HR and payroll for recruitment agencies in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Recruitment agencies in India face a payroll structure that most generic guides miss: you are simultaneously managing your own internal staff, a bench of contractual recruiters, and often a placed-workforce whose salaries you process on behalf of client companies. Getting each of these right requires separate treatment.
The three payroll populations you are likely running
Internal employees — your own recruiters, account managers and admin staff — are straightforward employees on your rolls. Standard EPF deductions apply: 12% from the employee's basic wage and 12% from the employer. If you cross the ESI wage threshold, ESI contributions are mandatory for eligible employees. You deduct TDS monthly under the new income tax regime (slabs rising to 30%, with a section 87A rebate available for lower incomes and a 4% health and education cess on top), file Form 24Q quarterly, and issue Form 16 annually.
Contractual or freelance recruiters are common in this sector. If they are individuals and not registered as businesses, TDS applies to their fees. The rate and section depend on the nature of engagement — consulting, professional services or otherwise. Resist the temptation to treat a long-term contractual recruiter as a vendor simply because you pay them an invoice; if they work fixed hours, use your tools and take direction from your managers, a labour authority may reclassify them as employees.
Placed workers on your rolls — common in staffing and temping arrangements — are legally your employees even though they work at a client's site. This means EPF, ESI, gratuity liability and all statutory obligations sit with your agency unless the client has signed an explicit co-employment or principal-employer agreement that shifts those obligations. Know which model you are operating under before you price a contract.
Gratuity and the five-year trigger
Recruitment agencies often have higher-than-average attrition, so gratuity planning is easy to defer. It should not be. Any employee — internal or placed on your rolls — who completes five continuous years of service is entitled to gratuity. The calculation is straightforward and defined by statute.
For a staffing agency, this creates a specific risk: a recruiter or placed worker who spends five years across multiple short-term assignments, all under your agency's employment, accumulates gratuity liability with you. Track tenure carefully. Some agencies provision for gratuity monthly rather than treating it as a surprise at exit.
The Labour Code implications for 2025 onwards
India's four consolidated Labour Codes came into force from 2025. For recruitment agencies, the Code on Wages and the Code on Social Security have direct impact.
The Code on Wages standardises the definition of "wages" used for calculating EPF, gratuity and other statutory benefits. Many agencies historically kept allowances high and basic pay low to reduce contribution bases. That approach carries more risk now because the Codes set a floor for what must be counted as wages. Review your CTC structures — particularly for placed workers — to ensure they comply with the revised definition.
The Code on Social Security consolidates ESI, EPF, gratuity and other schemes under one framework and extends coverage intent to gig and platform workers. If your agency places workers through app-based or project-based models, monitor how enforcement guidance develops. The direction of travel is towards broader coverage, not narrower.
Billing, margins and statutory cost accuracy
Recruitment agencies price their staffing services on a bill rate that must cover the worker's gross wages plus all statutory costs plus your margin. Underestimating statutory costs — EPF employer contribution, ESI employer contribution, gratuity provisioning, professional tax where applicable, and any bonus liability — compresses your actual margin.
Build a unit economics model for each staffing contract that lists every statutory cost as a line item. Then revisit it when wage revisions happen, because EPF and ESI contributions scale with the wage base. A wage hike for a placed worker that your client approves mid-contract can meaningfully change your cost if you have not built in a rate-revision clause.
Compliance obligations specific to the staffing model
Beyond payroll, staffing and recruitment agencies carry registration obligations that pure-employer businesses do not. Depending on the nature and scale of your placed workforce, you may need registration under the Contract Labour (Regulation and Abolition) Act — or its successor provisions under the Labour Codes — and you may need to maintain separate muster rolls and wage registers for workers placed at each principal employer's site.
Principal employers — your clients — also have obligations and will increasingly ask for compliance certificates and PF remittance proof before releasing your invoices. Build a monthly compliance pack into your delivery: challan copies, ECR filings, ESI remittance confirmation. Agencies that deliver this proactively reduce payment delays and avoid disputes when a client's auditor asks questions.
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