E-Commerce & Labour Laws – Applicability Of The Shops And Establishment Act On E-Commerce Entities

Posted On - 31 March, 2022 • By - Abhilasha SG

Is Shops and Establishment Act Applicable To E-commerce? Regulating E-Commerce Entities – The Shops and Establishments Act (“Act”) was primarily enacted to regulate the conditions of labour for those working in shops and establishments. This legislation is an aspect of newly updated labour and employment laws. It is pertinent to note that there is no central Act applicable to the whole of India; instead, the entry “shop/trade licenses” is a State subject in List II of Schedule 7 of the Indian constitution. As a result, the rules for these establishments differ from state to state as the Act is regulated by the Labour Department of the respective states concerned.

The registration of shops and establishments is necessary to ensure the rights and obligations of the employee and employer and to ensure humane working hours, sensible leave policy, reasonable opening and closing hours, healthy wages etc.

Gaining a license under the Shops and Establishments Act is significant as it acts as proof of undertaking for commercial activities such as carrying out trade and business. Another incentive is that government benefits can be availed only by those entities registered under this Act. 

Analysis Of “Shops” And “Establishments” With The Help Of Precedents

  1. In the case of The State of Mysore vs The Manager, Brooke Bond India[1], the Karnataka High Court held that the very idea of a “shop” in that connotation betokens a room or a place or a building where goods are sold. The rest of the definition merely implies ancillary places such as storerooms, godowns, workplaces etc., which are mainly used in connection with the business. An analysis of the definition of “shop” and “commercial establishment” makes clear that one element is common to both i.e., that there has to be a premises where (in the case of a commercial establishment) any business, trade or profession is carried on for profit and where (in the case of a shop) any trade or business is carried on, or where services are rendered to customers.
    The carrying on of a trade or business or a profession necessarily has to have a close and intimate connection with the premises. It cannot be disputed that trade, profession or business can be carried on without there being a premises — the definition requires the existence of areas such as offices that must have a necessary connection with the premises.
  1. In the case of Chief Commissioner, Delhi v. Federation of Indian Chambers of Commerce and Industry[2], the Court, while interpreting the definition of “commercial establishments” laid the following essentials for a place to fall within the definition of “commercial establishments”:
    • It must be a “premises” and,
    • It must have some trade, business or profession being carried on or,
    • Any work in connection with or incidental or ancillary thereto is carried on within.
  2. In the case of Shri Mookambika Temple vs Mr Raviraja Shetty[3], the court held that a plain reading of the definitions of the expressions “shop” and “commercial establishment” would show that unless the premises is being used for trade or business purposes or there is an element of commerce, it cannot be considered either a shop or a commercial establishment.
  1. In the case of Father Thomas Anthonysamy & Anr vs The State Of Bihar & Ors[4], the court held that to be considered an establishment, the dominant nature of work has to be seen to test whether the work performed by the establishment falls under the category of carrying on business, trade or profession or any work in connection with or incidental to the business trade or commerce. An establishment, according to the Bombay Shop and Establishment Act 1948, must practice the business/trade/commerce in connection to the same to qualify as one.

Thus, an examination of recent case laws relating to the Act shows that the definitions of “shop” and “commercial establishment” are mutually exclusive and the presence of a premises is sin qua non for any entity which seeks to obtain registration under this Act.

Is Shops and Establishment Act Applicable To E-commerce?

Most State Acts have a separate section on exemptions from registrations. E-commerce does not come under this section in any of the State Acts. However, it is also not expressly mentioned within the definition of “shops” or “establishment”, giving rise to the conundrum of its applicability to e-commerce entities. Therefore, a deeper examination of this issue is necessary.

Based on the aforementioned precedents, it is clear that the presence of premises is a prerequisite for getting registered under the Act. However, since e-commerce companies operate completely in an online mode on the internet, physical space is not necessary for business – especially in the wake of the e-commerce boom that has changed the way traditional markets operate in the last 2-3 years.

