Third-Party Payroll in India: Cost and Compliance Guide for Employers 2026

Third-party payroll is an employment arrangement in which workers are placed on the payroll of a specialised staffing agency (the third party) rather than on the rolls of the company where they actually work. The worker reports to your office, follows your instructions, and performs work essential to your operations. Legally, however, their employment contract is with the staffing agency, which is the employer of record responsible for salary disbursement, statutory contributions, and compliance filings.

How Third-Party Payroll Works: Step by Step

• Step 1: Onboarding: Workers are onboarded by the agency. Employment contract issued, KYC documents collected, PF UAN generated, ESIC IP number assigned.
• Step 2: Deployment: Workers deployed at your premises. Day-to-day supervision, attendance, and task allocation managed by you. Worker remains on agency rolls.
• Step 3: Attendance Submission: Monthly attendance, leave, and overtime data submitted by you to the agency before payroll cutoff.
• Step 4: Payroll Processing: Agency computes gross pay, applies all deductions (PF 12% employee, ESIC 0.75%, PT, TDS), and disburses net salary to each worker’s bank account. Payslips generated.
• Step 5: Statutory Remittances: Agency remits employer contributions (PF 12%, ESIC 3.25%) to government bodies by the 15th of each month.
• Step 6: Monthly Invoice: Agency invoices you for total CTC of all deployed workers plus management fee. One invoice, no individual payroll processing by your team.
• Step 7: Compliance Filings: Agency handles monthly PF ECR, ESIC returns, PT, quarterly TDS returns, and annual returns under the OSH Code, 2020.

Third-Party Payroll vs Direct Employment vs Payroll Outsourcing

Principal Employer Obligations under the OSH Code

Since 21 November 2025, contract labour in India is governed by the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code), which replaced the Contract Labour (Regulation and Abolition) Act, 1970. When you engage workers through a third-party payroll agency, you are the principal employer, with duties you cannot hand over by contract:

• Establishment registration: Establishments with 10 or more workers must register under Section 3 of the OSH Code. The contract labour provisions apply where 50 or more contract workers are engaged, up from 20 under CLRA.
• Contractor licence check: A contractor engaging 50 or more contract workers needs a single licence under Section 47, valid for five years. Check it before any worker is deployed.
• Wage liability (Section 55): If the contractor does not pay wages on time or pays short, you must pay the shortfall and can recover it from the contractor.
• PF and ESIC defaults: Under the Code on Social Security, 2020, unpaid PF and ESIC contributions can be recovered from the principal employer. Ask the agency for monthly challan copies.
• Welfare facilities: You must make sure contract workers at your site get the welfare, health and safety facilities the OSH Code requires.

Typical Cost Structure

Industries Using Third-Party Payroll

IT companies use third-party payroll for project-based technical staff and support roles where client contracts may restrict direct headcount. Manufacturing uses it for seasonal production ramp-ups and new plant expansions. Retail and e-commerce for festive season workforce scaling (hundreds of workers in days). BFSI for field sales executives and collection agents with performance-linked engagement. Logistics for last-mile delivery and warehouse operations with high turnover. Healthcare for housekeeping, security, and para-medical support roles.

How to Choose a Third-Party Payroll Provider

Why Employers Choose TMS for Third-Party Payroll

TMS has been operating in the HR outsourcing space for 20 years, with 450+ active clients and 8,500+ employees currently managed in India. Multi-state payroll capability handles PT, LWF, and state-specific compliance automatically. Every client receives a dedicated account manager and a monthly compliance report confirming statutory remittances made, registers maintained, and any regulatory developments relevant to their deployment. Zero-default record on statutory contributions across 20 years of operations.

Frequently Asked Questions

Are third-party payroll employees entitled to the same statutory benefits as direct employees?

Yes. All statutory benefits apply equally to third-party payroll employees: PF, ESIC, gratuity (after 5 years, or 1 year for fixed-term employees) and leave under the OSH Code or the state Shops and Establishments Act. The agency, as the legal employer, must provide all of these.

Can a third-party payroll employee be absorbed into our rolls later?

Yes. Many employers use third-party payroll as an extended evaluation period. Once you decide to absorb the worker, the agency manages their exit from its rolls and you issue a direct employment contract. There is no legal bar on this.

As a principal employer, am I liable if the agency does not pay wages?

Yes. Under Section 55 of the OSH Code, if the contractor fails to pay wages or pays short, you must pay the shortfall and recover it from the contractor. That is why a financially stable, compliant agency matters, and why monthly PF and ESIC challan copies are a basic risk check.

Looking to Outsource Payroll?

TMS handles accurate, compliant payroll for 450+ companies across India: salary processing, PF/ESIC, TDS, Form 16 / Form 130 & payslips. 20 years expertise. Zero payroll errors.

Run Third-Party Payroll with TMS

Third-party payroll only works if it stays compliant. Therefore, TMS runs it end to end:

• Payroll outsourcing: full salary processing, payslips, PF, ESIC, and TDS handled for you.
• Contract staffing: a compliant contract workforce with payroll and liability handled by TMS.
• Statutory compliance: labour-law and statutory filings under the new Labour Codes.
• Employer of Record (EOR): for global companies paying staff in India without a local entity.

About the Author

Abhijit Divekar

Abhijit Divekar is the Managing Partner of Team Management Services (TMS), with 20 years of experience in HR outsourcing, contract staffing, and statutory compliance across India. He has helped 450+ companies build compliant, scalable workforces.