Labour Laws for SME in India – WIRC 28112009

LABOUR LAWS APPLICABLE TO SMALL AND MEDIUM ENTERPRISES IN INDIA

MICRO SMALL AND MEDIUM ENTERPRISES

INTRODUCTION -

Small and medium enterprises (also SMEs, small and medium businesses, SMBs, and
variations thereof) are companies whose headcount or turnover falls below certain limits.

The abbreviation SME occurs commonly in the European Union and in international
organizations, such as the World Bank, the United Nations and the WTO. The term small and
medium-sized businesses or SMBs is predominantly used in the USA.

EU Member States traditionally have their own definition of what constitutes an SME, for
example the traditional definition in Germany had a limit of 250 employees, while, for example,
in Belgium it could have been 100. But now the EU has started to standardize the concept. Its
current definition categorizes companies with fewer than 10 employees as "micro", those with
fewer than 50 employees as "small", and those with fewer than 250 as "medium" Small medium
organizations need to have between 20-500 employees. By contrast, in the United States, when
small business is defined by the number of employees, it often refers to those with fewer than
100 employees, while medium-sized business often refers to those with fewer than 500
employees. Both the US and the EU generally use the same threshold of fewer than 10
employees for small offices (SOHO). In South Africa the term SMME, for Small, Medium and
Micro Enterprises, is used. Elsewhere in Africa, MSME is used, for Micro, Small and Medium
Enterprises.

Micro Enterprises contribute significantly to economic growth, social stability and equity. The
sector is one of the most important vehicles through which low-income people can escape
poverty. With limited skills and education to compete for formal sector jobs, these men and
women find economic opportunities in micro enterprise as business owners and employees.

Micro enterprises defy a definition. Street venders, carpenters, machine shop operators.
Seamstresses and peasant farmers---micro entrepreneurs come in all types, and their businesses
in many sizes. This diverse group requires a variety of support to grow and improve. Many of
these men and women and their employees are poor and have limited access to services. But they
do not lack potential. More than 80 percent of the businesses in Latin America and the Caribbean
have l 0 employees or less, and they account for as much as half of all employment in many
countries. Numbered at some 50 million, these micro enterprises can no longer be considered
marginal. They are the heart of the region's economy.

In most economies, smaller enterprises are much greater in number. In the EU, SMEs comprise
approximately 99% of all firms and employ between them about 65 million people. In many
sectors, SMEs are also responsible for driving innovation and competition. Globally SMEs
account for 99% of business numbers and 40% to 50% of GDP.

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SMEs IN INDIA

With the advent of planned economy from 1951 and the subsequent industrial policy followed by
Government of India, both planners and Government earmarked a special role for small-scale
industries and medium scale industries in the Indian economy. Due protection was accorded to
both sectors, and particularly for small scale industries from 1951 to 1991, till the nation adopted
a policy of liberalization and globalization. Certain products were reserved for small-scale units
for a long time, though this list of products is decreasing due to change in industrial policies
and climate.

SMEs always represented the model of socio-economic policies of Government of India which
emphasized judicious use of foreign exchange for import of capital goods and inputs; labour
intensive mode of production; employment generation; non-concentration of diffusion of
economic power in the hands of few (as in the case of big houses); discouraging monopolistic
practices of production and marketing; and finally effective contribution to foreign exchange
earning of the nation with low import-intensive operations. It was also coupled with the policy of
de-concentration of industrial activities in few geographical centers.

In India, the Micro and Small Enterprises (MSEs) sector plays a pivotal role in the overall
industrial economy of the country. It is estimated that in terms of value, the sector accounts for
about 39% of the manufacturing output and around 33% of the total export of the country.
Further, in recent years the MSE sector has consistently registered higher growth rate compared
to the overall industrial sector. The major advantage of the sector is its employment potential at
low capital cost. As per available statistics, this sector employs an estimated 31 million persons
spread over 12.8 million enterprises and the labour intensity in the MSE sector is estimated to be
almost 4 times higher than the large enterprises.

It can be observed that by and large, SMEs in India met the expectations of the Government in
this respect. SMEs developed in a manner, which made it possible for them to achieve the
following objectives:

· High contribution to domestic production

· Significant export earnings

· Low investment requirements

· Operational flexibility

· Location wise mobility

· Low intensive imports

· Capacities to develop appropriate indigenous technology

· Import substitution

· Contribution towards defense production

· Technology – oriented industries

· Competitiveness in domestic and export markets

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At the same time one has to understand the limitations of SMEs, which are:

· Low Capital base

· Concentration of functions in one / two persons

· Inadequate exposure to international environment

· Inability to face impact of WTO regime

· Inadequate contribution towards R & D

· Lack of professionalism


In spite of these limitations, the SMEs have made significant contribution towards technological
development and exports.

As a result of globalization and liberalization, coupled with WTO regime, Indian SMEs have
been passing through a transitional period. With slowing down of economy in India and abroad,
particularly USA and European Union and enhanced competition from China and a few low cost
centers of production from abroad many units have been facing a tough time. Those SMEs who
have strong technological base, international business outlook, competitive spirit and willingness
to restructure themselves shall withstand the present challenges and come out with shining
colours to make their own contribution to the Indian economy.

The concept of SSI has been done away with after enactment of ‘MICRO, SMALL AND
MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006’ (27 of 2006) w.e.f. 2nd October 2006.
As per Section 7(1) of the said act and Ministry Notification dated 29th September 2006, the
following enterprises (whether proprietorship, HUF, AOP, Co-op. Society, Partnership or any
other legal entity, by whatever name called) were classified as micro, small and medium
enterprise:

Nature of Investment in Plant and Machinery

Enterprise
Engaged in Manufacture or Production Engaged in providing Service

MICRO Up to Rs. 25 Lakhs Up to Rs. 10 Lakhs

SMALL Between Rs. 25 Lakhs and Rs. 5 Crores Between Rs. 10 Lakhs and Rs.2 Crores

MEDIUM Between Rs. 5 Crores and Rs. 10 Crores Between Rs. 2 Crores and Rs. 10 Crores

These SMEs and their role in nation building has also been recognized by World Bank when
very recently it has agreed to release USD 400 million new financing loan to the SIDBI in an
endeavour to further strengthen the growth of SMEs. This is in addition to the already disbursed
project which had been fixed by the World Bank on November 30, 2004.

