Documents Required for PF Registration Online
Any business that wishes to apply for PF needs to submit the following mandatory documents:
- PAN card of establishment
- Certificate of incorporation
- Cross cancelled cheque of establishment
- Address proof that is in the name of the establishment. It can be:
- Rent agreement
- Water
- Electricity
- Telephone bill
- Specimen signature of directors and authorised signatories
- Digital signature registration of the authorised applicant
- In case of voluntary registration, consent of the majority of employees
In some entities the underlying may also be needed:
- First sale bill
- First purchase bill of raw material and machinery
- GST registration certificate
- Bankers details
- Record of a monthly employee strength
- Register of salary and wages
You just need to collect the mandatory documents and send a copy of each document to us. The rest will be handled by the efficient team at Spinach Laws . From filing the form to verification processes and legal formalities, we handle it all!
Online ESIC Registration Overview
Employee State Insurance or ESI is a scheme commenced by the Government of India to offer medical, monetary, and other advantages to workers. ESI is managed by an autonomous authority – Employee State Insurance Corporation – which lies under the jurisdiction of the Ministry of Labour and Employment.
By law, any company that has more than 10 employees mandatorily needs to have ESI. In some states, the number of employees is 20. For employees earning more than ₹21,000 per month, including basic salaries and dearness allowance, the insurance is deducted from their pay.
Also, taxpayers with a turnover of less than ₹1.5 crore can opt for the composition scheme to get rid of tedious GST formalities and pay GST at a fixed rate of turnover.
Benefits of ESIC Registration
ESIC New Registration ensures that employees enjoy the following advantages:
Medical Aid
From the very first day of employment, registered ESI members and their families are entitled to enjoy the benefits of complete medical care and insurance.
Maternity Aid
Pregnant women are allowed maternity benefits that are payable up to twenty-six weeks. This period can be extended by 30 days on medical advice. To qualify for maternity benefits, employers are required to contribute their wages for 70 days in the preceding two contributions periods.
Disablement Benefits
Disabled employees can get 90% of their monthly salaries as disablement benefits.
Sickness Benefits
Absence from work during illness can be taken for a maximum of 91 days per year along with 70% of the monthly wages.
Dependent Benefits
In the unfortunate event of the demise of an employee during employment, the dependents of the deceased will receive 90% of his/her monthly salary.
Funeral Expenses
The deceased employee’s family is entitled to an additional amount of ₹10,000 towards funeral expenses.
Confinement Expenses
In the case of confinement of an insured woman or wife of an employee occurring in a place with no medical facilities under the ESI scheme, confinement expenses can be availed.
In addition, some need-based benefits:
Vocational Rehabilitation
Permanently physically challenged, insured employees are entitled to undergo vocational rehabilitation training at VRS.
Physical Rehabilitation
Available to employees in the case of physical disablement due to an employment injury or occupational hazards.
Old Age Medical Care
An annual payment of ₹120 ensures medical care benefits for retiring ESI employees or for those who are opting for VRS/ERS.
Extended Sickness Benefits
ESI members suffering from chronic diseases can avail the extended sickness benefit for up to 2 years, once the standard sick leave of 91 days has expired.
Enhanced Sickness Benefit
Registered ESI members willing to undergo sterilisation procedures are eligible for enhanced sickness benefits of 100% of their daily average wages. This benefit also allows a recuperating period of 7 days for vasectomy and 14 days for tubectomy from the date of surgery or admission in the hospital.
ESIC (Employees’ State Insurance Corporation) Registration Process
When you choose Spinach Law for ESIC New Registration, we complete it in three simple steps that take the minimum possible time.
Form Filling: The ESIC Online Registration form is filled by you completely and the necessary documents are submitted
Verification: Every detail you provide is cross-checked to ensure there are no errors or omissions made. This may take a maximum of 12 days
Submission: The ESI application along with other legal paperwork is submitted by us which requires 2 working days.
Your part of the ESIC Online Registration is completed at this point. The government reviews the application and processes your registration. Once granted, Spinach Laws sends you:
- The 17-digit identification code number
- Employee insurance number
- Temporary identity card
Eligibility/Entities Covered Under ESIC Registration in India
As per the ESI Act of 1948, all establishments are eligible for ESI registration online provided they fulfil the criteria of having the required number of employees in that state. The entities covered are:
- Shops
- Cinemas
- Movie theatres
- Medical institutions
- Hotels or restaurants
- Newspaper establishments
- Private educational institutions
- Roadside motor transport establishments
Note: For hotels and restaurants, it is mandatory to only offer the service and not have any manufacturing functions. In some states, medical and educational institutes are not included. For newspaper establishments, there is no coverage under the Factory Act.
