India's Labour Laws: A primer for Non-Profits and its stakeholders

In India, the scope of non-profit organisations (NPOs, also known as non-governmental organisations or NGOs) is wide and diverse. There are about 1.67 lakh NGOs across 37 States operating in India in 42 different sectors as per the NGO Darpan portal of the NITI Aayog, which may together employ more than 33 lakh resources. As such, NGOs are fast emerging as competitive employers.

Great Place to Work Institute, a global management consulting and research firm, identified the ten best NGOs in India, where the average employee strength was around 466 and 53% of them were women. As these numbers keep growing, it becomes important for these employers to be aware of the legal compliances they are required to meet.

Labour laws regulate the employment relationship between employer and employee in an organization, including unfair labour practices, holidays, annual leave, working hours, dismissals, minimum wage, layoff, and severance pay.

As many judgments have noted, a common stand taken by NPOs in India is they are exempted from adhering to key compliances as they are working for the larger good of the society are engaged in philanthropic activities and are not earning any profits from their activities. However, the judiciary’s view of the applicability of labour legislation, especially The Industrial Disputes Act, 1947 to NPOs is worth examining.

The Supreme Court considered the interpretation of the term "industry" in Bangalore Water Supply & Sewerage Board vs. A. Rajappa and ors (1978 (1) LLJ 349), in which it set up a triple test to determine whether an enterprise is an industry. This test was (i) systematic activity, (ii) organised by cooperation between employer and employee, (iii) for the production and/or distribution of goods and services calculated to satisfy human wants and wishes. Crucially, the Supreme Court held that the absence of a profit motive or gainful objective is irrelevant, regardless of the sector the enterprise is in. The true focus is functional and the decisive test is the nature of the activity with specific emphasis on the employer-employee relations. If the organisation is a trade or a business, it does not cease to be one because of philanthropy animating the undertaking.

This judgment was followed in many other judgments, including in the case of S. Thilagavathi vs The Presiding Officer, Labour Court, Madurai & Ors (W.A.Nos.1375 & 1376/2007) where the Madras High Court held that the Madurai Children Aid Society was an ‘industry’ for the purposes of the Industrial Disputes Act, 1947 and thereby subject to labour laws.

Because of this position, most labour laws apply to NPOs. Some of these are discussed below.

The Payment of Wages Act ensures the timely payment of wages to workers and defines an establishment as any place where manufacturing, trade, or business activities are carried out. Non-profit organisations may not engage in manufacturing or trade, but they do carry out business activities to achieve their social objectives.

Under this Act, if a non-profit organisation employs workers and pays them wages, it can be deemed an "establishment", irrespective of its profit-making nature, to which the provisions of this Act will apply.

Non-profit organisations, even though they may not engage in commercial activities, may still fall within the purview of this Act if they provide services or undertake any activities that fall under its ambit.

While the Act does not specifically mention non-profit organisations, it broadly covers establishments where individuals are employed to carry out various functions. Consequently, NPOs employing workers for administration, accounting, project management, etc., would be considered an "establishment" under this Act.

These legislations include the Employees' Provident Funds and Miscellaneous Provisions Act 1952, the Employees' State Insurance Act, 1948, and the Maternity Benefit Act, 1961, among others.

The applicability of these legislations to NPOs largely depends on the number of employees they have as in the case of any other employer and does not depend on whether or not they are organized for profit.

1. Employees can approach appropriate labour forums in case of industrial disputes.

2. Employees will have the right to be compensated for any injury incurred during employment.

3. Employers must contribute to the Employee’s State Insurance fund and Provident Fund.

4. Employers should extend 26 weeks of paid holiday (maternity benefit) to eligible women employees. Creche facility should also be extended if the organization has more than the precribed number of employees.

5. Employers should account for payment of gratuity to employees who render continuous service of five years.

6. Employees will be eligible for sick, earned, national and festival holidays / leaves.

7. If women employees are engaged for work between 8 PM and 6 AM in Karnataka, door to door transportation with adequate security at the cost of employers should be provided.

8. If employees are required to work beyond nine hours in a day or forty-eight hours in a week, overtime wages at double the rate of regular wages should be paid.    

Some of the reasons why companies should consider labour law compliance of NGOs as a crucial aspect of their due diligence process before providing Corporate Social Responsibility (CSR) funds include:

1. Labour law compliance by NGOs supports United Nation’s Sustainable Development Goals (SDG) 8, which focuses on decent work and economic growth.

2. Instances of labour law violations by partner NGOs can tarnish a company's reputation, resulting in public scrutiny, negative media coverage, and damage to stakeholder trust.

The consequences of the applicability of labour laws are that non-compliance will lead to hefty penalties, damages and interest rates, criminal prosecution of office bearers / authorised signatories and imprisonment of directors. Further reputational risks can hamper the funding prospects of the NPOs/NGOs. 

Labour laws in India are primarily designed to protect the rights of workers, it is crucial for non-profit organisations to carefully analyse their operations and consult legal experts to ensure compliance with relevant labour laws and safeguard the rights and welfare of their employees.

About the author: Sumanth Nagaraj is a Senior Associate at BCP Associates LLP.