Indian SMEs face constant challenges in the areas of finance, competition, regulatory aspects
and compliance with maze of various laws governing the entities.

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India has an exhaustive legal framework governing all aspects of business. Law is a set of rules
enacted or customary in communities and recognized as enjoining or prohibiting certain actions,
enforced by the imposition of penalties on wrong doer for breaking rules. In the ancient times,
the laws were religious or customary in origin; however, since the third decade of 19th century,
various law commissions recommended reforms codification of penal and criminal procedures
and subsequent commissions added various legislations governing different needs of society then
existing.

It would be a Herculean task to cover all the business and commercial laws governing SMEs in
India in the present paper, but however, a humble effort is being made to cover important
enactments with references to various laws.

 Arbitration and Reconciliation Act, 1996

Act relating to alternative in redressal of disputes amongst parties.
 Central Excise Act, 1944
Act governing duty levied on manufacture.
 Companies Act, 1956
Act governing all corporate bodies.
 Competition Act, 2002
Act to ensure free and fair competition in the market.
 Consumer Protection Act, 1986
Act relating to the protection of consumers from unscrupulous traders/manufacturers.
 Customs Act, 1962
Act dealing with import regulations.
 Customs Tariff (Amendment) Act, 2003
Act that has put in place a uniform commodity classification code based on globally
adopted system of nomenclature for use in all trade-related transactions.
 Electricity Act, 2003
Act that regulates generation, transmission, distribution, trading and use of electricity and
generally for taking measures conducive to the development of the electricity industry,
promotion of investment and competition, protection of the interests of consumers and
the assured supply of electricity to all areas.
 Environment Protection Act, 1986
Act providing the framework for seeking environmental clearances.
 Factories Act, 1948
Act regulating labour in factories.
 Foreign Exchange Management Act, 1999
Act regulating foreign exchange transactions including foreign investment.
 Income Tax Act, 1961
Act governing direct taxes on income of all persons, both corporate and non-corporate as
well as residents and non-residents.
 Industrial Disputes Act and Workmen’s Compensation Act
Labour laws dealing with disputes.
 Industrial (Development & Regulation) Act, 1951
Act governing all industries.

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 Information Technology Act, 2000

Act governing e-commerce transactions.
 The Prevention of Money Laundering Act, 2002
Act preventing money laundering and providing for confiscation of property derived
from, or involved in, money laundering.
 The Patents Act, 1970 with Patents (Amendments) Act, 2004
The Act amends the Patent Act, 1970 to extend the product patent protection to all fields
of technology, including drugs, foods and chemicals.
 Value Added Tax Act, 2005
Act governing the levy of tax on sales.
 Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002
Act seeking to put in place securitisation and asset foreclosure laws creating a legal
framework for the establishment of Asset Reconstruction Companies.
 The Special Economic Zones Act, 2005
Provides a long-term, stable policy framework and establishes a single-window clearance
mechanism for the establishment, development and management of SEZs and units
operating in such zones. An SEZ is a specifically delineated duty-free enclave and shall
be deemed to be foreign territory for the purposes of trade operations and duties and
tariffs.
 Payment of Wages Act, 1936
The Payment of Wages Act was enacted during the British Rule in 1936 on the
recommendations of the Royal Commission on Labour. The Act regulates the payment
of wages to workers and ensures that they are disbursed by the employers within the
stipulated time frame and without any unauthorized deductions.
 Contract Labour [R&A] Act 1970
Every principle employer who intends to employ contract Labor in his
Establishment/Factory shall make an application in specified form to the concerned
authority of the area in which the establishment sought to be registered is located.
 Payment of Bonus Act 1965
The payment of Bonus Act is applicable to every factory and every other establishment in
which twenty or more persons are employed on any day during an accounting year
excluding some categories of employees as contained in section 32 of the Act (i.e.
employees in Life Insurance – Corporation, seamen, port and dock workers, universities,
etc.).
 Minimum Wages Act
A Minimum Wages Bill was introduced in the Central Legislative Assembly on 11.4.48
to provide for fixation of minimum wages in certain employments. It was passed in 1948
and came into force with effect from 15.3.48.
 Dock Workers (Safety, Health & Welfare) Act, 1986
contains provisions for the health, safety and welfare of workers working in ports/docks.
 Mines Act, 1972
Contains provisions for measures for the health, safety and welfare.
 Maternity Benefit Act, 1961
Regulates employment of women before and after child birth and provides for 12 weeks
maternity leave, medical bonus and certain other benefits.

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 Payment of Gratuity Act, 1972

Provides for payment of gratuity @ 15 days’ wages for every completed year of service
or part thereof, in excess of seven months.
 Cigarettes and other Tobacco Products (Prohibition of Advertisement and
Regulation of Trade and Commerce, Production, Supply and Distribution) Act,
2003 read with Prohibition of Smoking in Public Places Rules, 2008

Provides for prohibition of smoking in a public place by defining public place and open
space with further explanation of smoking area or space and permitting hotels, restaurants
and airports to provide smoking area or space in a restricted manner with provision of
fine for violation.

The abundant availability of trained manpower in scientific, technical and managerial fields is
one of the strong factors which has helped India's development and which is one of the main
attractions to foreign investors looking for opportunities for profitable investment.

It is clear that if the labour laws of India are not conducive to privatization, then nothing tangible
can be achieved in the attempt to privatize the public sector units. It is however, the endeavor of
every management particularly in the wake of privatization to comply with as much legal
obligations as possible. The shift in the policy of Govt. of India from partial divestiture to full
divestiture has indicated that India Inc. wishes to capture the world market with full potential of
its vast human resource.

