💼 Behind India’s business boom lies a labour law trap—and foreign companies are walking into it

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Ketki Kulkarni
Ketki Kulkarni
Ketki is a Lawyer and Regulatory Compliance professional specializing in labour law compliance, with a proven track record of delivering tailored solutions to businesses of all sizes

Foreign companies setting up in India face a maze of labour laws. These rules can be tricky, and not following them can lead to big fines or a bad reputation. For foreign investors, HR heads, general counsels, and compliance teams, understanding these laws is critical to running a smooth business.

Understanding India’s Labour Laws

India’s labour laws come from both the central government and state governments. This means rules can differ depending on where your business is located. The government has recently simplified 29 labour laws into four main codes: the Code on Wages, the Industrial Relations Code, the Social Security Code, and the Occupational Safety, Health, and Working Conditions Code. These codes cover everything from wages to workplace safety.

Foreign companies often find these laws confusing because they’re different from their home country’s rules. For example, some states have their own minimum wage rates, which can range from ₹9,000 to ₹12,500 per month. Businesses must check the local rules for each state they operate in to avoid breaking the law.

Another challenge is registering with labour authorities. Companies must sign up with bodies like the Provident Fund Authorities and state labour departments. If you skip this, you could face penalties or legal trouble. Keeping accurate records and filing reports on time is also a must to stay compliant.

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Hiring and Managing Employees

Hiring in India comes with specific rules. For example, the Equal Remuneration Act says men and women doing the same job must get equal pay. This ensures fairness, but companies need to double-check their payroll to follow this law. Also, when hiring non-Indian employees, businesses must handle visa and work permit processes carefully. Filing the wrong documents or missing deadlines can lead to fines or delays.

When managing employees, companies need to know about contract types. India allows fixed-term contracts, which let you hire workers for specific projects without long-term commitments. But these contracts must follow the new labour codes to avoid problems. Another key rule is that employees can’t be forced to work overtime without their agreement. Overtime pay must be at least twice the regular wage.

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Misclassifying workers is a common mistake. For example, calling someone a freelancer when they work full-time under your control can lead to legal issues. Courts look at things like work hours and dependency to decide if someone is an employee or contractor. Getting this wrong can mean unexpected costs, like paying back benefits or taxes.

Workplace Safety and Social Security

India’s labour laws put a big focus on keeping workplaces safe. The Occupational Safety, Health, and Working Conditions Code sets rules for things like working hours and safety standards. Companies must follow these to avoid accidents and penalties. For example, employers need to report any workplace injuries and ensure safe working conditions.

Social security is another big area. The Social Security Code covers benefits like provident funds, health insurance, and maternity leave. Women employees are entitled to 26 weeks of paid maternity leave, and companies can’t fire them during this time. The code also includes gig workers, like delivery drivers, who now get benefits like life insurance and accident coverage. Businesses hiring gig workers may need to contribute 1-2% of their annual turnover to a social security fund.

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Non-compliance here can be costly. Forgetting to contribute to provident funds or failing to provide maternity benefits can lead to fines and legal disputes. Companies need to train their HR teams to understand these rules and set up systems to track compliance.

Avoiding Common Pitfalls

One major pitfall is not understanding state-specific rules. Each state in India can have different requirements for things like working hours or leave policies. Companies operating in multiple states need tailored HR policies to stay compliant. Regular audits and employee training can help catch mistakes early.

Another issue is termination. Employees can’t be fired without proper notice unless their contract allows it. For companies with more than 300 workers, firing employees may require government approval. Not following these rules can lead to disputes or court cases. Clear contracts and proper documentation can help avoid these problems.

Finally, workplace harassment laws are strict. The Sexual Harassment of Women at Workplace Act requires companies to have policies and committees to handle complaints. Ignoring this can lead to legal action and damage your company’s reputation.

By understanding these key compliance issues—labour laws, hiring rules, safety standards, and avoiding pitfalls—foreign companies can operate smoothly in India. Staying informed and setting up strong compliance systems is the key to success.

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