Labour Law Compliances For Startups In India

Introduction

The 114 unicorns amounting to a total valuation of $350 billion (as of March 2024), reflects a flourishing startup ecosystem in India[1]. In particular, they provide drive to technology and employment generation. Navigating labour law compliance is not easy, making it important for startups to follow suit to maintain a healthy operational culture, build trust among employees, and lure top talent. Following the labour laws is key to enabling startups to stay away from penalties, protect workers’ rights, and uphold a reputation in wholesome dealings.

Within numerous regulations, being conversant with labour laws and adhering to them is much more than a mere legal obligation; it is the strategic step toward long-term sustainability. In being compliant, startups are privy to government benefits and subsidies while minimizing the risk of lawsuits, disputes, and blackening their image and securing a working environment free of bias and full of transparency.

The compliance landscape for startups has undergone a fundamental shift with the Government of India notifying all four Labour Codes  the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020. These four Codes consolidate and replace 29 existing central labour laws, marking the most significant overhaul of India’s labour framework in decades. During the transition period, the existing labour acts and their rules continue to remain in force until state-level rules under the new Codes are finalized. 

Few Important Labour Law Compliances Required To Be Followed Are:

Owners must start businesses by complying with labour laws: that is, registration under respective acts. The Shops and Commercial Establishments Act (S&E) concerns commercial establishments like offices and shops, regulating working hours, holidays, and working conditions. The Factories Act envisages registration, under certain conditions regarding manufacture or minimum staff strength, with a view to assuring workers’ health, safety, and needs. Registration is compulsory for businesses employing contract labourers, as they fall under the provisions of the Contract Labour Act to safeguard the welfare and rights of contract labourers. Proper registration will ensure lawful compliance and the rights of both employees and business are protected. Under the new Labour Codes, all employers are additionally required to issue mandatory appointment letters to every worker, ensuring transparency and job security from the outset of the employment relationship.

Laws applicable:

1. Wage Laws

Wage legislation is a crucial benchmark striking a balance between reasonable remuneration to workers. A few of the significant legislations passed are:

Minimum Wages Act, 1948: This law requires firms to pay a minimum wage as determined by the government. Minimum wage varies depending on state and industry requirements, and enforcement is left in the hands of employers to apply the minimum wage of their jurisdiction. Under the Code on Wages, 2019, minimum wages have been extended to all workers across both the organised and unorganised sectors, removing the earlier limitation of coverage to only “scheduled employments.” A national floor wage has also been introduced, below which no state may set its minimum wage.
Payment of Wages Act, 1936: Through this Act, employees must receive wages in the form of money, cheque, or bank remittance, totally according to the wishes of workers, and payments must be made in time and without illegal deduction.
Payment of Bonus Act, 1965: Any company employing 20 employees or more is required to pay an annual bonus to such employees who are eligible. But those employees who have worked for less than 30 days in a year are exempt from the bonus.
Equal Remuneration Act, 1976: It enunciates that equal pay for equal work should be en-coded in employment irrespective of gender. The Act ensures equal pay between men and women for similar work. The Code on Wages, 2019 carries this principle forward and additionally permits women to work night shifts and in all types of work across all establishments, subject to their consent and the employer providing requisite safety measures a significant step toward greater workforce inclusion for startups hiring women in non-traditional roles. A critical change that directly impacts how startups structure compensation is the new standardised definition of “wages” under the Code on Wages, 2019. Under this definition, allowances such as house rent allowance, overtime, and bonuses are excluded from the wage calculation only up to 50% of total remuneration  any excess beyond this cap is treated as wages. This affects the calculation of EPF contributions, gratuity, bonus, leave encashment, and overtime pay, and startups that have structured salaries with heavy allowance components will need to recalibrate their payroll accordingly.

2. Working Hours, Overtime, and Holidays

Labor Laws, Governing Hours of Work, Ensure Fair Payment of Workers Who Work Overtime-Rest Days have been contracted in a sound, caring way-

Weekly Holiday Act, 1942: A weekly rest extending for at least one full day must be allowed for all commercial establishment’s merchants, theatres, and restaurants every week.

Overtime: Employees who work for extra hours beyond the standard work hours entitled to will be paid overtime at a higher prescribed rate according to the law. The Labour Codes now expressly require that overtime wages be paid at a rate of at least twice the normal rate of wages for work performed beyond regular working hours, bringing statutory clarity to a requirement that was previously interpreted inconsistently across different laws.