The Labour Laws can be categorized under the following 4 (four) broad categories, namely:

(a) Labour Laws enacted by Central Government and also enforced by Central Government
(b) Labour Laws enacted by Central Government enforced by both Central Government as
well as State Government
(c) Labour Laws enacted by Central Government and enforced by the State Government
(d) Labour Laws enacted and enforced by State Government (The List given herein is
restricted to labour laws frequently encountered by Industries in Maharashtra)

(c) Labour Laws enacted by Central Government and also enforced by Central
Government

1. The Employees’ State Insurance Act, 1948

2. The Employees’ {Provident Fund and Miscellaneous Provisions Act, 1952
3. The Dock Workers (Safety, Health and Welfare) Act,. 1986
4. The Mines Act, 1952
5. The iron Ore Mines, Manganese Ore Mines and Chrome Ore Mines Labour
Welfare (Cess) Act, 1976
6. The iron Ore Mines, Manganese Ore Mines and Chrome Ore Mines Labour
Welfare Fund Act, 1976
7. The Mica mines Labour Welfare Fund At, 1946

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8. The Beedi Workers’ Welfare Cess act, 1967

9. The Limestone and Dolomite Mines Labour Welfare Fund Act, 1972
10. The Cine Workers Welfare (Cess) Act, 1981
11. The Beedi Workers Welfare Fund Act, 1976
12. The Cine Workers Welfare Fund Act, 1981

(b) Labour Laws enacted by Central Government enforced by both Central Government
as well as State Government

1. The Child Labour (Prohibition and Regulation) Act, 1986

2. The Building and Other Construction Workers’ (Regulation of Employment and
Conditions of Service) Act, 1996
3. The Contract Labour (Regulation and Abolition) Act, 1970
4. The Equal remuneration Act, 1976
5. The Industrial Disputes Act, 1947
6. The Industrial Employment (Standing Orders) act, 1946
7. The Inter-State Migrant Workmen (Regulation of Employment and Conditions of
Service) Act, 1979
8. The Labour Laws (Exemption from furnishing Returns and Maintaining Registers
by certain Establishments) Act, 1988
9. The Maternity Benefit Act, 1961
10. The Minimum Wages Act, 1948
11. The Payment of Bonus Act, 1965
12. The Payment of Gratuity Act, 1972
13. The Payment of wages Act, 1936
14. The Cine Workers and Cinema Theatre Workers (Regulation of Employment)
Act, 1981
15. The Building and Other Construction Workers Cess act, 1996
16. The Apprentice Act, 1961

(c) Labour Laws enacted by Central Government and enforced by the State Government

1. The Employers’ Liability Act, 1938

2. The Factories Act, 1948
3. The Motor Transport Workers Act, 1961
4. The Personal Injuries (Compensation Insurance) Act, 1963
5. The Personal Injuries (Emergency Provisions) Act, 1962
6. The Plantation Labour Act, 1951
7. The Sales Promotion Employees (Condition of Service) Act, 1976
8. The Trade Union Act, 1926
9. The Weekly Holidays Act, 1942
10. The Working Journalists and other Newspaper Employees (Conditions of Service)
and Miscellaneous Provisions Act, 1955
11. The Workmen’s Compensation Act, 1923
12. The Employment Exchange (Compulsory Notification of Vacancies) Act, 1959

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13. The Children (Pledging of Labour) Act, 1938

14. The Bonded Labour Systems (Abolition) act, 1976
15. The Beedi and Cigar Workers (Conditions of Employment) Act, 1966

(d) Labour Laws enacted and enforced by State Government

1. The Bombay Industrial Relations Act, 1946

2. The Bombay Shops and Establishments Act, 1948
3. The Maharashtra Mathadi, Hamal and Other Manual Workers (Regulation of
Employment and Welfare) Act, 1969
4. The Maharashtra Recognition of Trade Unions and Prevention of Unfair
Labour Practices Act, 1971
5. The Maharashtra Workmen’s Minimum House Rent Allowance Act, 1983

While the compliance with various Labour Laws rests with the Employer, Chartered
Accountants as Professionals are often called for consultations on issues arising there from. Also,
compliances under various regulating laws require Chartered Accountants to understand the
basic provisions concerning Labour Laws. Apart from professional opportunity existing in the
less traveled road, it would be in the interest of fulfillment of social obligation that as individual
awareness is increased.

The recognition of Chartered Accountants under ESIC for certification of half yearly returns is a
step in this direction. Companies will no longer be harassed by inspector raj to get certificates for
compliance with labour laws, if a proposal by the body of company secretaries, ICSI, is accepted
by the government since ICSI has submitted a proposal to the Labour Ministry proposing
changes for replacing inspectors with company secretaries in giving such certificates.

Coverage of Present Paper

The plethora of legislations as well as judgments and notifications covering various aspects are
neither the subject matter of this paper nor is the intention of the paper writer to cover all the
above pieces of legislation.

This paper intends to cover the following acts:-

a. The Minimum Wages Act, 1948

b. The Payment of Bonus Act, 1965
c. The Employees’ State Insurance Act, 1948
d. The Bombay Shops and Establishments Act, 1948

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THE MINIMUM WAGES ACT, 1948

 General :-
The need for a country of having minimum wage fixing machinery was stressed by the
International Labour Organization long back in 1928. Twenty years later our country
passed The Minimum Wages Act, 1948. The reason given by the government for passing
the Act was that workers organization in the country was poorly developed and
consequently their bargaining power also was very poor. The act is a boon to a large
number of poorly paid persons in this country.

 Applicability :-
The Minimum Wages Act, 1948 is applicable to various schedule of employment, which
are notified by the appropriate Government from time to time. At present in Maharashtra
Minimum Wages Act is applicable to about 70 (Seventy) Schedule of employment.

The Act is applicable to all types of employees i.e. whether they are Monthly rated, Part-
Time employees, daily rated or piece rated employees, casual, temporary or permanent
employees.

 Procedure of fixing Minimum Wages :-

The appropriate government has to fix and revise minimum wages either -
- by appointing one or more committees and sub-committees consisting of
representatives of employers and employees and also of independent persons to hold
necessary enquiries and by taking into consideration the advice tendered by the
committee or committees, or by formulating and publishing its proposals and taking
into consideration the representations received in response to the proposals.

 What Minimum Wages Consist :-

The Minimum Wages consist of:

1. Basic rate of wages and special allowance or cost of living allowance or

2. Basic rate of wages with or without cost of living allowance or
3. All inclusive rates, cost of living allowance and the cash value of the concessions
if any.

• Basic Wages :- Once the appropriate Government declares by its notification the
Basic rate of wages for the particular schedule of employment, than it remains
constant throughout till the Government revises it by another notifications.

• Special allowance or cost of living allowance :- Generally the said allowance

declares by the appropriate authority at the fixed intervals. At present in
Maharashtra the period of special allowance is for six months i.e. January to June
& July to December.

