12 August, 2016
From time to time, concerns have been raised by entrepreneurs and various Indian and international surveys about the challenges faced by start-ups and other companies doing business in India. India has also been rated very low on charts concerning ease of doing business.
India is a vast country with several states and union territories, which presents differences in culture, language, faith and food habits. But doing business in India also means complying with a long list of Central (Federal) and State statutes and their varied interpretations. In addition, judicial pronouncements of concerned High Courts and the Hon’ble Supreme Court of India must be taken into consideration.
Regulatory compliance with several laws is time consuming and complicated, adding to the financial and intellectual burden on start-ups. This, in turn, shifts their focus from development and growth of the core business to ensuring compliance with laws.
As a result, laws, rather than acting as a catapult and augmenting the growth of businesses, force several start-ups to reconsider their plans/strategies concerning doing business in India.
Two Types of Labour and Employment Laws
Apart from several tax, environmental and real estate laws, employment laws in India (commonly referred to as Industrial Laws) are a source of great concern for start-ups in India.
In India, various Central and State level labour and employment legislations govern conditions of employment, social security, health, safety, welfare, wages, trade unions and industrial disputes, etc. Several labour and employment statutes become applicable only upon fulfillment of prescribed thresholds, which could be wages of an employee(s), strength of employees in an organisation, etc. Some other statutes, meanwhile, may become applicable to specific/specified industries or to certain types of employees.
This means that a start-up needs to be on a constant vigil regarding applicability of a statute(s) [whether Central (Federal) or State or both], including the stage at which any one or more statutes may become applicable. Some non-compliances may not only pose a limited financial risk but also loss of goodwill and may become a source of continuous inconvenience due to inspections by the concerned authorities and actions as a result thereof.
Difference in Basic Concepts in Legislations
Lack of uniformity in some of the common terms used across labour and employment laws applicable to an organisation pose a practical challenge and inconvenience to start-ups. For example, a large number of labour and employment legislations have different: (i) applicability criteria; (ii) definitions of ‘employee’; (iii) definitions of ‘wages’ and also what is included or excluded from the wages; and (iv) manners of calculation thereof. Some basic aspects, such as the components that need to be taken into consideration while computing wages for the purposes of identifying provident fund contributions, could be different from components taken into account while calculating bonus entitlement of an employee, etc.
There is a real need for laws that allow start-ups to agree short or long-term arrangements/ engagements with individuals, without being worried about the possibility of such individuals making burdensome demands.
Relationship Matters
Currently, most start-ups not only hire employees on their own payrolls, but until they are certain of their growth and business needs, also use independent consultants, direct or indirect contract employees and various other vendors, etc., to meet with their manpower needs.
In the absence of labour and employment laws addressing each manpower arrangement, companies depend upon professional guidance to ensure that any such arrangement does not expose it to risk of claims or demands of compensation (severance, etc.) and/or permanent employment.
There is a real need for laws that allow start-ups to agree short or long-term arrangements/ engagements with individuals, without being worried about the possibility of such individuals making burdensome demands.
Conclusion
Recently, realising the above and intending to ease doing business for start-ups,, the Prime Minister of India launched Start-up India Action Plan (Plan), in January, 2016 , to provide a conducive growth environment and a friendly, flexible regulatory regime for business start-ups.
As per the Plan, a start-up is, “an entity, incorporated or registered in India not prior to 5 (five) years, with annual turnover not exceeding INR 250,000,000 (Rupees Two Hundred Fifty Million only) (approximately USD 3,500,000) in any preceding financial year, and working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.”
The Plan provides for a flexible and less time consuming compliance regime for start-ups. Start-ups are allowed to self-certify compliance with certain identified labour and employment laws. Further, start-ups are exempt from inspections under labour and employment laws for a period of three years unless authorities are in receipt of trustworthy and certifiable complaints of violation, filed in writing and approved by at least one official superior to the level of inspection officer.
While beneficial results of the Plan are yet to be seen, this seems to be a step in the right direction and shows the government’s keen interest in creating a growth focused plan for start-ups.
Nonetheless, to stay focused on core business, start-ups need to set up programmes to attain the minimum knowledge of labour and employment laws that may be relevant to them for their short term to long term business needs. This will not only allow the smooth operation of business but also lead to growth and profitability.
For further information, please contact:
Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas
cyril.shroff@cyrilshroff.com
