Labour laws applicable in MSME

The micro, small and medium-sized enterprises (MSMEs) account for a massive share of employment globally. The Indian micro, small and medium-sized enterprises base is the biggest after China. It comprises 63.05 million micro industries, 0.33 million small enterprises, and nearly 5,000 medium enterprises. These MSMEs provide a wide range of services while producing items ranging from conventional stuff to gadgets using the latest technology.  

The Indian MSME sector is expected to achieve exponential growth due to the government's 'Make in India' drive to appeal to more foreign direct investments. Despite all these efforts, India's 60+ million MSMEs stay small rather than growing.

One of the key reasons is the complex regulatory framework and compliance requirements that consist of more than 69 thousand compliances, more than 6 thousand filings, and nearly 1.5 thousand different acts. The labour involves around 400+ acts, 32 thousand compliances, and 3 thousand filings.

Complex, isn't it? No need to worry. If your establishment falls under the MSME category, we have a list of some important labour laws and the acts under them that you need to understand.

1. Laws related to industrial relations

Industrial labour laws govern the relationship between the employee-employer or management-workers, particularly groups of workers represented by a union within an organisational setting.

These laws are based on the Industrial Employment (standing orders) Act, 1946 which applies to all industrial establishments with hundred or more employees, apart from other establishments specified by the government through prior notification. Also, it applies to all units coming under the central government control.

Another important act is the Industrial Disputes Act, 1947 which applies to all establishments and guides the authorities in terms of their powers, jurisdiction, the extent of control, penalties, and punishments if any industrial dispute between employer-employer, workers-workers, employer-workers.

2. Laws related to Wages

These laws are based on the Payment of Wages Act which applies to all workshops, manufacturing and processing units, establishments carrying out work related to construction development, infrastructure maintenance, irrigation or generation/ transmission/distribution of power, etc. Besides the applicability may be extended by the central government to some other units through prior notification.

Under the act, the key provisions guide the fixation and payment of wages, time of payments, conditions for reasonable deductions from an employee's salary, etc.

Similarly, the Minimum Wages Act applies to all industries and prohibits employers from paying workers less than the minimum wages. The state governments keep revising the minimum wage from time to time.

Another act is the Payment of Bonus Act, applicable to all factories and other establishments with 20 or more workers. Factories must calculate the bonus as per a prescribed formula. The maximum bonus amount, time of bonus payment, etc., are governed by this law.

3. Laws for Equality and Empowerment of Woman

There is the Maternity Benefit Act that applies to all establishments that employ women. The Equal Remuneration Act applies to all establishments, factories, shops, institutions, industries, etc. It eliminates any discrimination in the payment of remuneration for an equal amount of work done by the employees. The act also has provisions for penalties, punishments, and appeals in case of flouting of laws.

4. Laws for the underprivileged section of the society

As per the child labour act, employing children in any form is prohibited. This applies to all establishments where individuals are given employment without any terms and conditions.

This act prohibits employing children up to the age of 14 to work in any establishment. This type of employment is considered a punishable offence. Moreover, children of the age group 14 to 18 years can be employed if they have to work for less than six hours per day, and no deduction can be made from their wages in this regard.

5. Laws in context to social security

The Employees State Insurance Act applies to all permanent factories (not the seasonal ones). The factories must employ ten or more workers manufacturing using power or  20 or more employees doing manufacturing without using power.

Also, it applies to shops, restaurants, hotels, hospitals, etc., where employees draw a salary of up to rupees ten thousand. The aim is to provide social insurance to the employees for emergencies like sickness, employment, injury, and childbirth.

Another act called the Employees Provident Fund Act applies to factories that employ 20 or more employees. Once the establishment falls under the purview of this act, it will always be like that even if employee number becomes less than 20.

The act aims to provide the pension fund and provident funds for employees in factories and other establishments. Here the employer contributes 12%, but it may change from time to time.

Similarly, the Gratuity Act applies to all factories, shops, mines, plantations, railways, and other establishments with ten or more people. Under this act, gratuity is paid to every employee who has a continuous service for more than five years on account of their superannuation, retirement/resignation, or employee's death/disablement in case of accident/ disease. The central government changes the limit and method of computation of the gratuity amount from time to time.

6. Laws related to the safety and security of the employees

Here we have the Factories Act that aims to provide enhanced security to the factory workers and thus increases the accountability of their employers to take care of their employees. This applies to all establishments.

Apart from these, there are laws related to employment and training, weekly holidays, and many others.

Changes to boost MSMEs growth amid lockdown

Due to the slowing down of economic activities during the COVID-19 lockdown, the government increased pressure to boost businesses. The government has announced many changes to cope with this situation, including how MSMEs have been categorised. MSMEs are now classified based on their investments and turnover. Earlier this classification was done solely based on turnover, making more trading units being categorised in MSME than the investment heavy manufacturing units. With the new definition, many more manufacturing units will now come under the MSMEs category.

The reforms brought by the government will impact the provisions of the labour code in all the categories of MSME differently. However, some noticeable benefits and challenges brought by the changes in the labour code are:

1. Size-based thresholds

Most labour laws apply to the establishments based on the size (generally ten or more), which is significantly positive. It will help small businesses lessen their load of compliances and enable them to grow and stay competitive.

2. Less compliance cost

MSMEs can save their operational cost by reducing compliance costs due to the simplification and digitalisation brought by the new reforms.

3. Reduced complexity

The new reforms have reduced the complexity considerably. Earlier, many laws had different definitions of terms resulting in variable understanding. This led to compliance complexity, often resulting in lapses. The reduced variances in labour codes will help small businesses who cannot afford legal experts.

4. More flexibility

No government permission is required for layoffs and cutbacks unless employees are more than 300, thus providing more flexibility to the MSME for growth. Different types of livelihood, such as permanent, fixed-term, or contractual employees are now recognised.

However, there are some areas in the labour codes where MSMEs may have challenges. These include increased cost of compliance for safety norms and steep penal provisions. This may be an obstruction for some MSMEs.

Also Read:

1) Ten Benefits that MSME Can Avail
2) MSME – Industries that form a Foundation for a Robust Economy
3) How to register your business under MSME?
4) How to Avail MSME Certificate?
5) How to get your business listed on the Stock Exchange?