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 How to pay minimum wages :-

The minimum wages payable under the Act must be paid in cash. However, employer
can pay them in kind with the permission of the appropriate Government.

 Classification of employees :-
The appropriate Government classified the employees for the purpose of declaring Basic
wages as per the notifications. The employees are classified as under :
( i ) Highly skilled ( ii ) Skilled ( iii ) Semiskilled ( iv ) unskilled & others.
The definition of the above classifications differs from each schedule of employment but
generally it defines as under :

( i ) Highly skilled – The employee who is a degree holder for a particular job of work
and performs the job independently applying his own mind to do the assigned job.
i.e. Engineers, Doctors, Artists etc.

( ii ) Skilled – Skilled employee is one who is capable of working efficiently, exercising

considerable independent judgment and discharging his duties responsibly. i.e.
Turner, Fitter etc.

( iii ) Semiskilled – Employee is one who does work generally of a well-defined routine
nature wherein major requirements is not so much of the judgment, skill and
dexterity, but of proper discharge of duties assigned to him for a relatively narrow
job and important decisions are made by others.

( iv ) Unskilled – Employee is one who does operations that involve the performance or
previous experience although a familiarity with the occupational environments is
necessary. i.e. Helper, Peons etc.

 Different Zones :-
The Minimum wages declares by the appropriate Government differs with different
Zones. The different Zones are also notified in the Government Gazettes. Generally there
are three Zones but sometimes Government declares less than 3 Zones or more than 3
Zones for a particular schedule of employments.

The Zones comprises of –

Zone I – All municipal corporations.
Zone II – Shall comprise ‘ A ’ and ‘ B ’ category Municipal councils
and District Head Quarters.
Zone III – Comprises of all other areas not falling in Zone I and II.

 Obligation of the employer :-

Where Minimum wages are fixed and enforced under Section 5 in respect of any
employment covered by the Act, the employer is bound to pay to every employee
engaged in that employment wages at a rate of not less than the Minimum rate so fixed
and enforced. Any employer shows his incapability to pay the minimum wages, than it is
irrelevant whether he has capability to pay or not.

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 Normal working hours :-

The normal working hours prescribed for the employees covered by the Act is of 9 hours
and not more than 48 hours in a week.

 Overtime :-
An employee covered by the Act works for more than 9 hours on any day or 48 hours in
any week, he is entitled to get Overtime Wages at double the ordinary rate of wages.

 Records to be maintained :-
1. Muster Roll cum Wages Register Rule 27 (1)

2. Muster Card cum Wages slips shall be issued to employees every month Rule 27
(2)

3. Bound Inspection Book (Rule 28)

For records maintained on computer special permission is required to be taken from

the Competent Authority.

 Inspectors :-
The appropriate Government may, by Notification in the official Gazette appoint such
Persons as it thinks fit to be inspectors for the purpose of this Act.

 Claims :-
Every claim for Minimum wages shall be presented to the Notified officer within six
months from the date on which the Minimum Wages became payable.

 OFFENCES :- If any employer –

- pays to any employee less than the Minimum rates of wages fixed for that
employee’s class of work

- Contravenes any rate or order made by appropriate Government regarding hours of

work
He would be punished with imprisonment up to six (6) months or with fine up to
Rs.500/- or with both.

 Jurisdiction :-
Industrial Tribunal has jurisdiction of adjudication upon a dispute relating to the fixation
of Minimum Wages.

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THE PAYMENT OF BONUS ACT, 1965

 General :-
The payment of Bonus Act, 1965 gives to the employees a statutory right to a share in the
profits of his employer. Prior to the enactment of the Act some employees used to get
bonus but that was so if their employers were pleased to pay the same.

 Object :-
The object of the Act is to maintain peace and harmony between labour and capital (i.e.
employees & employers) by allowing the employees to share the prosperity of the
establishment reflected by the profits earned by the contributions made by capital,
management and labour.

 Applicability :-
The Act is applicable to

a) Every factory
b) Every other establishment employing 20 (Twenty) or more persons.

The Government can, however, apply the Act to any establishment employing less than
20 (Twenty) but not less than 10 (Ten) persons.

Note :- The Government of Maharashtra, by a Notification dt. 11.04.1984 has applied

the Act to factories and other establishment employing 10 or more but less than
20 persons w.e.f. Accounting year 1983.

Once the Act applies it shall continuously remain in force irrespective of number of
employees fall in number i.e. once covered always covered.

 What about Public Sector ?

Public sector establishment which sells any goods produced or manufactured by it or
renders any services in competition with private sector and earns income from such sell
or services shall be covered by the Act.

 Eligibility :-
Every employee who is drawing a salary or wages up to Rs.3,500/- per month and has
worked for a minimum period of 30 days in a particular year is entitled to get Bonus. As
per above ceiling all employees drawing wages up to Rs.3,500/- per month shall be
eligible for Bonus irrespective of his grade / designation i.e. manager / part-time / casual
/ seasonal employee etc.

 On what Salary / Wages Bonus is payable :-

For the purpose of calculation of Bonus Salary or Wages includes Basic Salary, Dearness
Allowance / Special Allowance only, but does not include other allowances such as
Overtime, House Rent Allowance, Conveyance, Traveling Allowance, Monthly Bonus,
Contribution to Provident Fund, Retrenchment compensation, Gratuity or commission.

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 Calculation of Bonus :-
1. The employee who is drawing salary or wages not exceeding Rs.3,500/- per
month is entitled to get bonus on entire salary or wages.

2. The employee who is drawing salary or wages between Rs.3,500/- per month and
Rs.10,000/- per month, the Bonus payable to him is to be calculated as, if his
salary or wages were Rs.3,500/- per month. An employee getting a salary or wage
exceeding Rs.10,000/- per month is not at all entitled to get Bonus as per The
Payment of Bonus Act.

 Minimum & Maximum Bonus :-

The employer is bound to pay his employees every year a minimum Bonus of @ 8.33%
of the yearly salary or wage or Rs.100/- which ever is higher, whether he has allocable
surplus or not. If any year the allocable surplus exceeds the amount of Minimum Bonus
payable to the employees, the maximum Bonus payable by the employer to his employee
in that particular year is @ 20% of the yearly salary or wages.

Hence, Bonus is payable to the employee between 8.33% & 20% as per availability of
allocable surplus.

