Employment LawLabour Codes and Startups: What Small Businesses Often Miss

INTRODUCTION

When we think of startups, the first image that come to mind are fast-paced environments, creative energy and the hustle of young innovators changing the world. But in the middle of building a brand, there is something many startups forget or intentionally ignore until it is too late, i.e., labour compliance. With India’s new labour codes aiming to simplify and unify over 40 existing labour laws, there is now both an opportunity and a challenge for startups to ensure compliance.

While large corporations usually have compliance teams and legal advisors, small businesses and startups often operate in a grey area and on a need basis. Founders are juggling fundraising, product development, marketing, and team building. In the whirlwind of launching and growing a business, labour laws seem like background noise until they create serious problems.

THE NEW LABOUR CODES

The Indian government introduced four consolidated labour codes to streamline and modernize the country’s labour laws. These codes are:

1. The Code on Wages, 2019: It covers payment of wages, minimum wages, equal remuneration, and payment timelines.
2. The Industrial Relations Code, 2020: It deals with the relationship between employers and employees, strikes, trade unions, and dispute resolution.
3. The Occupational Safety, Health and Working Conditions Code, 2020: It focuses on working conditions, safety, and health standards across different sectors.
4. The Code on Social Security, 2020: It integrates laws on provident fund, employee state insurance, maternity benefits, gratuity, and more.

These codes are with an objective to simplify compliance, improve transparency, and increasing ease of doing business.

WHAT STARTUPS OFTEN MISS

1. Misclassification of Employees

One of the most common pitfalls is incorrectly classifying workers. In many startups, especially in early stages, founders treat all team members as “contractors” or “freelancers” to avoid compliance with benefits like Provident Fund (PF), Employee State Insurance (ESI), or gratuity. But under the new labour codes, such classifications are under scrutiny. If someone is working full-time within the organisation, the law may consider them an employee, regardless of the title or agreement you gave them.

Startups must be cautious about this, especially under the Code on Social Security, which mandates benefits based on the nature of work and working conditions rather than job title.

 2. Ignoring Social Security Contributions

Young businesses often overlook contributions to the PF, ESI, or gratuity, assuming they only apply to big companies. But under the new codes, startups with even 10 employees are liable for certain social security provisions.

Failing to deposit PF or ESI not only attracts fines and interest but can also invite litigation and reputational damage which can shake investor confidence or stall funding rounds.

3. Not Understanding Fixed-Term Employment Rules

Many startups prefer short-term contracts or project-based hires. The new Industrial Relations Code formally recognizes fixed-term employment, which can benefit startups by allowing greater flexibility without compromising employee rights. These employees are now entitled to the same benefits (including gratuity) as permanent employees, provided they work for more than a year.

What this means is that startups must be careful when renewing contracts or laying off employees at the end of a project. Termination without proper documentation or notice may lead to legal complications.

4. No Policy Frameworks or Documentation

Startups usually function on informal terms, with no to little documentation in place. However, under the new codes, transparency and documentation are key.

Startups need properly drafted offer letters, appointment letters, employment policies, and records of working hours, leaves, and payroll. The Code on Wages mandates timely and documented payment of wages. The absence of a structured framework can leave you exposed during labour inspections or legal disputes.

5. Not Knowing About Health and Safety Provisions

Most startup founders assume that health and safety codes apply only to factories or hazardous industries. The Occupational Safety, Health and Working Conditions Code extends to all establishments, including offices. For example, if your startup has more than 10 employees, you must ensure:

• Clean and ventilated workspace
• Safe drinking water
• Restrooms (including for female employees)
• First aid boxes
• Compliance with work hour limits and weekly off rules

This code also mandates appointment of a welfare officer and safety officer once a business crosses specific thresholds. Ignorance is not an excuse anymore; especially in an era where employee welfare is under the spotlight.

6. Non-Compliance Can Be Costly

The penalties under the new codes are much sharper than earlier laws. Some violations can lead to imprisonment or hefty fines, and many offences are now compoundable, meaning they can be settled out of court, but that still means hefty expenses for the company.

HOW STARTUPS CAN NAVIGATE LABOUR CODES SMARTLY

Nobody can get their compliance secured within a day but it is also true that ignorance of the law is not an excuse. Here are a few practical steps:

1. Start small, but start now: Even if you are a five-person team, begin by setting up basic HR documentation and payroll systems.

2. Use digital compliance tools: Several platforms now offer automated solutions for PF/ESI calculation, payslip generation, and leave tracking.

3. Regular internal audits: Regularly review and audit the organisation’s internal processes and ensure ongoing compliance.

4. Train and Educate your team: Ensure that the team, key stakeholders, founders, etc. are on the same page about compliance responsibilities.

AMLEGALS REMARKS

The present time is comparable to the period of industrialization of Europe, where new startups are coming into existence every single day. However, unlike industrialization today, the labour laws are very strict, and their enforcement is given special importance by the governments all over the world. Hence, it becomes very crucial for the founders or the senior executives of the startups to ensure that they fulfil the legal compliances as well as treat their employees in a way which is expected by both by the employees as well as the laws of the state.

A startup can only grow and eventually rise to become a big corporation if it ensures the fine balance which lies between managing its human resources and its startup’s operations.

– Team AMLEGALS