Would You Qualify To Be A Startup Owner?
It is generally understood that a startup is a new venture that is based on the premise of using technology and intellectual property to innovate and monetize new products or services. But what does the law say? Does your venture qualify as a startup?
The Legal Framework For Indian Enterprises Including Startups
Indian legal system is based mostly on the archaic laws that we picked up from our colonial past, and any company operating in India has to adhere to those laws. Many new laws have been formulated, and suitable amendments have been made to earlier laws to keep in tune with the changed social and commercial landscape. But for the startup ecosystem, many provisions of Indian laws which would make sense to regular companies might seem impractical or difficult to implement for startups, especially when it comes to labor laws. In legal terms, a startup can qualify as one only if it fulfils these two conditions – it must have been incorporated less than five years ago, and its turnover in any of the previous financial years must have been less than twenty-five crores Indian rupees. Let us try to understand a few labor laws in India and how startups are impacted by them.
Indian Companies Act, 2013
This law was first established in 1956, and the new law which replaced it in 2013 still remains the most important labor law in India. This law defines the various ownerships of companies (private, public, sole proprietorship etc.). When examined in the context of startups, we see that many startups are started by a single person with the aid of external funding from venture capitalists. The new Act brings in the concept of OPC (One Person Company), which would be considered as a private company with just one director. There are several other provisions of this law which have been inserted specifically for startups, although they are not related to labor issues specifically.
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Industrial Employment Act, 1946
One of the purposes of this law is to ensure that any company employing more than 100 persons is supposed to lay down clearly and specifically the conditions of employment like working hours, leave and absence, termination of employment etc. Startups have been exempted from this provision for a period of 11 years.
Minimum Wages Act, 1948
Because of the huge diversity in working conditions and socio economic parameters in India, there is no single minimum wage structure across the country, and every state has its own provision of minimum wages. A startup would need to look into the specific minimum wages requirement of the state or states it is employing people in.
Payment Of Wages Act, 1936
This law prohibits any employer from keeping a disparity of wages / salary on the basis of caste, color, creed, sex etc. A startup needs to remember that it is also covered by this Act, and must offer salaries accordingly, without any kind of bias except for skills and work experience of its employee.
Payment Of Gratuity Act, 1972
By its very definition, a startup should have been started less than five years ago. And as per the rules of this Act, the payment of gratuity to long serving employees only takes effect once the employee has served at least five years in the employ of the company. Therefore this is one labor law that startups need not worry about, for now.
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Maternity Benefits Act, 1961
With a large number of women coming into the workforce, startups see several women entrepreneurs creating a startup or coming to work for a startup. This Act provides several provisions for fully paid maternity leave before and after a woman’s childbirth. Startups usually have very few employees in the initial years, so it is important for a startup to know the provisions of this Act and make backup and reorganization plans well in advance, because Maternity Leave is not a matter of just a few days.
Prevention Of Sexual Harassment Act, 2013
This is a recent law that seeks to protect women from sexual harassment at the workplace or at a place outside their workplace where they need to travel to for work. It has provisions for the prevention and prohibition of sexual harassment, and also provides measures for redressal in case there is a case of sexual harassment. We have heard of the sexual harassment case at a major radio taxi aggregator which involved senior executives, and similar issues could arise at any startup as well.
The Need For Startups To Know Their Labor Laws
These are just a few examples of labor laws and what they mean for startups. There is a feeling among many entrepreneurs that the IT industry in general, and startups in particular, are not bound by all the provisions of these laws, which were enacted with traditional factories and establishments in mind. But that is wrong, because every startup is governed by the law of the land. As an example, startups might think that they are beyond the Industrial Disputes Act simply because startups do not have trade unions. But we have heard of the court ruling in 2013 against a unlawful termination notice served by one of the Indian IT majors simply because they had not followed the procedures (like 30 day notice period) laid down in the Act.
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How The Government Is Helping
Recognizing that our legal system as it stands now might not be easily applied to every facet of a startup’s lifecycle, the government came up with a simplified Startup Action Plan in 2016. It not only contains help regarding the interpretation of laws for startups, but also provides compliance exemption for startups in as many as six Indian labor laws which deal with issues every startup is involved in, like interstate movement of workers, contract employees, employee insurance, provident fund etc. For these 6 laws, startups are permitted a 3 year window for self-certification of compliance, which would surely save them a lot of paperwork and hassle, and allow them time to focus on their business.