 Available surplus & allocable surplus :-

The Bonus payable under the Act is linked with profits of the company. The employer
has to calculate “Gross Profit” of his establishment in the manner specified in section 4.
Than from Gross Profit so calculated he has to deduct the sums referred to in section 6 as
prior charges. The balance amount is called available surplus i.e. a percentage of
available surplus calculated in accordance with the provisions of sub-section (4) of
section 2 is called allocable surplus.

Where, allocable surplus exceeds the amount of minimum Bonus payable to the
employee, the Employer must pay to every employee in respect of that year Bonus in
proportion to the salary or wages earned by the employee during the year subject to
maximum of 20% of such salary or wage.

 What is set on & set off of allocable surplus :-

Set On :-
Where for any year the allocable surplus exceeds the amount of maximum Bonus
payable to the employees, than the excess shall (subject to limit of 20% Bonus of total
salary / wages) be carried forward for being set on in the succeeding year and so on to be
utilized for the purpose of Bonus.

Set Off :-
Where for any year there is no surplus in respect of that year falls short of the amount of
minimum Bonus payable i.e. 8.33% to the employees and there is no amount or sufficient
amount carried forward and Set On which could be utilized for the purpose of minimum
Bonus, than such minimum amount or the deficiency as the case may be shall be carried
forward for being Set Off in succeeding year and so on.

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 Deductions from Bonus :-

1. In any year the employer has paid any amount to an employee as customary /
pooja bonus than he can deduct such amount from Bonus payable to the employee
for that year

2. If any employee is found guilty of misconduct causing financial loss to the

employer can deduct the amount of loss from the amount of Bonus payable to the
employee for the year in which he was found guilty of misconduct.

 Time limit for payment of Bonus :-

1. Bonus must be paid within a period of 8 months from the close of accounting year
as per Income Tax Act i.e. April to March.

2. If any dispute about the payment of Bonus pending before any authority than
Bonus must be paid within one month from the date of Awards.

 Remedy for recovery of Bonus :-

If any employer fails to pay Bonus to the employee, he can make the application for his
recovery of Bonus to the competent Authority & Authority issues a certificate to the
collector to recover the same as an arrears of land revenue i.e. Attachment of Property &
Assets. However, the time limit for application to the Authority is within one year from
the date on which Bonus amount became due.

 Offences / Punishments :-
If any persons contravenes the provision of the Act or any rule made there under or fails
to comply with any directions given to him he would be punished with imprisonment up
to six (6) months or with fine up to Rs.1,000/- or both.

 Productivity Bonus :-
Bonus paid on production or productivity or under a formula different from that under the
Act can be allowed but subject to the Provisions of the Act in respect of the payment of
minimum or maximum Bonus. However, Attendance Bonus or any other allowances are
outside the purview of payment of Bonus Act.

 Excluded categories :-
Following categories are excluded from application of the Bonus Act:

1. L.I.C. of India
2. Reserve Bank of India
3. Unit Trust of India
4. Universities & other Educational Institutions
5. Any other establishments permitted by Government for a specified period and
subject to specified conditions.

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 Newly set-up establishment :-

The newly set-up establishment is exempted from paying Bonus to its employees in the
first 5 (Five) years following the year in which the employer sells the Goods produced or
manufactured by him. If however, employer derives profit in any of the first five years,
he has to pay Bonus for that year. The provisions of Set-On & Set-Off are not applicable
in such cases.

 Disqualifications for receiving Bonus :-

Employee is disqualified from receiving Bonus if he is dismissed from the service for (A)
Fraud (B) Riotous or Violent behaviour while on the premises of the establishment (C)
Theft, misappropriation or sabotage of any property of Establishment.

 Records to be maintained :-
1. A register in “Form No. A” showing Computation of Allocable Surplus.
2. A register in “Form No. B” showing Set-On & Set-Off of the allocable surplus.
3. A register in “Form No. C” showing details of the Bonus due to each of the
employee & deductions under Section 17 & 18 and the amount actually disbursed.

Annual return in “Form No. D” to be submitted to the competent Authority within 30 days after
the expiry of time limit.

THE EMPLOYEE'S STATE INSURANCE ACT, 1948

The Employees State Insurance Act, provides for certain benefits to employees in case of
sickness, maternity and employment injury.
The Act extends to the whole of India. It applies to all factories (including Government
factories but excluding seasonal factories) employing ten or more persons and carrying on a
manufacturing process with the aid of power or employing 20 or more persons and carrying on a
manufacturing process without the aid of power and such other establishments as the
Government may specify.
A factory or other establishment to which this Act applies, shall continue to be governed by its
provisions even if the number of workers employed therein falls below the specified limit or the
manufacturing process therein ceases to be carried on with the aid of power, subsequently
The Act does not apply to the following:
i. Factories working with the aid of power wherein less than 10 persons are employed;
ii. Factories working without the aid of power wherein less than 20 persons are employed;
iii. Seasonal factories engaged exclusively in any of the following activities viz. Cotton
ginning, cotton or jute pressing, decortication of groundnuts, the manufacture of coffee,
indigo, lac, rubber, sugar (including gur) or tea or any manufacturing process incidental
to or connected with any of the aforesaid activities, and including factories engaged for a
period not exceeding seven months in a year in blending, packing or repackaging of tea
or coffee, or in such other process as may be specified by the Central Government;

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iv. A factory which was exempted from the provisions of the Act as being a seasonal factory
will not lose the benefit of the exemption on account of the amendment of the definition
of seasonal factory
v. Mines subject to the Mines Act, 1952;
vi. Railway running sheds;
vii. Government factories or establishments, whose employees are in receipt of benefits
similar or superior to the benefits provided under the Act and Indian naval, military or air
forces.
The appropriate Government may exempt any factory or establishments or class of factories or
establishments or any employee or class of employees from the provisions of this Act.

EMPLOYEES ENTITLED
Every employee (including casual and temporary employees), whether employed directly or
through a contractor, who is in receipt of wages upto Rs. 10,000 p.m. is entitled to be insured
under the E.S.I. Act. However, apprentices engaged under the Apprentices Act are not entitled to
the E.S.I. benefits. Coverage of part time employees under the ESI Act will depend on whether
they have contract of service or contract for service with the employer. The former is covered
whereas the latter are not covered under the E.S.I Act.

