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Labour Law compliances –Significance To Start-Ups And SME’s

Non-compliance with regulations by startups and SMEs is being taken seriously. This underscores the importance of adhering to rules to maintain reputation and ensure business continuity.

Labour Law compliances –Significance To Start-Ups And SME’s
POSTED ON February 21, 2024 1:13 PM

India is slated to be a global leader in start-ups and Entrepreneur-driven organisations by 2030 which is fueled by benefits and schemes provided by the Government, technological innovations, and high domestic demand. At the same time, Small and Medium-sized Enterprises (SMEs) a enjoying a rapid growth phase in India across the manufacturing and services sector, with many privileges and benefits offered by the Government to ensure this sector attracts more participants and remains agile. 

While there are many benefits offered to this sector such as reduced interest rates, collateral-free loans, tax exemptions, and protection against delayed payments, there is no discount or subsidy from the Government when it comes to adherences with Compliances. Non-compliance is viewed seriously and could result in heavy penalties including imprisonment thereby affecting the reputation and business continuity. 

Labour law compliances are often mistaken to be restricted to workforce-related compliance alone such as payroll compliances and social benefits but in reality, it is far more comprehensive including Establishment compliances, Factory compliances if engaged in manufacturing, Environment, Health, Safety compliances, Contractor compliances and in recent times ESG compliances is gaining relevance. Further, there are specific compliances related to the nature of business as well.

The majority of the labour law compliances are applicable to the Start-ups and MSME sector irrespective of the scale of operations, vintage, revenue size, or profitability. This is an important perspective that needs to be kept in mind by the leaders of such organizations. 

Some of the important areas of labour law compliance that would be relevant to the Start-up / SME organisations would include the following: 

  • Licenses and Registrations under the various Labour Laws/Acts as applicable under the State and Central Laws depending upon the nature of business of the entity. 
  • Statutory benefits such as Provident Fund, Employee State Insurance, Profession Tax, Labour Welfare Fund, Statutory Bonus, Gratuity, Superannuation, Leave encashment. 
  • Registers are to be maintained under the applicable laws of the State and Centre. 
  • Returns are to be filed on a periodic basis under the applicable laws of the State and Centre. 
  • Other important laws such as Minimum Wages, POSH, Rights of Persons with Disabilities, Engagement of Apprentices, Inter-State Migrant Workers, and Industrial Disputes. 

The first and most important step to be undertaken by any new organisation for adherence to labour law compliances is to understand the Laws and Acts applicable to the entity under State and Central Laws depending on their nature of business and location of operations.

From this emanates the next steps which involved procuring the licenses and registrations, many of which are currently available through the online portal of the respective authority. If there are any exemptions offered for start-ups and SMEs, the same needs to be considered while checking the applicability of the Laws, Acts, and Registration/Licensing requirements.

Post obtaining the requisite license and registration, the appropriate deductions and payments need to be made to respective authorities and acknowledgments need to be maintained for future records, inspections, and responses to notices from authorities, if any. Appropriate policies need to be drafted for defining procedures under labour laws, training, and education initiatives for the employees, and periodic documentation such as registers, and returns need to be maintained. 

The above-mentioned could seem to be elaborate and cumbersome, and indeed to some extent it requires diligent fulfillment which may be time-consuming, and with proper knowledge of procedures, there would also be some cost involved towards appropriate adherence to compliance. Larger organisation could afford to have a department with a set of knowledgeable resources which may not be the case with bootstrapped start-ups and SMEs which would prefer to have their bandwidth and financial resources used for business growth rather than compliance costs.

There are many professional firms and software available in the market at affordable prices which take care of a large part of the labor law compliances in a efficient and simple manner. The start-ups/SMEs may use these options to utilize their time and efforts on core business while compliances are taken care of by professionals or software. 

It is easy and important to comply with labour laws, this is critical from a start-up/SME perspective as they will at some state in their business lifecycle want to raise capital for growth through various means, whether listing in the capital markets or through investors where the due diligence process captures every element of compliance adherence and gaps could result in issues detrimental to the growth and reputation of the entity. 

Authored By Mahesh Krishnamoorthy, Managing Director, Core Integra

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