Labour law applicability is often misunderstood by many business owners who believe labour laws apply only to large corporations with hundreds of employees. In reality, compliance obligations can begin the moment you hire your first employee. As your workforce grows, additional legal requirements are triggered automatically based on employee strength, nature of business, and state-specific rules.
Understanding which labour laws apply to your organisation is not just a legal formality—it is essential for protecting your business from penalties, inspections, and operational disruptions. This guide explains how labour law applicability in India is linked to employee count and how it directly impacts labour compliance, payroll compliance, factory compliance, and shop and establishment compliance requirements that employers must manage at every stage of growth.
Not Sure Which Labour Laws Apply to Your Business?
Labour law applicability changes as your employee strength grows. From shop and establishment compliance and payroll compliance to ESI, EPF, gratuity, bonus, and factory compliance, missing a single registration can lead to penalties and inspections. Our compliance experts help you assess your current employee count and ensure 100% statutory coverage—without confusion or risk.
Why Employee Strength Determines Compliance
In India, most labour legislations are threshold-based. This means certain laws become mandatory once your organisation crosses a specified number of employees. These thresholds vary depending on:
- Type of establishment (commercial, factory, service-based, etc.)
- Nature of operations
- State-specific regulations
- Wage limits (in some cases)
Because of these variables, two businesses with the same number of employees may not have identical compliance obligations. However, employee strength remains one of the primary triggers for statutory registration and ongoing compliance.
Compliance Requirements Starting from 1 Employee
Even if you operate a small office with a minimal team, compliance begins immediately.
1. Shops and Establishments Registration
Most commercial establishments must register under the applicable state Shops and Establishments Act once business operations commence and employees are hired. This governs:
- Working hours
- Leave policies
- Holidays
- Employment conditions
Registration timelines vary by state but are generally required within a fixed period of starting operations.
2. Professional Tax (State Specific)
Professional Tax is applicable in certain states and is deducted from employee salaries. Employers must register, deduct, and deposit the tax within prescribed timelines.
3. National and Festival Holidays
State-specific laws mandate compulsory holidays and related wage compliance. Even small establishments must adhere to these provisions.
Key Takeaway: Compliance does not start at 10 or 20 employees—it often begins at 1.
When You Reach 10 or More Employees
Crossing the 10-employee mark is a major compliance milestone for many businesses.
1. Employees’ State Insurance (ESI)
Under the Employees’ State Insurance Act, ESI registration becomes mandatory for eligible establishments once the employee threshold is met (commonly 10 employees in many states).
It provides medical and cash benefits to employees earning within prescribed wage limits. Employers must:
- Register eligible employees
- Deduct employee contribution
- Deposit employer contribution
- File periodic returns
Non-compliance can attract interest, penalties, and inspections.
2. Payment of Gratuity
Under the Payment of Gratuity Act, gratuity becomes applicable when an establishment employs 10 or more persons on any day in the preceding 12 months. Once applicable, it continues to apply even if employee strength later falls below 10.
Employers must pay gratuity to employees completing five years of continuous service.
3. Maternity Benefit
The Maternity Benefit Act mandates paid maternity leave and related benefits for eligible female employees in applicable establishments.
Compliance includes:
- Granting statutory leave
- Maintaining registers
- Avoiding unlawful termination
4. Equal Remuneration & Wage Laws
The Minimum Wages Act and related wage regulations ensure employees are paid at least the prescribed minimum rates.
Employers must:
- Follow notified wage rates
- Maintain wage registers
- Ensure timely salary payments
5. Sexual Harassment Compliance (POSH)
Under the Sexual Harassment of Women at Workplace Act, organisations with 10 or more employees must constitute an Internal Committee to address complaints.
This is often overlooked by growing startups but is mandatory.
When Your Workforce Reaches 20 or More Employees
Crossing 20 employees brings additional major statutory obligations.
1. Employees’ Provident Fund (EPF)
The Employees’ Provident Funds and Miscellaneous Provisions Act becomes applicable once an establishment employs 20 or more persons.
