Employment Law Compliance Requirements for Startups in India

By Suma R V - King Stubb & Kasiva

January 17, 2023

The year of 2022 observed mass layoffs across all sectors in India and deeply affected the booming Startup and Tech sector that had to revisit the growth it made in terms of human resource hiring in the past few years in light of economic situations and new-age business models.

Startups must ensure compliance with the laws of the land as non-adherence to legal requirements damages the business and reputation of the employer. Hence, any restructuring & reorganization of the business or the workforce should comply with the legal requirements for startups

This article delves deep into certain key aspects of employee management for startups from the Indian labour and employment laws perspective.

Protection of Different Types of Workers in India

Understanding the categorization of the workforce in India is very essential as it determines the laws applicable and the compliance requirements.

Workmen: The settlement & investigation of industrial disputes are regulated by the Industrial Disputes Act, 1947 (“IDA”). This Act also defines the term ‘workman’ as a person hired/paid to engage in skilled or unskilled work, manual or technical work, and/or clerical work in industry. The IDA also specifies the exclusion of persons engaged in managerial or supervisory roles. The “Workman” category’s wage threshold for non-coverage for employees working in a supervisory role, is INR 10,000 (Indian Rupees Ten Thousand) per month.

IDA requires employers to abide by certain processes, before changing the conditions of service of its workmen such as wages, holidays, leaves, hours of work, etc. It also regulates lay-off, closure, retrenchment, and transfer of undertakings.

Non-workmen: The terms and conditions such as employment termination, of non-workmen, are regulated under the State-specific Shops and Establishments acts.

In the case of workers working in a factory, as per the Factories Act, 1948, the conditions of service such as leaves, week off, hours of work, etc., are regulated as per the provisions of the Factories Act. The special legislation created also recognizes and protects contract labour/third-party employees.

The categorization of the workforce is essential to resolve and plan the organization/reorganization of the workforce for startups in India to chart out human resource processes including hiring or firing and consultatively plan HR policies.

Technicalities of Employment Contracts – implied terms & manner of entering into a contractual agreement

The relationship between an employer-employee in India might be stated or inferred, oral or written. However, forming an employment contract to avoid any disputes or differences between the parties over the terms of employment is a usual practice. The Shops and Establishments Acts in certain States require employers to issue appointment letters to their employees. Statutory-mandated terms and conditions of service are generally the minimum legal requirements to be ensured by the employers.

Social Security benefits

Employers must follow all applicable social security laws. According to the Employees’ Provident Funds and Miscellaneous Provisions Act of 1952, any employer with 20 or more persons must pay appropriate contributions to the employees’ provident fund on behalf of every employee making not more than INR 15,000 per month. Certain other legislations such as the Employees’ State Insurance Act, 1948, the Payment of Gratuity Act, 1972 and the Maternity Benefit Act, 1961 take care of medical and disability benefits, retiral benefits, and benefits for women during pregnancy and post-childbirth respectively.

Employee handbook, HR policies & guidelines

Indian employment laws do not specify all aspects of employment. For example, restriction on dual employment is limited to certain industries and certain activities of employees. The guidelines on social media usage by employees are not specifically dealt under Indian employment laws. Hence, it is necessary to draft and implement comprehensive HR policies and guidelines to specify the rules and regulations for the employment of employees. 

Trade Union Rights and Recognition

The Trade Unions Act (TU Act) of 1926 defines the process for trade union registration and certain legal aspects of registered trade unions. Maharashtra has enacted State-specific law that provides for the recognition of trade unions.

As per the TU Act and IDA, trade unions may negotiate the terms and conditions of employment of workmen in industry, including wages, with the employer, and sign settlement agreements. In addition, the TU Act grants registered trade unions substantial protection from criminal conspiracy prosecutions and civil court lawsuits and for any acts carried out in support of trade conflicts.

Legal Basis for Discrimination and Protection of Employees from Discrimination

The Indian Constitution forbids discrimination against citizens on grounds of sex, religion, caste, race and place of birth. To achieve these goals, laws forbid discrimination in the workplace against members of protected classes, such as people with disabilities, transgenders, and people who are HIV positive, and provide avenues for legal remedies against discrimination. Similarly, specialised regulations have been established to encourage the employment of particular groups of people. For instance, the Maternity Benefit Act of 1961 (Maternity Benefit Act), which provides paid maternity leave and other benefits, aims to provide a supportive work environment for all female employees.

Rules for Sexual Harassment and Remedies Available

According to the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“PoSH”), companies are required to create a policy against sexual harassment of women and make it generally known within their workplaces. Each organization with 10 or more employees should establish an internal committee to address accusations of sexual harassment made by women. Additionally, the employer must organize frequent awareness campaigns for staff members to educate them on the PoSH Act's requirements.

Transfer of Employee Rights in Business Sale and Retroactive Implications of Contract on Business Sale

In the case of a share sale, only the entity's ownership structure would change as a consequence of the buyer acquiring shares; the employer would remain the same. As a result, there won't be any need for an employee’s consent in the event of a share sale. However, if the transaction involves the sale of an asset or business (together with any connected workers), the employees' permission must be secured before their employment may be transferred to the buyer who will be a new employer.

Employee rights, including any special rights granted to them under a collective bargaining agreement, will remain the same following the sale of an asset or business (unless commercially agreed otherwise), including rights to retrenchment compensation and gratuities based on the length of continuous service rendered.

Successful Completion of Termination of employment

An employer is required to provide the affected employee notice of termination (or compensation in place of notice) unless the employee was fired for proven misbehaviour. According to the IDA, an employer must provide a workman who has been continuously employed for at least one year at least one month's notice (or pay in lieu of notice) (Notice of Retrenchment) in addition to the required severance pay. Non-workmen’s notification requirements will be governed by the State-specific Shops and Establishments Act and conditions of their employment contract.

Statutory registers and filing of returns

The labour legislations in India require employers to maintain certain statutory registers and records and file returns with the labour authorities.

Way Ahead for Start-up Compliances of Labour Laws

The Government of India and States/UT governments have eased and simplified the compliances for startups recognized by the Department for Promotion of Industry and Internal Trade. Self-certification of compliance under certain labour laws and relaxation in the inspection of establishments have been helping startups in compliances of labour laws.

Conclusion

The above being the key legal requirements under the labour and employment laws in India, startups must ensure compliance to avoid any hurdles in carrying out their business operations. Also, in the recent case scenarios, where start-ups and companies are getting merged or acquired, it is essential to delve into employee rights and liabilities during such corporate action for the smooth functioning of the industries.

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