Eligibility for ESIC Registration in India
The general rule to be eligible for ESI (Employees’ State Insurance) registration is to have 10 or more workers. But in some regions, ESI is applicable only if there are more than 20 employees.
Other eligibility criteria that need to be fulfilled are:
- Any employee whose gross salary is up to ₹21,000 per month can avail of this with the help of the employer
- Establishment registered with EPFO
- The contribution to ESI is 6.5% of the gross salary. It is divided as:
- 4.75% by the employer
- 1.75% by the employee
- For industrial units, where there are chances of occurrence of injury or health issues at the business premise, all employees with a salary less than ₹21,000 compulsorily need to have ESI.
Documents Required for online ESIC Registration
To register for ESI the employer has to submit the following documents along with the application:
- The registration certificate or license issued by – Shops and Establishments/Factories Act
- Address proof
- Rent receipt of the occupied premises, mentioning its capacity
- Copy of PAN card
- Copy of bank statement
- Photocopy of the last building tax/property tax receipt
- Memorandum and Articles of Association or Partnership Deed registration or Trust Deed registration – depending on the applying entity
- Photocopy of registration
- Certificate of commencement of production
- Registration No. of CST/ST/GST
Note: For ESI filings, a monthly pay sheet is required for computing the contribution amount for each employee.
Online Professional Tax Registration – an Overview
Professional tax is a tax that is imposed by state governments on all salaried individuals. Professional tax is applicable to all working professionals, such as chartered accountants, lawyers, and doctors. It is levied based on the individual’s employment, trade or profession. The tax rates differ across all states, however, the maximum amount that can be levied as professional tax is ₹2,500 per annum.
Easy Online Professional Eligibility
Professional tax applicability: Professional tax is levied on all types of trades and professions in India. It has to be paid compulsorily by every staff member who is employed in any private firm operating in India. Professional tax registration is the onus of every business owner, who must take up responsibility for deduction of professional tax and payment for the same.
Professional tax for self-employed: Any professional who obtains a monthly regular income will need to pay the professional tax. By the word professional, we mean people employed in specialized fields such as accountancy, media, etc.
Who is exempted from paying professional tax?
The professional tax rules provide exemptions for a few individuals; the exemptions are different based on the state you belong to. The professional tax rules provide exemptions to the following individuals:
- Parents of children suffering from mental or permanent disability
- Members of the armed forces
- Individuals with permanent physical disability
- The age differs state wise
- Badli workers engaged in the textile industry
- Women engaged exclusively as an agent under the directorate of small savings or Mahila Pradhan Kshetriya Bachat Yojana
- Guardians or parents of mentally challenged individuals.
Benefits of Professional Tax Registration
Here are the reasons why one should never miss a professional tax payment
- Judicial requirement: Employers in many states of India are strictly bound by the judiciary to obtain the registration of professional tax. After the registration, they have to make the deductions and pay the service taxes of all the employees who work under them.
- Avoid paying penalties: Failure to professional tax registration results in huge penalties that keep on increasing over time.
- Easy to comply: The professional tax regulations are so easy to follow. The registration procedures can be done quickly and the further proceedings are also much easier.
- Deductions: Deductions can be claimed in the salary on the basis of the professional tax paid. The deductions will be allowed in the year corresponding to which the taxpayer made the payments.
- State government tax: The local authorities and the state government have the right to collect all the professional taxes based on employment, profession trades and much more. The collected amount of professional tax per annum should not go beyond ₹2500 per annum.
Documents Required for Professional Tax Registration
- Certificate of incorporation, including MOA and AOA/LLP agreement
- PAN card of company/LLP attested by the company director
- Proof of office location with NOC from the owner of the premises
- Proof of company bank account with bank statement and a cancelled cheque
- Passport size photograph, address and identity proof from all the directors
- Board resolution/ statement of consent by the partners
- Shop and establishment certificate
- Salary register and attendance register.