As per the Karnataka Shops and Establishment Act, a “shop” means any premises where any trade or business is carried on or where services are rendered to customers, and includes offices or warehouses (whether on the same premises or otherwise) used in connection with such trade or business, but does not require that a commercial establishment or a shop be attached to a factory.

Thus, an e-commerce entity having an office space or a warehouse also necessitates that the e-commerce entity be registered under the Act. No e-commerce entity can function without a registered workplace, even if it might be the home of the entrepreneur itself as it will be considered an office, thereby warranting a license under the Act. By implication, if there is a physical place to handle the official work of an e-commerce business, then a license under the Act is required. 

In this context, it is pertinent to note the proposal by the government of Rajasthan to include e-commerce within the purview of the Rajasthan Shops and Establishment Act 1958. The proposed amendment states, “Any premises where any trade or business or e-commerce is being carried out but (the premises) is not covered under a shop or a commercial establishment’ would be included.”[5] The move by the government of Rajasthan acknowledges the applicability of the law to e-commerce companies,[6] but the proposed amendment fell short of being enacted into law.

Moreover, the Minister of State in the Ministry of Commerce & Industry (Shri C.R.Chaudhary) while answering unstarred questions in the Parliament regarding regulations governing e-commerce clearly stated that the “Activities of e-commerce companies inter alia involve the compliance of Shops and Establishment Act of the State concerned.”[7]

Furthermore, The Reserve Bank of India has laid out Know Your Customer (KYC) guidelines – accounts of proprietary concerns[8] under which if a separate account in the name of the business is to be created for e-commerce transactions, a license under the Act would be a necessity. Thus, as most e-commerce entities have a payment gateway for their online store, RBI requires valid entity proof for the same via the Shops and Establishment license which will enable opening the account with ease.

Model Shops And Establishment Bill 2016

Model laws, which are not legally binding, lay down policy guidelines that can be adopted by state governments either in the form approved by the centre or with changes. All shops and establishments not covered by the Factories Act 1948 will come under the purview of this model law but it will not be a mandatory provision for the country as a whole. Units employing 10 or more workers are proposed to be brought under this Act.[9] However, it is applicable only to retail stores.

The e-commerce regulatory space could have been better governed by unequivocally including e-commerce within the ambit of this Model Shops and Establishment Bill 2016 especially in the wake of e-commerce companies flouting labour laws as the concept of gig economy grows more popular. E-commerce companies have so far managed to present themselves as mere ‘facilitators’ or ‘mediums’ between online sellers and buyers with no physical establishment or labour obligations and archaic laws have enabled them to do so and make their own rules.[10]

Conclusion – Is Shops and Establishment Act Applicable To E-commerce?

A detailed analysis of the diverse provisions of the Act shows that the Act is a beneficial legislation that has been enacted to regulate the conditions of work of the employees. The welfare of the employee is a social need that cannot be denied.[11] Mandatory registration of e-commerce companies under the Act would certainly provide much-needed recourse for workers/employees not covered under the Factory Act 1948. It is pertinent to ensure that the loophole in the law is not exploited to evade registration under the Act in the absence of a traditional brick-and-mortar store with business conducted online through websites, especially in the era of e-commerce.

It is suggested that the courts take the lead and provide a purposive and beneficial interpretation of the Act so that the scope is expanded to include economic activities conducted even in the absence of any physical premises. As e-commerce is not defined in the central and state laws as a shop or establishment, it is about time that the legislature takes the first step to amend the Act to make it more inclusive especially in the wake of changing developments such as the one proposed by the government of Rajasthan.

The outdated labour laws are very much in need of an overhaul to effectively address the challenges and concerns posed by e-commerce. Bringing e-commerce under labours laws such as the Shops and Establishment Act is essential to ensure basic working conditions for employees. 

Contributed by Abhilasha SG, Associate

King Stubb & Kasiva,
Advocates & Attorneys

Click Here to Get in Touch

New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Kochi | Kolkata
Tel: +91 11 41032969 | Email: info@ksandk.com