Sunday, June 12, 2016

The Compliance Conundrum under the Start-up India Action Plan

[The following guest post is contributed by Suprotik Das, a 5th year law student at the Jindal Global Law School, Sonepat, Haryana.]


The Government’s efforts to enhance the ease of doing business through the Start-Up India Action Plan (the “Action Plan”) is a positive step toward an element of certainty and stability to the start-up ecosystem in India.

It is known that compliances have always been a tricky affair for start-ups as there are no distinct laws applicable to start-ups as yet. The new Action Plan proposes to reduce the labour and environment compliance burden that start-ups face through self-certification by means of a mobile app, which is an innovative step to reduce transaction costs. However, with regard to labour law compliance, this post argues that the situation is far from resolved. Here, I focus on the labour law compliance aspect of the Action Plan by highlighting its flaws and suggesting some changes.

Compliances under the Action Plan

Chapter 1 of the Action Plan lays down the following labour law compliances:

1.         The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996

2.         The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979

3.         The Payment of Gratuity Act, 1972

4.         The Contract Labour (Regulation and Abolition) Act, 1970

5.         The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952

6.         The Employees’ State Insurance Act, 1948

On a bare perusal of these legislations, one wonders why the government has picked such a peculiar list of legislations? An immediate question which arises is, why has a beneficial legislation such as the Industrial Disputes Act, 1947 been left out of this list?

The Industrial Disputes Act, 1947

At this juncture, the question to be answered is this: how can the Industrial Disputes Act apply to a start-up?  Judicial precedent in the prominent case of Bangalore Water Supply and Sewerage Board v. A. Rajappa,[1] lends credence to the fact that a start-up can fall under the ambit of the Act. In this case, the Supreme Court laid down the famous troika to ascertain the meaning of ‘industry’. The court stated that where there was:

(a)       A systematic activity;

(b)       Organized by the cooperation between the employer and the employee;

(c)       For the production and/or distribution of goods and services calculated to satisfy human wants and wishes, not spiritual nor religious wants,

that enterprise/organization is an ‘industry’ within the meaning of Section 2(j) of the Industrial Disputes Act, 1947.

What does this mean for the current start-up ecosystem?

If an enterprise qualifies as ‘industry’ as per section 2(j) of the Act, the employees are able to raise ‘industrial disputes’ as per sections 2-A and 10 of the Act. For the employer, it means complying with the provisions dealing with strikes, lock-outs, lay-offs, retrenchments, awards, wages and settlements, among others. No doubt, this will increase the compliance burden for start-ups in India.

Extending the meaning of ‘industry’ to a start-up

There are three reasons why the Industrial Disputes Act may be made applicable to a start-up in India in the near future. These are:

1. The very nature, object and purpose of a start-up meet every element of the triple test. 
2. Judicial precedent has stretched the ambit of the definition of ‘industry’ in section 2(j) to include a number of establishments (including hospitals) under it, which are in the production and profit-making business. There has been no judicial pronouncement until now on the question of whether a start-up qualifies as ‘industry’ or not. However, given the far-reaching implications of the Bangalore Water Supply Case and the fact that the Industrial Disputes Act is a beneficial legislation which has been subjected to liberal interpretation, a court just may extend the meaning of ‘industry’ to include start-ups.  
3. Since there are no numerical thresholds regarding the number of workmen that an enterprise has to employ in order to comply with the Industrial Disputes Act, a court may be cognizant of the fact that a start-up has to mandatorily comply with the provisions of the Industrial Disputes Act, wherever applicable.
If one peruses the other six labour legislations prescribed under the Action Plan, all of them have a numerical threshold to satisfy before an organization has to be in compliance with it. This means that only if an establishment employs ‘x’ number of employees and above, it will have to comply with the act. For example, the Contract Labour (Regulation and Abolition) Act, 1970 applies to to every establishment in which 20 or more workmen are employed or were employed on any day of the preceding 12 months as contract labour.

An immediate problem with point 3 is that for a start-up to circumvent the application of these six prescribed labour legislations, all it has to do, is to employ lesser than the statutorily prescribed number of workmen. However, it cannot dodge the applicability of the Industrial Disputes Act, should it qualify as an ‘industry’.


1.         An immediate recommendation would be for the government to prescribe a ‘negative’ list instead of a ‘positive’ list. This means that the government should specify a list of labour legislations that a start-up need not comply with, rather than list down ones that it ought to comply with.

2.         The government could also frame an exclusive legislation applicable to start-ups on the lines of the Jumpstart Our Business Startups (JOBS) Act in the USA.

3.         Thirdly, the government could also specify that the Industrial Disputes Act, 1947 ought to apply to a start-up only if a particular numerical threshold is reached. This seems feasible for the following reasons:

(a)        The overarching theme and vision of the Action Plan is to reduce the compliance burden on start-ups;

(b)       If a start-up employs lesser than 15-20 employees, compliance with the detailed provisions under the Industrial Disputes Act will be meaningless and burdensome as the act was designed to apply to a large industry in its literal sense.

Thus, the Government ought to really consider the Industrial Disputes Act in light of the Action Plan and ought to come up with a notification or order clarifying the applicability or non-applicability of the same to the start-up regime so as to resolve the peculiar situation created by the Action Plan and decrease the convoluted compliance burden on start-ups.

- Suprotik Das

[1] AIR 1978 SC 548

1 comment:

Anonymous said...

Great post Suprotik.
Keep up the good work!