Online Professional Tax Registration – Detailed Process
- Step 1: PAN card, address, and identity proof of all the directors/partners/proprietors of the company must be provided
- Step 2: All the employee details must also be furnished
- Step 3: The application form for professional tax must be filled by the employees
- Step 4: Our experts will submit it to the concerned authorities
- Step 5: The basic acknowledgement will be provided by us within 5 to 7 working days
- Step 6: The registration hard copy will be issued within 10 days in all the major cities
- Step 7: In other places, it might take up to 15 to 20 working days.
Understanding the Professional Tax Registration Applicability
Firms/Companies/LLPs
In the case of professional tax, firms, LLPs, corporations, societies, HUFs, associations, clubs, and companies are considered taxable entities. All the branches involved in these will also be considered separate individuals under professional tax.
Individuals (Professionals)
Legal practitioners such as notaries and solicitors, medical representatives such as dentists, medical consultants, doctors, and other professionals such as management consultants, tax consultants, surveyors, company secretaries, chartered accountants, insurance agents, engineers, architects, and contractors are all considered professional individuals who need to pay professional tax.
Partners and Directors
People who act as company directors, firm partners, LLP partners, and designated partners should pay professional tax. They should register under the professional tax act within 30 days of getting appointed in these roles.
Employers
Within 30 days of the company’s incorporation, the company/firm must get a professional tax enrollment certificate (PTEC) by registering on the government portal.
The company/firm must have a professional tax registration certificate (PTRC) within 30 days of employing a staff member.The employers are supposed to deduct professional tax from the salary of the people employed under them and submit it at the professional tax department during the time of filing returns.
- The employers are supposed to deduct professional tax from the salary of the people employed under them and submit it at the professional tax department during the time of filing returns. The employer will have to register at the professional tax department before 30 days of its applicability.
What are the Consequences of Professional Tax Violation?
Though the actual penal interest or penalty can change according to each state’s legislation board, all states will be charged a penalty if they have not registered after the professional tax legislation is made applicable. Also, penalties will be charged if the payments are not made within the due date or if the return is not filed within the due date specified.
Shops & Establishments License – An Overview
All states have their own Shop and Establishment Acts but adhere to the same general provisions. State Labour Departments regulate Shop and Establishment Acts. According to this Shop and Establishment Act, registrations are issued by the respective states. Therefore they differ slightly from state to state. The Act regulates all shops and commercial establishments within the state.
As defined by the Shop and Establishment Act, a shop is where goods are sold or provided, whether retail or wholesale or where services are rendered. Commercial establishments generally employ people for office work, such as commercial, financial, trading, or insurance companies. Offices, godowns, storerooms, and warehouses are examples of commercial establishments. The term includes hotels, boarding houses, restaurants, cafes, theatres, and other public entertainment venues. However, factories and industries are not covered by this shop act registration. They are governed by the Factories Act 1948 and the Industries (Development and Regulation) Act 1951.
Why Was the Shop Act License Introduced?
- To Impose Rules Based On Local Culture and empower states: It expressly allows states to frame their regulations and rules pertaining to the labour workforce engaged in such commercial establishments and make necessary exceptions
- To Convert Unorganised Sector Into Organised: Government aims to convert the unorganised sector into an organised industry by bringing in rules and regulations
- Mandates registration: Business registration is mandatory for entrepreneurs under the Shop and Establishment Act, which is the most significant push towards organising and monitoring this sector. With more and more small shops and commercial establishments registered, the government will be able to provide them with better assistance and resources
- To Regulate Wages Of The Employees: Before, any shop or commercial establishment could fix any salary/wage for its employees, and there was no way to regulate it. Daily wagers and labourers received substantially less money, and business owners weren’t held accountable. Shops and Establishment Certificate holders must now comply with government rules regarding wages and provide the care each employee deserves
- Stop Child Labour: Among the most important features of the Shop and Establishment Act is making child labour illegal and punishable. Child labour was common before opening shop establishment licenses, which destroyed lives. Government regulations and rules regarding shop and establishment license have made this illegal
- Healthy Working Conditions: Regardless of the condition of the business, the shop act registration requires business owners to maintain a healthy working environment and provide washrooms, baby care rooms, etc.
Benefits of Shop and Establishment License
Legal Right to Conduct Business
Obtaining a shops and establishments license and providing evidence of business, such as a partnership or sole proprietorship, gives the business owner the legal right to operate within the Act’s jurisdiction. Law enforcement officials cannot harass and bother them.
Business Banking Account
According to RBI regulations, every business must have a separate business account to manage its money. Under the Shops and Establishments Act, only a certificate can be used to create this business account.