Besides, in the following cases, the employees have been held to be covered under the Act:
i. persons employed in a canteen of a club,
ii. drivers employed by the Transport organization,
iii. persons engaged in distribution and sale of products,
iv. persons carrying administrative work of processing the orders and executing sales,
v. hawkers employed for sale of products,
vi. employees of cycle stand and canteen run in cinema theatres by contractors,
vii. members of editorial and administrative staff of a printing press publishing newspaper,
viii. a home worker rolling beedies at home,
ix. medical representative,
x. persons employed in a hospital attached to and maintained by factory,
xi. part-time doctor employed for ambulance room,
xii. book binders engaged by a contractor, and
xiii. sales clerk working in a factory.

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EXEMPTION FROM MATERNITY BENEFIT ACT, 1961 AND WORKMENS

COMPENSATION ACT, 1923.
An employer/establishments covered under the E.S.I. Act is exempt from the provisions of
Maternity Benefit Act and Workmen’s Compensation Act. It is specifically provided that when a
person is entitled to any of the benefits provided by the Act, then he shall not be entitled to
recover any similar benefits admissible under the provisions of any other enactment.

EMPLOYERS / EMPLOYEES CONTRIBUTION

The employer is required to contribute at the rate of 4.75% of the wages paid/payable in respect
of every wage period. The employees are also required to contribute at the rate of 1.75% of their
wages, except when the "average daily wages in a wage period" are equal to or less than Rs. 50.
Employees earning less than and upto Rs. 50 per day are exempted from payment of
contribution.
It is the employers responsibility to deposit his own as well as employees contributions in respect
of all employees including the contract labour, into the E.S.I. Account.
The employer may deduct the employees contribution from his wages in respect of the period for
which the contribution is payable.

EMPLOYEE BENEFITS

SICKNESS BENEFIT
Every insured employee is entitled to the cash benefit for the period of sickness occurring during
any benefit period and certified by a duly appointed medical practitioner if the contributions in
respect of him were payable for not less than (78 days) in the corresponding contribution period.
However, in the case of a newly appointed employee, eligible for the first time who has got
shorter contribution period of less than 156 days, he shall be entitled to claim sickness benefit if
he pays contribution for not less than half the number of days available for working in such
contribution period. The benefit is payable at the standard benefit rate, corresponding to his daily
average wages. The benefit is, however, not payable for any day on which the employee works,
remains on leave, holiday or strike, in respect of which he receives wages.
Sickness benefit shall be allowed to an employee for any day on which he remains on strike, if: -
i. he is receiving medical treatment and attendance as an indoor patient in any E.S.I.
hospital or a hospital recognized by the E.S.I. Corporation for such treatment; or
ii. he is entitled to receive extended sickness benefit for any of the diseases for which such
benefit is admissible; or
iii. he is in receipt of sickness benefit immediately preceding the date of commencement of
notice of the strike given by the Employees Union to the Management of the
factory/establishment.

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No sickness benefit shall be payable for the first two days of sickness following, at an interval of
not more than 15days, after the sickness in respect of which sickness benefits were last paid.
Further no sickness benefit shall be payable to any person for more than 91 days in any two
consecutive benefit periods.
CONDITIONS TO BE OBSERVED
Any person in receipt of sickness benefit:
a. shall remain under medical treatment at the ESI dispensary or hospital and carry out the
instructions of the medical officer;
b. shall not do anything which retards or reduces his chances of recovery;
c. shall not leave the area where medical treatment is provided without medical officers
permission;
d. shall get himself examined by the medical officer.
MATERNITY BENEFIT
A periodical cash benefit is payable to an insured woman employee, in case of confinement,
miscarriage, medical termination of pregnancy, premature birth of a child, or sickness arising
from pregnancy, miscarriage, etc., occurring or expected to occur in a benefit period, if the
contributions, in respect of her were payable for atleast (70 days) in the two immediately
preceding contribution periods.
The benefit is payable at twice the standard benefit rate or Rs. 20, whichever is higher, for all
days on which the she does not work for remuneration during the period prescribed as under.
DISABLEMENT BENEFIT
Disablement benefit is payable in the form of cash installments, to an employee who is injured in
the course of his employment and is, permanently or temporarily, disabled, or contacts any
occupational disease. It is sufficient if it is proved that the injury was caused by an accident
arising out of, and in the course of employment, no matter when it occurred, and where it
occurred.
The accident shall be deemed to have arisen out of and in the course of employment unless there
is evidence to the contrary,
i. where an accident happens while the employee is traveling in employers transport, to or
from his place of work;
ii. where an accident happens in or about any premises at which the employee is employed
for the purposes of his employers trade or business, while the employee is taking steps, in
an emergency, to rescue, secure or protect persons who are injured or imperiled or to
avert or minimize serious damage to property;
iii. where the employee is at the time of the accident acting in contravention of any law or
any safety rules and instructions, if the employee is acting for the purpose of, and in
connection with, the employers trade or business.

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The employee claiming any disablement benefit is required to furnish a medical certificate as
prescribed under the regulations. The employee is also required to observe certain conditions as
to medical examination etc., as prescribed for sickness benefit.
The benefit for temporary disablement is, however, not payable for any day on which the
employee works, remains on lease, holiday or strike, in respect of which he receives wages.
However, disablement benefit for temporary disablement shall be allowed to an employee for
any day on which he remains on strike, if:
i. he is receiving medical treatment and attendance as an indoor patient in any ESI hospital
or a hospital recognized by the ESI corporation, for such treatment; or
ii. he is in receipt of such disablement benefit immediately preceding the date of
commencement of notice of the strike given by the Employees Union to the management
of the factory/establishment.
NOTICE OF INJURY
The insured employee who sustains an employment injury should give a notice of the same to the
employer or manager or supervisor or foreman, etc., by means of entry in the Accident Book or
otherwise in writing or even orally. This notice is very important for claiming the disablement
benefit.
ACCIDENT REPORT BY THE EMPLOYER
In case of an accident in the establishment, the employer should prepare an Accident Report in
Form 16 (in triplicate) and submit to the local office and the Insurance Medical Officer. The
third copy is the office copy. The reports are to be submitted within 48 hours in ordinary cases
and immediately in death cases.
BENEFITS NOT TO BE COMBINED
An employee shall not be entitled to receive for the same period-
a. both sickness benefit and maternity benefit; or
b. both sickness benefit and disablement benefit for temporary disablement; or
c. both maternity benefit and disablement benefit for temporary disablement.
The employee shall be entitled to choose any one of the aforesaid benefits, at his option.

