I do find it strange if someone can be on a level below you and be 'managing' you. It's not about having the same professional skills - lots of people successfully manage teams with very different or higher level professional skills than they do, but managing people involves telling them what to do, appraising their work, motivating them to meet targets and taking ultimate responsibility for what they do and don't achieve. Difficult to see how you could do that successfully if you are paid less and have less seniority within an organisation tbh. Doesn't sound as though it's working especially well here either.
However, leaving that aside for a minute, when I said reason, I didn't mean a reason why colleague needed adjustment, I meant reason why it is going on unaddressed. There is (as you have alluded to) a reason why your boss is allowing this to happen, rightly or wrongly, and that must inform your actions. There's always a reason why something's happening and understanding it is very helpful. It's not always the reason that is given or is most apparent, although it may be here.
Part of the reason will be the issues you mentioned, about ticking boxes, knowing the law and all that. Fine. But some of it may be to do with you. Why are you being taken advantage of? Look at your own behaviour and see what you can do, how you can change, to alter your situation.
Whatever boxes your boss is trying to tick by allowing this behaviour from someone else, I can't imagine anything which means you can't challenge the situation. I can't imagine any boxes that need ticking that justify a situation like this with such an impact on the rest of the team.
I think there is probably a combination of factors here, partly to do with boxes that your boss feels need ticking, partly to do with you not taking charge enough of your own situation and being firm enough about your needs, and partly about the insecurities/concerns of your boss.
Think about what you want to achieve and what you can do yourself to achieve it. Do you need to (for example) talk to your colleague 'man to man' and find out what's going on, explain how his behaviour is affecting you? Do you need to speak more firmly with your boss, arrange a review meeting and firmly request in a non-negotiable way some actions to be taken to address the situation? Do you need to speak to other colleagues and find out what they think? Do you need to address your own behaviour so that you are not taken advantage of going forward and be firm about your own priorities?
Could be some or all of these, only you will be able to work out what's most likely to succeed for you.