Hassle-free Inspections
Shop and Establishment License provide access to government schemes designed to promote small businesses. Businesses registered under the shop and establishment legislation can also access low-interest bank loans, financial plans, and programmes.
Availing Government Benefits
Shops and Establishments Act licenses provide access to government schemes designed to promote small businesses. Businesses registered under the shop and establishment legislation can also access low-interest bank loans, financial plans, and programmes.
Encourage Expansion
By giving a legal entity status, a business owner who is 100% committed to following the Shop Act’s compliances will be able to strengthen the entity’s market position, allowing the business owner to reach out to newer consumers.
Documents Required for Shop and Establishment Registration
We provide end-to-end online fulfilment services that are hassle-free and 100% digital. Please prepare your documents as soon as possible
- Shop or business address proof
- ID proof
- PAN card
- Payment challan
- Additional business licenses necessary to start a business
Regulations Under The Shop and Establishment Registration Act
As part of the Act, the following matters are regulated:
- Work hours, annual leave, weekly holidays
- Compensation and wages
- Employing children is prohibited
- Women and young people cannot work night shifts
- Inspected and enforced
- Rest interval
- Hours of operation
- Employers’ record keeping
- Terms of dismissal.
Penalties For Not Acquiring Shop Act License
Under the Shop and Establishment Act, penalties vary by state and are typically monetary, operational, or imprisonment-based. Although the monetary value is high, the risk of a closure notice hangs over various non-compliances.
Closure of Shop or Establishment
If a shop or establishment closes for any reason, the occupier must inform the Chief Inspector in writing within 15 days of the closure. The Chief Inspector will then cancel the shop and establishment registration and remove the business from the register.
Shop and Establishment Registration Process
Step 1: Contact our Experts
Book a slot with our experts from SPINACH LAWS . They will resolve all your queries about the shop and establishment registration and initiate the process
Step 2: Submit your Documents
Provide all the documents required for shop and establishment registration to our associates from Spinach Laws for the documents as per your requirement. You have to submit the same
Step 3: Inspection & Approval
During an inspection, the labour department will verify the information you provided and the documents attached to your application. Usually, an inspection isn’t needed. The authorities usually approve your application after reviewing your application and visiting your business location. We will deliver your license to your doorstep.
What is an ESOP or the Employee Stock Option Plan?
Top talent is managed and recruited by businesses using ESOPs (Employee Stock Option Plans)! Under this employee benefit programme, the business encourages its staff to purchase shares of ownership at a predetermined rate. Employee stock ownership plans (ESOP) are frequently offered by employers to encourage long-term loyalty from their workforce. It encourages workers to deliver better work and show devotion to the organisation.
Let’s say a worker receives 400 shares. 100 shares will vest once each year has passed. The value of the shares to employees rises together with the company’s value. This controls the staff turnover as well. Read through to find out more about ESOP, pros and cons of ESOP, stock option plan and so on.
Uses of ESOP
- ESOPs are a tax-advantaged method that provides shareholders with fair value.
- A ‘low and slow’ ownership shift is possible with an employee stock option plan.
- People that contribute positively and work for the company for a long time benefit from ESOPs.
- It produces independent, long-lasting businesses that are tax-favoured.
- A legacy is established and maintained by the Employee Stock Option Plan.
The Pros and Cons of an employee stock option scheme
One might have the doubt, what are the pros and cons of an ESOP? Here, let us see a few points explaining few advantages and disadvantages of an ESOP:
Disadvantages
- High Price These schemes are comparatively expensive to administer and exceedingly complicated. An owner should budget at least ₹ 40,000 simply to get started on the most basic design. The business will have to pay annual fees to third parties for trustee, legal, administrative, compliance, and valuation services during the life of the plan. Transaction costs apply to both the hiring of new employees and the retirement of existing ones.
- Reduced Value An ESOP bases its decision to buy stock in a company on a notional valuation study from a licenced firm. This valuation may be considerably less than what a competitive selling procedure with numerous potential bidders and investors may produce. Depending on the industry, a company might often earn a selling valuation that is 20 to 30 percent greater than an ESOP valuation.
- Exhausting Resources Less money is available to invest in the expansion of the company, the employment of talent, the exploration of new markets, etc. as a result of these fees and payments as well as the buyback requirements of an ESOP. The business may find it difficult to invest in development and innovation because supporting the strategy currently takes priority over cash flow and liquidity, which are under constant pressure.
