India: Relaxation From Labor Law Compliances For Start-Up Ventures

The Ministry of Labour & Employment, with the sole aim to support & promote the Start-Up ecosystem and encouraging entrepreneurs in setting up new start-up ventures resulting in creation of employment opportunities, issued an advisory to the States/UTs/ Central Labour Enforcement Agencies for a compliance regime based on self-certification and regulating the inspections under various Labour Laws.

The term start-up may be best explicated as a commercial enterprise which is an emerging business or industry aiming to meet a peculiar market requirement by way of building up a viable mode of business involving a novel product, service, process or a platform. In Indian scenario (keeping in mind the available compliance relaxations) a start has been defined as an entity (working towards innovation, development, deployment or commercialization of new products, processes or services, driven by technology or intellectual property) incorporated or registered in India not prior to seven years (for Biotechnology Startups not prior to ten years), and with annual turnover not exceeding rupees twenty-five crores in any preceding financial year. It has been further clarified that a startup must not (i) be a business formed by splitting up, or reconstruction, of a business already in existence and/ or (ii) register turnover for the previous financial years in excess of rupees twenty-five crores or completed seven years from the date of incorporation or registration.

As per directions issued by the Ministry, start-up ventures shall be allowed to self-certify compliance (through the Startup mobile app) with nine labor and environment laws. In case of the said nine labor laws, no inspections will be conducted for a period of three (03) years from the date of incorporation of the star-up venture. In other words, if start-up ventures furnish self-declaration for compliance of nine labor laws for the first year from the date of starting the start-up, no inspection under these labor laws, wherever applicable, will take place. For compliance of applicable environment laws, start-up ventures which fall under the 'white category' (as defined by the Central Pollution Control Board or CPCB) shall be able to self-certify compliance and only random checks would be carried out in such cases.

Below is the list of the nine labor laws (along with brief note on its applicability & compliance required therein subject to state amendments) as included in the Ministry's advisory for exemption from compliance:

1) Industrial Disputes Act, 1947;

An Act to make provision for the investigation and settlement of industrial disputes, and for certain other purposes. The Industrial Disputes Act 1947 extends to the whole of India and regulates Indian labor law so far as that concerns trade unions. Every person employed in an establishment for hire or reward including contract labor, apprentices and part-time employees to do any manual, clerical, skilled, unskilled, technical, operational or supervisory work, is covered by the Act. This Act though does not apply to persons mainly in managerial or administrative capacity, persons engaged in a supervisory capacity and drawing > 10,000 p.m. or executing managerial functions and persons subject to Army Act, Air Force and Navy Act or those in police service or officer or employee of a prison. The objective of the Industrial Disputes Act is to secure industrial peace and harmony by providing machinery and procedure for the investigation and settlement of industrial disputes by negotiations.

The laws apply only to the organized sector. Chapter V-B, introduced by an amendment in 1976, requires firms employing 300 or more workers to obtain government permission for layoffs, retrenchments and closures. A further amendment in 1982 (which took effect in 1984) expanded its ambit by reducing the threshold to 100 workers. The Act also lies down:

  1. The provision for payment of compensation to the workman on account of closure or lay off or retrenchment.
  2. The procedure for prior permission of appropriate Government for laying off or retrenching the workers or closing down industrial establishments
  3. Unfair labor practices on part of an employer or a trade union or workers.

2) Trade Unions Act, 1926;

An Act to provide for the registration of Trade Unions and in certain respects to define the law relating to registered Trade Unions. Its object is the protection and promotion of the interests of the working class.

3) Building and Other Constructions Workers' (Regulation of Employment and Conditions of Service) Act, 1996;

An Act to regulate the employment and conditions of service of building and other construction workers and to provide for their safety, health and welfare measures and for other matters connected therewith or incidental thereto. Requires licensing of the principal employer along with annual reporting on construction workers employed.

4) Industrial Employment (Standing Orders) Act, 1946;

The Act requires employers in industrial establishments to define with sufficient precision the conditions of employment under them and to make the said conditions known to the workmen employed by them. It applies to every industrial establishment wherein one hundred or more workmen are employed or were employed on any day in the preceding 12 months.

The Software & IT industry in India had been exempt from complying with this Act for 11 years before the government withdrew the exemption in 2012. Now, all Software & IT companies which have more than 100 employees, fall under the ambit of this Act.

An industrial establishment is defined as: a) An industrial establishment as defined in clause (ii) of section 2 of the Payment of Wages Act 1936, b) a factory defined in clause (m) of section 2 of the Factories Act 1948, c) a railway as defined in clause (4) of section 2 of Indian Railway Act 1890, d) the establishment of a person who, for the purpose of fulfilling a contract with the owner of any industrial establishment, employs workmen.