ABSTENTION VERIFICATION
The employer should furnish and verify the particulars in Form 28, in respect of the abstention of
an employee from work, for which sickness/maternity/temporary disablement benefit has been
claimed.

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PAYMENT OF BENEFIT IN CASE OF DEATH

If an employee dies during any period for which he is entitled to a cash benefit, the amount of
such benefit shall be payable up to and including the day of his death. The amount of benefit
shall be paid to the nominee or, where there is no nomination, to the heir or legal representative
of the deceased employee.
INSPECTORS-THEIR DUTIES AND POWERS
The E.S.I. Corporation may appoint Inspectors to carry out the purposes of the Act, within the
local limits assigned to each of them.

DUTIES
The duties of an Inspector are:
a. Inquiring into the correctness of any of the particulars stated in any return of contribution;
b. Ascertaining whether any of the provisions of the Act has been complied with; and
Such other duties as may be authorized by the Corporation or specified in the regulations.

POWERS
The Inspectors are vested with following powers to carry out their duties and functions aforesaid:
i. To require any employer or contractor to furnish to him necessary information;
ii. To enter, at any reasonable time, any office, establishment, factory or other premises of
the employer or contractor, and require the person in change thereof to produce for
examination accounts, books and documents relating to the employment of persons and
payment of wages, or to furnish to him necessary information;
iii. To examine the employer or contractor, his agent or servant, or any person found in the
factory, establishment, office or other premises, or any employee; and
iv. To make copies of, or take extracts from, any register, account books or other document
maintained in such factory, establishment, office etc.

OBLIGATIONS OF EMPLOYERS

1. The employer should get his factory or establishments registered with the E.S.I.
Corporation within 15 days after the Act becomes applicable to it, and obtain the
employers Code Number.
2. The employer should obtain the declaration form from the employees covered under the
Act and submit the same along with the return of declaration forms, to the E.S.I. office.
He should arrange for the allotment of Insurance Numbers to the employees and their
Identity Cards.
3. The employer should deposit the employees and his own contributions to the E.S.I.
Account in the prescribed manner, whether he has sufficient resources or not, his liability

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under the Act cannot be disputed. He can not justify non-payment of E.S.I. contribution
due to non-availability of finance.
4. The employer should furnish a Return of Contributions alongwith the challans of monthly
payment, within 30 days of the end of each contribution period.
5. The employer should not reduce the wages of an employee on account of the contribution
payable by him (employer).
6. The employer should cause to be maintained the prescribed records/registers namely the
register of employees, the inspection book and the accident book.
7. The employer should report to the E.S.I. authorities of any accident in the place of
employment, within 24 hours or immediately in case of serious or fatal accidents. He
should make arrangements for first aid and transportation of the employee to the hospital.
He should also furnish to the authorities such further information and particulars of an
accident as may be required.
8. The employer should inform the local office and the nearest E.S.I. dispensary/hospital, in
case of death of any employee, immediately.
9. The employer must not put to work any sick employee and allow him leave, if he has
been issued the prescribed certificate.
10. The employer should not dismiss or discharge any employee during the period he/she is
in receipt of sickness/maternity/temporary disablement benefit, or is under medical
treatment, or is absent from work as a result of illness duly certified or due to pregnancy
or confinement.

DISPUTES & REMEDIES

EMPLOYEES STATE INSURANCE CORPORATION
The Employees State Insurance Scheme is administered by the Employees State Insurance
Corporation, which is constituted by the Central Government. It consists of representatives of the
Central Government, medical profession and members of Parliament. The Corporation is vested
with the following powers.
• To promote measures for the improvement of the health and welfare of insured
employees and for the rehabilitation and re-employment of those who have been disabled
or injured
• To appoint inspectors for purposes of the Act.
• To determine the amount of contribution payable in respect of employees of a factory or
establishment, which has not furnished or maintained any particulars, registers or records.
EMPLOYEES INSURANCE COURT
Any dispute arising under the Act shall be decided by the Employees Insurance Court and not by
a Civil Court. It is constituted by the State Government for such local areas as may be specified
and consists of such number of judges, as the Government may think fit. It shall adjudicate on
the following disputes and claims.
Disputes as to
i. Whether an employee is covered by the Act or whether he is liable to pay the
contribution, or

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ii. The rate of wages or average daily wages of an employee, or

iii. The rate of contribution payable by the employer in respect of any employee, or
iv. The person who is or was the principle employer in respect of any employee, or
v. The right to any benefit an the amount and duration thereof, or
vi. Any direction issued by the Corporation on a review of any payment of dependents
benefit, or
vii. Any other matter in respect of any contribution or benefit or other due payable or
recoverable under the Act.
Claims as to
i. Recovery of contributions from the principle employer,
ii. Recovery of contributions from a contractor,
iii. Recovery for short payment or non-payment of any contribution under section 68,
iv. Recovery of the value or amount of benefits received improperly under section 70,
v. Recovery of any benefit admissible under the Act
No dispute shall be admitted unless the employer deposits with the Court 50% of the amount due
from him as claimed by the Corporation.

THE BOMBAY SHOPS’ & ESTABLISHMENTS ACT, 1948

 General :-
Legislation to regulate conditions of work in Shops & Commercial Establishments has
been in force in the state of Maharashtra for nearly 57 years. The first Shops Act of the
State was enacted in 1939. The Present Shops & Establishments Act, 1948 is an
improved version of the 1939 Act. Though the Present Act has undergone several
improvements during the last 48 years. But it has failed to fulfill the legitimate
expectations of its beneficiaries due to its inadequate provisions & unsatisfactory
implementations.

 Applicability :-
This Act is applicable to all Commercial Establishments, Shops, Residential Hotels &
Clubs, Restaurants, Eating Houses, Theatres Other Places of Public Amusement or
Entertainment.

This Act is also applicable to Factories having total manpower less than 10 with the aid
of power & less than 20 without the aid of power.