- It’s Challenging Many of the parties involved benefit in the form of third party fees, it is difficult to obtain an unbiased judgement about this type of stock ownership plan from the industry. Many plans employ an independent trustee to represent member interests and external companies to handle plan administration and record keeping in order to avoid conflicts of interest. Fiduciary Liability Insurance is also advised to safeguard the company against any allegations of improper handling of employee benefits.
Advantages
- Built-in Buyer An ESOP can help the enormous number of baby boomers wishing to sell their companies find a buyer in a market that is rapidly becoming saturated with companies up for sale.
- Tax Benefits If the company complies with a comprehensive list of requirements, ESOPs can provide a number of tax benefits. And while establishing an employee stock ownership plan is quite expensive, depending on the firm, its structure, and a wide range of other circumstances, it may be less expensive than selling the business.
- Owner and employee advantages Middle-market businesses can frequently achieve their objectives with a thoroughly thought-out exit strategy. The ESOP then has the potential to protect the legacy and stability of the company while rewarding key management and employees for their performance and commitment. The ownership of the business is still held by individuals the owner knows and trusts. This can reflect very favourably on the owner who decides to give their staff the reins, and a sale to an ESOP can be made gradually or all at once, allowing the owner options in how to exit the company.
How Does ESOP Work?
Let us see on how an ESOP work from the explanation given below:
When a company offers ESOPs, they are held in trust for a specific amount of time. The vesting term is the time frame in question. Employees may then exercise their ESOPs after the vesting time has passed. The quantity of shares to employees that may be offered, their price, and the recipients are all determined. Following this, the chosen employees will have the opportunity to exercise their ESOPs and purchase company shares at allowed prices, which are below market value.
Checklist for Employee Stock Option Plan 2022-23
- Check the articles for any specific provision on the issue of share under ESOP.
- The date and members of the compensation committee should be included in the board meeting.
- Notice of general meeting including the number of ESOP to be granted.
- Likewise, hold a general meeting for approval of shareholders by way of ordinary resolution. Additionally, include the authorization for the issue of shares under ESOP and the formation of the compensation committee.
- There must be a compensation committee (CC). The CC shall be a committee of board directors consisting of a majority of independent directors.
- Approval of shareholders by separate resolution.
- The requirement of a draft copy of certificates.
- Filing of Form-PAS-3.
- Disclosure in Director Report (DR).
- Maintenance of the register of ESOP in SH-6 at the registered office of the company or such other place as the board may decide.
- Entities in the register shall be authenticated by CS or any other person authorised by the board.
Eligibility for ESOP
According to the IRS (Indian Revenue Service), the maximum age an employer can impose to be eligible for an ESOP is 21. Moreover, he/she must be eligible for ESOP in the year of joining the company. An employer can restrict eligibility to employees with two years of service but only if the plan has immediate vesting.
How to register an Employee Stock Option Plan
Draft The ESOP Rules
Your ESOP rules set out the terms that apply to all options granted under the plan, including the process for granting options, how and when employees can exercise their options, and what happens to the options on an exit event, or if an employee leaves. The document will include the following schedules:
- Schedule 1: A grant letter setting out the terms of the options you want to grant to recipients.
- Schedule 2: The form of the exercise notice to be delivered to the company when an option holder wants to exercise their vested options.
- Schedule 2: The form of the exercise notice to be delivered to the company when an option holder wants to exercise their vested options.
- Schedule 3: An option certificate which records the number of options, exercise price and vesting provisions.
Approve The Rules And The Option Pool
Once you are satisfied with the ESOP rules, your directors and shareholders will need to sign some corporate approval documents to adopt the ESOP rules and set up your option pool.
Board And Shareholder Approval
There are some resolutions which include:
- The approval of the Employee Stock Option Plan rules.
- The total number of options in the ESOP pool.
- Authorization for the board to grant options to recipients of their choosing, and
- Authorization to issue shares on any exercise of the options.
Shareholder Waivers And Consents
Your constitution and shareholder’s agreement may include pre-emptive rights on the issue of new shares. If this is the case, these shareholders with preemptive rights will need to sign a waiver in respect of any options granted the ESOP.
Grant your options
Prepare Your Directors’ Resolutions:
Each time you want to grant options, you should ask your corporate secretary to prepare a new set of directors resolutions in writing, approving the grant of options to a specific recipient.