The various matters to be provided in the standing orders issued under this act include:

  1. Classification of workmen, e.g. permanent, temporary, apprentices, etc
  2. Manner of intimating to workmen periods and hours of work, holidays, paydays and wage rates
  3. Shift working
  4. Attendance & late coming
  5. Conditions of, procedure in applying for, and the authority which may grant leave and holidays
  6. Requirement to enter premises by certain gates, and liability to search
  7. Closing & reporting of sections of the industrial establishment, temporary stoppages of work and the rights & liabilities of the employer and workmen arising therefrom
  8. Termination of employment, and notice thereof to be given by employer and workmen
  9. Suspension or dismissal for misconduct, acts or omissions which constitute misconduct
  10. Means of redress for workmen against unfair treatment or wrongful exactions by the employer or his agents or servants
  11. Any other matter which may be prescribed

Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979;

An Act of the Parliament of India enacted to regulate the condition of service of inter-state laborers in Indian labor law. The Act's purpose is to protect workers whose services are requisitioned outside their native states in India. Whenever an employer faces shortage of skills among the locally available workers, the act creates provision to employ better skilled workers available outside the state. This Act makes provision for availing with the onsite services of interstate workers by the contractors / establishments to overcome only the temporary shortage of required skilled workers in a state. The purpose of this act is not to encourage interstate migration of workers against the interests of local workers as the principal employers would have to incur more cost in deploying interstate workers.

Role of principal employers

  1. Registration of all principal employers who employs or employed directly or indirectly five or more Interstate Migrant Workmen on any day of the preceding 12 months.
  2. Maintain the registers indicating the details of interstate workers and make available for scrutiny by the statutory authorities.
  3. Every principal employer shall nominate a representative duly authorized by him to be present at the time of disbursement of wages by the contractor and it shall be the duty of such representative to certify the amounts paid as wages in such manner and may be prescribed.
  4. Principal employer shall be liable to bear the wages and other benefits to interstate workers in case of failure by the contractor to effect the same.
  5. Liable for the prescribed punishments for violations committed under this Act.

5) Payment of Gratuity Act, 1972

Gratuity is a payment to be made to an employee upon the termination of her service, provided she has had a continuous service of 5 years or more. The employer has to pay gratuity at the rate of 15 days per year of service of the last drawn salary, with the years of service rounded down to the nearest whole number. Gratuity is payable within 30 days of the last date of employment. As a prudent financial practice, establishments are supposed to provide for gratuity benefits on their balance sheets, at end of each financial year

6) Contract Labour (Regulation and Abolition) Act, 1970;

This act is to regulate the employment of contract labor in certain establishments and to provide for its abolition in certain circumstances. It is applicable to:

  1. Every establishment in which twenty or more workmen are employed or were employed as contract labour on any day in the preceding 12 months
  2. Every contractor who employees or employed twenty or more workmen on any day in the preceding 12 months
  3. The act doesn't apply to establishments in which work only of an intermittent or casual nature is performed:
  4. If work is performed for more than 120 days in the preceding 12 months, then it is not classified as intermittent
  5. If work is of a seasonal nature and is performed for more than 60 days in the preceding 12 months, then it is not classified as intermittent

In the context of this act, establishment means any place where an industry, trade, business, manufacture or occupation is carried out. Every principal employer of an establishment to which this Act applies shall, within the appropriate period, apply for registration with the registering officer. Once the registration has expired or been cancelled, the establishment cannot employ contract labor. The principal employer is responsible for adequately providing the following to the contract labor:

  1. Canteens
  2. Rest rooms & washing facilities
  3. First aid facilities
  4. Timely and complete payment of wages

7) Employees' Provident Funds and Miscellaneous Provisions Act, 1952; and

This act provides for the compulsory contribution towards a fund for the future of an employee after his retirement. EPF contributions are to be done on a matching principle, with the employee contributing 12% of the basic plus dearness allowance towards the EPF account, matched by the employer making the same contribution. EPF contributions are mandatory for employees drawing less than Rs 15,000 per month

8) Employees' State Insurance Act, 1948

This Act is to provide certain benefits to employees in case of sickness, maternity and employment injury, and to make provisions for certain other matter thereto. ESI is applicable to any establishment/factory which employs 10 or more persons at any point of time. The ESI fund is made up of contributions from employer and employee, which are governed as per the following rules:

  1. Only to be done for employees whose monthly wages are Rs 15,000 or lesser
  2. Employer's contribution is 4.75% of the total wages, and employees' contribution is 1.75% of the total wages
  3. If the wages of an employee are less than Rs 100 per day, he/she is exempted from making employee contributions, but the employer has to continue making contributions

It has been directed in the Advisory that from the second year onwards, up to third year from the setting up of the units, the start-up ventures are required to furnish self-certified returns which will only be inspected if a credible / verifiable complaint of violation is filed in writing and approval has been obtained from the higher authorities.

It is to be borne in mind that the Advisory does not exempt start-up ventures from the ambit of compliance of above said labor laws but provides an administrative mechanism to regulate inspection of start-up ventures, so that such ventures are motivated to be self-complied and fulfill adherence to the rule of law. Also, the exemptions serve as a gestation period for the young & new entrepreneurs to get accustomed to the labor laws and their implementing authorities and also to avoid harassment by restricting the discretion and arbitrariness.

It must be hoped that such benefits (and many more to come) do actually boost the start-up sector and the existing labor laws are molded further to address the issues of the present times and make provision for times to come.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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