3. Leave Policies

The employer must formulate a leave policy that is not only in accordance with the law but also for the welfare of its employees:

The Maternity Benefit Act, 1961- Says that a female employee gets 26 weeks of paid maternity leave, provided she has completed 80 days’ work in the preceding 12 months. Further, it offers other benefits like nursing breaks along with protection against work termination during maternity leave.

Sick Leave and Annual Leave: Employees are entitled to have annual leave and sick leave, and the responsibility to safeguard their entitlement falls on the fact that the law is written and governs the employers. The Occupational Safety, Health and Working Conditions Code, 2020 standardises leave entitlements and working condition norms across industries, replacing the patchwork of industry-specific rules that startups previously had to navigate.

4. Social Welfare and Financial Security

The government takes different approaches to the goal of protecting employees financially. All the concerned employees will get inputs equal from the startups:

Employees’ Provident Fund (EPF) Act, 1952: All organizations that have one or more employees are required to contribute to the Employees’ Provident Fund (EPF)-a retirement fund, a proportion of an employee’s monthly salary contributed to the fund by the employer and the employee. Under the Code on Social Security, 2020, EPF coverage now applies universally to all establishments with 20 or more employees, regardless of the industry or sector, removing the earlier industry-specific exclusions.

Employees’ State Insurance (ESI) Act, 1948: Provides coverage for organizations employing 10 or more workers with incomes below a set salary limit. Provides insurance against health and social security benefits such as sickness, maternity, and disability.  The Code on Social Security, 2020 expands ESI coverage pan-India, eliminating the earlier restriction that limited applicability to notified areas. Establishments with even one employee engaged in hazardous processes are now mandatorily covered, and smaller establishments may voluntarily opt into ESI with mutual consent of the employer and a majority of employees. 

Particularly relevant for tech-driven startups is the Code on Social Security’s extension of social security coverage to gig workers and platform workers a category that was entirely outside the ambit of the earlier legal framework. Aggregators and startups engaging gig or platform workers are now required to contribute between 1% to 2% of their annual turnover, capped at 5% of amounts paid to such workers, towards a dedicated Social Security Fund for these workers. 

5. Workplace Welfare and Safety

Startups must ensure safe working conditions and meet workplace welfare legislation:

Factories Act, 1948- A startup would have to meet the provisions of health, safety, and welfare of this Act, for example, safety of employees, regulation of working hours, sanitation, and welfare facilities, if such startup is a factory as far as the number of employees or industry is concerned.

Employees Compensation Act, 1923- Requires the employers to insure against compensation in the event of any worker injured or killed by reason of his employment. The start-ups must insure or guarantee against liquidation of such claims. The Labour Codes now further provide that courts may direct 50% of fines imposed on employers for safety violations to be paid directly to the injured worker or their legal heirs as compensation. Startups with 500 or more workers are also advised to constitute safety committees with employer and worker representation to ensure shared accountability for workplace safety. Additionally, all employers are now required to provide free annual health checkups to all employees above the age of 40 years  a welfare measure introduced under the new Codes that startups with a growing, maturing workforce should factor into their HR planning.

6. Sexual Harassment Policies

Start-ups must, as per the given laws, formulate policies to discourage and address sexual harassment in the workplace and ensure a respectful and safe working environment:

Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013: Under this act, it is mandatory for all business owners, even start-ups, to set up an Internal Complaint Committee to file any sexual harassment case. It asks the company to maintain a zero-tolerance approach to harassment so that a safe working environment can be offered to each employee, particularly women.

7. Gratuity and Bonus

Start-ups need to adhere to two major provisions of employee benefit regulations.

Payment of Gratuity Act, 1972: Companies with 10 or more employees are bound to make payments of gratuity to those employees who retire after five years of service in a single company. Gratuity is an amount of money paid lumpsum to the employee as a token of goodwill by the employer while parting ways. The fixed-term employees are now entitled to gratuity after completing just one year of continuous service, as opposed to the five-year threshold applicable to permanent employees. This is particularly relevant for startups that engage talent on project-based or fixed-term contracts.

The Payment of Bonus Act, 1965: A company that has 20 or more employees is required to give a bonus every year to all the eligible employees, typically ranging from 8.33 percent to 20 percent of the employees’ monthly salary based on the company’s profits.

8. Dispute Resolution and Trade Unions

The startups should also note laws that govern the industrial dispute resolution and the workers unions.

