Servicing Payroll For Startups? 6 Major Problems To Expect

The startup world may be a wonderful place to be in. Their success continues to amaze and encourage us in some ways . However, in their single-minded pursuit to urge off the bottom and move as fast as possible, startups often don’t grant enough focus to HR and statutory compliance elements so on make sure that there are not any problems within the end of the day . 

Here, I’ll discuss what I’ve learned from working as a Payroll Processing Vendor In Delhi. Highlighted below are a number of the crucial matters that startups need to lookout of to make sure that they’re properly safeguarded. When checked out from the attitude of the PSP, the points also will bring back light a number of the common challenges faced and the way we will avoid/overcome them.

Let’s begin…

1. Pay first… decide later?

We have often seen that startups pay their employees without having given much thought to the salary structure. It so happens that one’s CTC is misinterpreted as ‘net pay’. The startup would comply with give the worker salary of, let’s say, Rs.35,000 per month and happily transfers the quantity to his account.

Unfortunately, the happiness is brief lived. Statutory deductions within the sort of professional tax, tax (TDS) and labor contributions need to be considered before making payments to employees. Non-deduction of such taxes or contributions will end in the startup bearing its burden, often with interest and penalty.

2. Minimalistic payroll data

In addition to employment agreements, the company should keep track of employee advancements, bonuses, leaves, and loans. Again, it’s common for these to be communicated orally to the worker which ends up in much hair splitting at the time of execution. we’ve started seeing a trend of startups not maintaining leave records. Whilst this is often beneficial to the worker , its rampant misuse leads to the loss of the startup’s most vital asset – cash. Startups should define their HR policies clearly. These policies, while being flexible, shouldn’t compromise on the startup’s own business interest.

3. Getting too creative

Startups are an ingenious lot; they need to be, it’s in their DNA. Unfortunately, we cannot afford to be too creative when it involves statutes. we’d like to abide by the law and need to make sure that our operations function within its framework. Startups tend to urge creative with salary structures, working hours, leave policies and other HR matters.

For instance, consider salary structuring. A typical salary structure has several components, some taxable et al. tax-free. However, the scope of the latter is fairly limited. to beat this limitation, tax-free components like the uniform allowance (offered to factories, etc., where employees need to be wearing prescribed uniforms) are expanded by startups to incorporate formal wear like suits and coats!

There is also a real problem surrounding leaves within the startup space. for instance , in Karnataka, whereas 24 days/annum of leave (including sick leaves) are to be granted to employees working 5 days every week , startups often offer only a lesser number of leaves. this is often done upon the pretext that they’re offering other benefits, like a work-from-home option, compensatory offs, etc. That notwithstanding, the wants vis-a-vis leaves under the Shops & Commercial Establishment Law will need to be complied with.

Often, such scenarios cause penal consequences. Further, non-compliance will cause unsavory comments on the due diligence report.

4. Pending statutory dues… can pay it out of investor money?

This is a remark that’s often quoted by startups when PSPs ask them to settle statutory dues. PSPs are often viewed as harbingers of bad news as they keep highlighting issues – startups don’t like issues; they like solutions. Sadly, aside from the payment of statutory dues, PSPs haven’t any solution to supply . Cash is just too crucial to be ‘wasted’ on paying these dues. they might rather pay employee salaries (it’s another matter that it’s CTC they pay and not net salary – refer point 1 above). they might like better to settle these dues using investor money. Investor money is for the expansion of the startup and not for cleaning up its mistakes. Every rupee invested into the startup is with the religion that it’ll be used well. Correcting a mismanaged financial position isn’t one among them. It’s best that statutory dues are settled in time.

5. Going completely paperless isn’t always an honest idea

Startups love going paperless; some to travel green, some to save lots of costs. However, when it involves employment contracts, this is often not a really good idea. we’ve often seen that the understanding between the worker and therefore the employer is oral or, at best, on emails (WhatsApp may be a close competitor now!). there’s little regard given to the great quaint way – to possess things in writing and to possess the contracts signed off. The absence of a written contract often results in misunderstandings and eventually to disputes. Contracts not only define the terms of employment, but are key documents to guard the interests of the startup. property protection, non-disclosure clauses, etc., are sine qua non in any employee engagement. It’s best to possess all employee contracts in writing.

Also Read – Things to Consider Before Availing of Used Car Finance

6. Facing a cash crunch to afford talent? No problem… ESOPs to your rescue!

Startups have given ESOPs an entire new meaning. during a public Ltd. (PLC), ESOPs add up only there’s the likelihood of converting these shares to cash, which usually happens during acquisition or funding. Until then, ESOPs exist on paper. Further, ESOPs have an enormous tax impact on their exercise which many startups are clueless about. the worker is required to pay tax on the difference between the fair value of the stock and therefore the money paid to accumulate it (which is typically very low). This involves a head especially for workers who leave a corporation before a liquidity event with their vested shares, these stock options got to be exercised at that point . The tax has got to be paid within the year the worker exercises the choice and not within the year when it’s converted to cash. within the year of such exercise, employees often come to the employer to debate on who bears the tax liability; it’s often the employer who finishes up bearing the burden. a transparent understanding of how ESOP operates and its tax impact will help startups structure this policy better.

We would wish to emphasize here that startups should, additionally to the humongous pile of tasks on their table, start watching labor compliances with renewed interest. It’s in their future benefit to get on the proper side of the law. Furthermore, verification of employee engagement at the time of its inception is required (e.g. employment contracts), its life (e.g. leave records) and its termination (e.g. full & final settlement letter) got to be tightened.

Payroll service providers are here to assist startups improve their processes and startups shouldn’t hesitate to succeed in bent experts whenever they feel the necessity to try to to so.

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