Exemptions :
The Establishment of the Central Government & State Government are exempted from
all the Provisions of the Act, further

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a) The Government by issuing a General notification can temporarily exempt all the
establishments from all or some of the Provisions of the Act by suspending the
operation of such provision on account of any holidays or festive occasions.

b) The Government by issuing special notifications can permanently exempt any

establishment from all or some of the Provisions of the Act by making such
provisions inapplicable to that establishment on account of the Special requirement of
that establishment.

 Registration :-
The Employer of an establishment has to apply to the Inspector of the Local Area
concerned in the prescribed form (Form – A) along with the prescribed Fees for
Registration of the firm under the Act. After the Scrutiny & Inspection the Inspector will
issue Registration Certificate to the Establishment.

Change / Amendment in Certificate :

If there is any change in the particulars mentioned in the Certificate the employer has to
notify the same to the Inspector by applying in the prescribed form (Form – E) along
with prescribed fees & get the Registration Certificate suitably amended (At present
prescribed fees is Rs.100/-.)

Renewals :
The employer has to get the Registration Certificate renewed every year by applying to
the Inspector in prescribed form (Form – B) accompanied by prescribed fees. The
employer can get it renewed for the period of maximum 3 (Three) years.

The application for renewal may be made before 15 days from the Expiry of period of
registration Certificate.

 Closure of Business Activities :-

At the time of Closure of Business Activities the employer has to notify to the Inspector
with in 10 days of his Closure Activities, then the Inspector will cancel the registration of
the Establishment.

 Issue of Duplicate Certificate :-

If registration certificate is lost, destroyed or defaced, the employer should apply for
duplicate certificate with prescribed fee for duplicate certificate.

 Working hours :-
The main restrictive provisions about working hours are as follows :
a) Opening hours :
• Shops : Not earlier than 7.00 a.m.
• Shops selling Milk, vegetables etc. : not earlier than 5.00a.m.
• Restaurants, Eating Houses etc. : Not earlier than 5.00 a.m., however, working
hours for preparation may start from 04.30 a.m.

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b) Closing hours :
• Shops : Latest by 8.30 p.m.
• Shops selling Pan/Bidi etc. : Latest by 11.00 p.m.
• Restaurants, Eating Houses etc. : Latest by 12.00 midnight.
• Theatres, Public Amusement or Entertainment : Latest by 00.30 a.m.

 Working hours for an employee :-

An employee in a Shop or Commercial Establishment can not be required or allowed to

work more than 9 hours in a day (Excluding Lunch hours) & 48 hours in a week.

• Interval / Rest : An employee must be allowed an interval of rest of atleast one hour
after 5 hours of continuous work.
• Spread- over work :
a) An employee working in a shop or commercial establishment his spread over
work can not exceed 11 hours in a day.
b) For Hotel, Restaurants & Eating house- Spread over work can not exceed 12
hours in a day.
c) For Theatre, public Amusement or entertainment – Spread over work can not
exceed 11 hours in a day.

 Weekly Holiday :-
• Every Shop & Commercial Establishment must remain closed on one day of the
week. No deduction can be made from the wages of any employee in a shop or
commercial establishment on account of any day on which it has remained so closed.
• For Hotels, Restaurants, Eating House & Theatres an employee must be given at least
one day in a week as a holiday.

Note : The above restrictions can be relaxed in certain circumstances.

 Public Holidays :-
In addition to annual Leave with pay an employee is entitled to a paid holiday on 26th
January, 1st May, 15th August & 2nd October every year.

 Leave with Wages :-

The Main provisions are as under :

 An employee is entitled to annual Leave with Pay for 21 days for 240 days of work in
a Calendar year.
 An employee who has not worked for 1 calendar year is entitled to Leave with pay 5
days for every 60 days of work.
 Leave with Pay can be accumulated up to 42 days.
 A discharged employee is entitled to Leave for the balance of Leave to his credit.

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 Overtime Work :-
When any employee is required to work overtime he must be paid for a such work at
double the rate of his ordinary wages.

 Minimum Wages :-
Any employee working in Shops or Commercial Establishments shall get minimum
wages as under :

Basic Wages Zone I Zone II Zone III

Skilled 3330 3230 2930
Semi-Skilled 3230 3130 2830
Un-Skilled 3130 3030 2730
Special Allowance

In addition to above basic Wages every employee shall be paid Special Allowance as
per 6 monthly allowance declared by appropriate authority based on index number.
* The above limits need to be verified periodically since these are liable for revision.
 Records to be maintained :-

1. Muster Roll cum Wages Register in form No. II Rule 27 (I).

2. Leave Register in Form No. M
3. Leave Cards in Form No. N.
4. Muster Cards cum Wage Slip.
5. Inspector’s Visit Book.
6. To display various notices such as timetable for working hours, list of holidays, date
of payment of wages etc.

 Employment of children :-
The employment of children is totally prohibited Anybody who is below the age of 15
years is considered to be a child.

• Young persons :
Any body who is between the age of 15 years & 17 years is considered to be a young
person. No young person can be required or allowed to work whether as an employee
or otherwise, in any establishment :
a) after 7.00 p.m.
b) For more than 6 hours in any day
c) Not allowed to work which involves danger to life, health or morals.

 Employment of Woman :-
Restrictions are placed on the closing hours for women as well as on giving them danger
work. Thus no women can be required or allowed to work as an employee or otherwise,
in any establishment after 9.30 p.m., In other words women can not be required or
allowed to attend work late in the evening. Similarly no woman working in any

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establishment, whether as an employee or otherwise, can be required or allowed to

perform work involving danger to her life, health or morals (Note: In certain cases &
nature of activities of the establishments relaxation has been granted)

 Powers of Inspectors & Punishment for various offences :-

a) To enter the premises which is an establishment
b) To make examination of the premises, registers, records & notices.
c) To take evidence of any person.
d) To seize the necessary registers, records or other documents & retain them for a
reasonable time for examination thereof or for prosecution of the employer

Conclusion –

With the multi faceted services offered by Chartered Accountants, the area of Labour Laws
would be providing an opportunity. The SMEs also may well improve the condition of
maintenance of various records under different Labour Laws as are applicable and take the help
of expertise of Chartered Accountants. The concept of Social Audit when enacted in labour laws
may compel SMEs to undertake such audit but however, it may well help them at present
improve compliance and reduce probable penal consequences.

Compiled by –
CA Vijay Joshi

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