The Compliance Conundrum under the Start-up India Action Plan

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.
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
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
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,
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
(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.

[1] AIR 1978 SC 548

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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