Send Each Recipient Their Grant Letter:
- Once you have received the letter, you can issue them their option certificate. You can find the option as the certificate form in schedule 3. Here the schedule should be left blank and a separate option certificate provided to the recipient. That is, you need to create a fresh, separate word doc.
Update Your Register Option
Internally, you should also be keeping an option register, which is a record of all the options the company has granted, the vesting schedules, expiry dates, and exercise dates.
Documents for Employee Stock Option Plan
- Minutes of a board meeting.
- Special resolution approving ESOP along with the explanatory statement.
- Minutes of the general meeting.
- Boards report.
- Register of employee’s stock option plan.
- PAS- 3, MGT- 14.
Posh Compliance – an Overview
Do you know that 2 out of 5 women in a workplace experience sexual harrasment? To avoid any such activities towards women, the Government of India introduced the initiative called POSH Act in the year 2013. Employers are now required by law to submit an annual compliance report (ACR) every year in order to address this issue and improve compliance. This guarantees the availability of trustworthy data for analysing the degree of POSH compliance by employers and the volume of complaints received and resolved.
Pre- Documenting POSH Complaint
How do one file a POSH complaint? There are two phases to this – pre-investigation documentation and post- investigation documentation. Here are the details about the pre-documentation process in POSH compliance:
- Be as detailed as you can. For instance, if someone says something with a sexual undertone, that statement must be recorded
- Note the precise time and location of the incident. As an illustration, in Conference Room A or during the regular staff meeting. This will prevent the defendant from offering up fabricated defences
- Keep track of everyone participating. This extends past the accuser and the offended party. Note the names of any prospective witnesses and anyone who could have knowledge of the occurrence
- Keep track of everyone participating. This extends past the accuser and the offended party. Note the names of any prospective witnesses and anyone who could have knowledge of the occurrence
- It doesn’t matter if the offended party has trouble recalling specifics. It is crucial that the investigators are able to focus their inquiry as much as possible to eliminate any room for ambiguity.
Documents Required For Post- Investigation
Here are the few documents that are mandatory for the judicial review and hence they must be authentic and error-free.
- Complaint’s copy
- Any proof affiliated with the complaint
- List of witnesses accompanied with the complaint
- Notice issued to the respondent by the IC
- Respondent’s reply
- A list of witnesses of the respondent
- Both complainant’s and respondent’s statement
- Cross-examination statements of witnesses
- Report of the inquiry (signed by all IC members)
- Representations made by the parties in opposition to the report
- Confidentiality agreements signed by the complainant, respondent, witnesses, and others as indicated by the committee
- All of the meetings’ minutes, verbatim
- Meeting notices in their entirety, and
- Any order or directive given to management, in chronological order.
Who Can Apply for the POSH Act?
Any ‘worker’ who is a person hired in a workplace for any work on a regular, temporary, ad hoc, or daily salary basis, as well as any interns, contractors, probationers, or apprentices working on a volunteer basis, is subject to the POSH Act.
According to Section 2(o) of the Act, a ‘workplace’ is any department, organisation, undertaking, establishment, business, etc., including those funded by the government or owned by the private sector, hospitals, sports facilities, and/or residential properties with more than 10 employees. The definition of ‘workplace’ is further expanded by this clause to include any location an employee visits while on the job, including any transportation the employer provides.
Mandatory Steps to be Taken by Any Company: POSH Act
Here are the few details regarding the ICC or Internal Complaints Committee and other requirements for the employees with regard to POSH compliance:
| Internal Complaints Committee | Other Mandatory Duties |
|---|---|
| Constitute an IC committee to hear and redress the sexual harassment grievances with the presiding officer as a woman at a senior level | Provide a safe environment at workplace by creating an anti-sexual harassment policy in the organisation |
| Annual report must be formed by IC and sent to employer | Treat sexual harassment as a misconduct and initiate action for such misconduct |
| Provide capacity building programs to IC members | Display posters/ notice in visible places on consequences of sexual harassment |
| Monitor the performance and function of the IC members | Organise workshops and awareness programs for new employees at regular intervals |
| Allow for mediation as a recourse to the complainant | Provide assistance to the aggrieved woman if she chooses to file a complaint |
| If not applicable, the IC has to make an inquiry and forward it to the police for case registration under Section 509 of the Indian Penal Code, 1860 | Monitor the timely submission of reports by the IC |
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