The commonest compliance error in an early stage company is treating labour law as one switch that flips at some headcount. It is not. Each obligation carries its own threshold and its own definition of what is being counted, and a few of the ones that bite earliest are the ones founders miss.
What applies from day one, or close to it
- Registration of the establishment. An office in Bengaluru is a commercial establishment under the Karnataka Shops and Commercial Establishments Act, 1961, which the labour codes did not repeal. Registration, the register and record obligations, hours, leave and holiday provisions all follow from that Act and the Karnataka rules.
- A letter of appointment for every employee. The Occupational Safety, Health and Working Conditions Code, 2020 makes it a duty of every employer to issue a letter of appointment to every employee on appointment, with the information and in the form the appropriate Government prescribes, and to issue one within three months to anyone who did not have one when the Code commenced. This is a duty with no headcount threshold attached to it, and it is widely ignored. Our guide on what an Indian employment agreement should contain sets out what the document should say.
- Wages. The Code on Wages, 2019 governs minimum wages, timely payment, permissible deductions and equal remuneration. The wage floor and the payment obligations are not size gated.
- Contract terms and statutory dues on exit. Notice, full and final settlement, leave encashment and the issue of Form 16 are contractual or tax obligations that exist at any size.
The POSH obligation starts at ten
A workplace with ten or more employees must constitute an Internal Committee under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, chaired by a senior woman employee and including an external member. A twelve person company is over that line. Failure to constitute the Committee is itself an offence carrying a monetary penalty, with escalating consequences on repetition. This is the obligation early stage companies most often discover only when a complaint arrives.
A workplace with ten or more employees must constitute an Internal Committee under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, chaired by a senior woman employee and including an external member. A twelve person company is over that line. Failure to constitute the Committee is itself an offence carrying a monetary penalty, with escalating consequences on repetition. This is the obligation early stage companies most often discover only when a complaint arrives.
Thresholds worth checking against your headcount
- Provident fund and employees' state insurance. Coverage under the Code on Social Security, 2020 turns on the establishment thresholds and wage ceilings notified for those schemes. Twelve people is below the level at which provident fund coverage ordinarily becomes compulsory, but voluntary coverage is available and is common in the sector. Confirm the current position for your class of establishment rather than working from a remembered number.
- Gratuity. The gratuity chapter of the Code on Social Security applies to establishments of the size stated in the chapter, and the entitlement itself is five years of continuous service, relaxed for death, disablement and the expiry of fixed term employment. A three year old company has nobody eligible yet, which is exactly the moment to budget for it. Our note on gratuity under the Code on Social Security sets out the computation.
- Standing orders. Chapter IV of the Industrial Relations Code, 2020 applies to an industrial establishment employing three hundred or more workers, or which employed that number on any day of the preceding twelve months. Below that, your HR policy and appointment letters do the work standing orders would otherwise do, which is a reason to write them properly.
- Contract labour. The contract labour part of the safety Code applies to an establishment in which fifty or more contract labour are employed or were employed on any day of the preceding twelve months. Below that the licensing regime does not bite, but the principal employer's liability for a contractor's unpaid wages still deserves attention when you sign a staffing contract.
- Closure notice. The sixty day notice of intended closure to the appropriate Government does not apply to an industrial establishment in which fewer than fifty workers are employed or were employed on any day in the preceding twelve months.
- Prior government permission before lay-off, retrenchment or closure applies only to a factory, mine or plantation with three hundred or more workers. It does not reach an office at any size.
What still applies to an exit at twelve people
Small size does not remove termination obligations. If the person is a worker with a year of continuous service, the conditions precedent to retrenchment apply: one month's notice in writing with the reasons or wages in lieu, fifteen days' average pay for every completed year and any part over six months, and notice to the appropriate Government. And Section 39 of the Karnataka Act protects any employee with six months of continuous service from removal without reasonable cause and without one month's notice or pay in lieu, subject to its exclusion of persons occupying positions of management.
Small size does not remove termination obligations. If the person is a worker with a year of continuous service, the conditions precedent to retrenchment apply: one month's notice in writing with the reasons or wages in lieu, fifteen days' average pay for every completed year and any part over six months, and notice to the appropriate Government. And Section 39 of the Karnataka Act protects any employee with six months of continuous service from removal without reasonable cause and without one month's notice or pay in lieu, subject to its exclusion of persons occupying positions of management.
A short list worth doing this quarter
- Register the establishment and keep the certificate current
- Issue a compliant appointment letter to every person on the payroll
- Constitute the Internal Committee and hold the training
- Write an HR policy that says what standing orders would have said about misconduct and the enquiry procedure
- Fix the payroll registers, payslips and statutory deduction records now, while they are small
- Diary the next thresholds against your hiring plan so the obligations do not arrive unannounced
For the mapping between the older statutes and the codes, and the dates from which each obligation runs, see our overview of what the four labour codes changed for employees.