Employers must:
- Register under EPF
- Deduct employee contributions
- Contribute employer share
- File monthly returns
- Maintain compliance records
Failure to comply can result in substantial financial liabilities and prosecution in extreme cases.
2. Payment of Bonus
The Payment of Bonus Act applies to establishments employing 20 or more persons.
Eligible employees earning within prescribed salary limits are entitled to annual bonus payments, subject to minimum and maximum percentages defined by law.
When You Cross 25 or More Employees
Certain additional compliance requirements may apply depending on the nature of operations.
1. Standing Orders
Under the Industrial Employment Standing Orders Act, larger establishments must define and formalise employment conditions through certified standing orders.
These regulate:
- Employee classification
- Termination procedures
- Misconduct definitions
- Disciplinary actions
2. Factories and Manufacturing Units
If your business involves manufacturing and meets prescribed thresholds, the Factories Act becomes applicable.
It governs:
- Workplace safety
- Health standards
- Working hours
- Welfare facilities
This law is heavily inspection-driven and non-compliance can lead to severe penalties.
Compliance Is Not Just About Headcount
While employee strength is critical, other factors also determine applicability:
- Nature of business (factory vs service establishment)
- Wage thresholds
- Use of power in manufacturing
- State-specific amendments
- Contract labour engagement
For example, engaging contract workers may trigger compliance under separate labour regulations even if your direct employee count is low.
What Happens If You Ignore Compliance?
Ignoring labour law applicability can create serious risks:
- Heavy monetary penalties
- Backdated statutory dues with interest
- Prosecution of directors or authorised signatories
- Government inspections
- Reputational damage
- Operational disruption
Many businesses discover non-compliance only during funding due diligence, statutory audits, or government inspections.
Compliance Checklist Based on Employee Strength
| Employee Count | Key Compliance Areas |
|---|---|
| 1+ | Shops & Establishment Registration, Professional Tax (State Specific), Holiday Compliance |
| 10+ | ESI, Gratuity, Maternity Benefit, POSH Compliance, Wage Laws |
| 20+ | EPF Registration, Bonus Compliance |
| 25+ | Standing Orders (where applicable), Factory Compliance (if manufacturing) |
Note: State laws and business nature may alter applicability.
Common Misconceptions Among Employers
“We are a startup, so labour laws don’t apply.”
Startup status does not provide exemption from statutory obligations once thresholds are met.
“We have interns and consultants, not employees.”
Authorities may treat certain engagements as employment depending on control and supervision.
“We dropped below 10 employees, so the law no longer applies.”
In several cases, once a law becomes applicable, it continues even if employee count reduces later.
Why Proactive Compliance Matters
A structured compliance approach helps in:
- Smooth audits and inspections
- Better investor confidence
- Reduced financial risks
- Stronger employer branding
- Employee trust and transparency
Businesses that build compliance into their operational systems avoid last-minute chaos and penalty exposure.
When Should You Conduct a Compliance Review?
You should review labour law applicability:
- When employee strength increases
- When opening a new branch
- When expanding into another state
- Before funding or acquisition
- During internal audit cycles
Periodic compliance audits ensure that statutory registrations, filings, and documentation remain updated.
Final Thoughts
Labour law compliance in India is dynamic and closely tied to employee strength. What may not apply today could become mandatory tomorrow as your workforce grows.
The safest approach is to regularly evaluate your employee count against statutory thresholds and review applicability under central and state laws. A proactive compliance strategy protects your organisation from financial, legal, and reputational risks.
If you are unsure which labour laws apply to your business based on your current employee strength, conducting a structured compliance assessment is the most effective next step. It ensures clarity, reduces uncertainty, and allows you to focus on growing your organisation with confidence.
Is Your Business Fully Compliant as Employee Strength Grows?
As your team expands, labour law applicability changes automatically. Missing ESI, EPF, gratuity, bonus, shop and establishment compliance, or factory compliance registrations can trigger penalties and inspections. Don’t wait for a notice—get your labour and payroll compliance reviewed before it becomes a financial risk.
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