The Industrial Disputes Act of 1947: This Act regulates the redressal of any disputes between any employer and any employee concerning the layoff, retrenchment, or closure of any establishment. Startups must pursue all such processes of dispute resolution to avoid legal hindrance. Under the Industrial Relations Code, 2020, the threshold for requiring government permission before retrenchment or layoff has been raised from 100 to 300 workers, offering startups greater operational flexibility when managing workforce size. Fixed-term employment contracts have also been formally recognised under the Code, providing startups a lawful, structured route to engage talent for specific durations without the obligations attached to permanent employment.

The Trade Unions Act of 1926: This Act provides for the establishment and registration of a trade union by the employees. Startups, especially those with sufficient numbers of their employees, may have to conduct negotiations through trade unions. The Industrial Relations Code also introduces clearer mechanisms for union recognition and collective bargaining, and startups experiencing workforce growth should be mindful of these provisions as their headcount scales. 

Conclusion:

Labour law compliance in India is the cornerstone for startups ensuring sustained growth and a congenial work environment. Legal compliance in wages, working hours, leave policies, and social security avoids incurring any legal penalties and protects worker rights. Certain critical labour laws to be observed include the Minimum Wages Act, Employees’ Provident Fund Act, and Maternity Benefit Act-all of which impose equitable compensation upon the employer-protecting the finances and basic rights of the employee.

Also, those employees are nurtured and instilled with loyalty or trust. Compliance under the Factories Act and the Sexual Harassment Act assists in providing a safer and more respectful working environment. Compliance with gratuity, laws of the bonus, and dispute resolution will further strengthen relations with employees and decrease risks of any hot-water legal issues. Instances show that such compliance not only minimizes the legal risks posed to such startups but also augments their stature, which in turn attracts quality talents providing a surety to the startup of enjoying a long and fruitful existence with sustained manpower. Proper labor law adherence is imperative for a flourishing and responsible business.

[1] Invest India (2025) Role of government initiatives in boosting startups. Available at: https://www.investindia.gov.in/blogs/role-government-initiatives-boosting-startups (Accessed: 13 February 2025).

[2] HG.org (2025) Startups and labour law compliances in India. Available at: https://www.hg.org/legal-articles/startups-and-labour-law-compliances-in-india-66786 (Accessed: 13 February 2025).

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Frequently Asked Questions

What are the four new Labour Codes applicable to startups in India?

The Government of India has notified four Labour Codes that consolidate 29 existing central labour laws: the Code on Wages, 2019; the Industrial Relations Code, 2020; the Code on Social Security, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020. During the transition period, existing labour acts and rules remain in force until state-level rules under the new Codes are finalised.

Is registration under the Shops and Establishments Act mandatory for startups?

Yes, registration under the Shops and Commercial Establishments Act is mandatory for commercial establishments such as offices and shops. The Act regulates working hours, holidays, and working conditions. Manufacturing units must register under the Factories Act subject to staff strength thresholds, and businesses engaging contract labour must register under the Contract Labour Act to safeguard the welfare and rights of contract workers.

What does the Code on Wages, 2019 say about minimum wages?

The Code on Wages, 2019 extends minimum wage protection to all workers across both the organised and unorganised sectors, removing the earlier limitation of coverage to only scheduled employments under the Minimum Wages Act, 1948. The Code also introduces a national floor wage, below which no state government may fix its minimum wage rate, ensuring a baseline standard of remuneration across India.

Are appointment letters mandatory for employees under the new Labour Codes?

Yes, under the new Labour Codes, every employer is required to issue a mandatory appointment letter to every worker. This requirement is intended to ensure transparency, formalise the employment relationship, and provide job security to employees from the outset. The obligation applies regardless of the size of the establishment, making formal documentation a baseline compliance requirement for startups.

How must wages be paid to employees under the Payment of Wages Act, 1936?

Under the Payment of Wages Act, 1936, wages must be paid to employees in the form of currency, cheque, or bank remittance, as per the preference of the worker. Payments must be made within the prescribed time limits and without any unlawful deductions. The Act ensures timely disbursement and protects workers from arbitrary or unauthorised wage cuts by employers.

Why is labour law compliance important for startups in India?

Compliance with labour laws helps startups avoid penalties, safeguard workers’ rights, and maintain a reputable standing in business dealings. Adherence enables access to government benefits and subsidies, reduces exposure to lawsuits and disputes, and prevents reputational harm. It also fosters a transparent, bias-free workplace, builds employee trust, attracts talent, and supports long-term sustainability of the venture.

Last Updated on 30 May, 2026