Reimagining labour laws for MSMEs

Source: The post “Reimagining labour laws for MSMEs” has been created, based on “Reimagining labour laws for MSMEs ” published in “The Hindu Businessline” on 8 November 2025. Reimagining labour laws for MSMEs.

UPSC Syllabus: GS Paper 3 – Indian Economy

Context: Micro, Small, and Medium Enterprises (MSMEs) form the backbone of India’s economy, employing over 70% of the workforce and keeping supply chains dynamic. The Shram Shakti Niti 2025 recognises the vital role of MSMEs in generating employment and driving production. However, India’s consolidated labour codes, while progressive, often impose uniform compliance burdens unsuitable for small firms. A tailored Employment Relations (ER) Code has been proposed to bridge this gap — bringing MSMEs under the fold of protection while maintaining operational flexibility and proportional compliance.

Context and Rationale for Reform

1. India consolidated nearly 50 labour laws into four codes — on Wages, Social Security, Industrial Relations, and Occupational Safety and Health (OSH).
2. These reforms primarily address large enterprises with robust administrative systems.
3. MSMEs, on the other hand, rely on trust-based, informal relationships and operate with limited resources and administrative capacity.
4. Applying identical compliance procedures to both small and large enterprises leads to a structural mismatch that discourages formalisation.
5. Thus, the next logical step is a dedicated ER Code for small establishments, balancing protection, flexibility, and practicality.

Key Features of the Proposed Employment Relations (ER) Code

1. Applicability: Designed for enterprises employing up to 50 workers, easing compliance requirements.
2. Work Councils: Establishment-level councils comprising employer and employee representatives. It is empowered to decide on working hours, safety norms, leave, and benefits through mutual agreements.
3. Advisory Labour Department: The government’s role would shift from punitive enforcement to guidance, mentorship, and feedback.
4. Digital Integration: It links enterprises and Work Councils with EPFO, ESIC, and DGFASLI databases and enables tracking of employment records, social security benefits, and compliance digitally.
5. Incentive-Based Compliance: Verified digital records of fair practices could qualify firms for tax relief or credit incentives, promoting voluntary compliance and formalisation.

Benefits of the ER Code

1. Encourages Formalisation: Brings small firms under formal labour protection systems.
2. Ensures Flexibility: Simplifies compliance while ensuring workers’ rights are protected.
3. Strengthens Collaboration: Promotes dialogue between employers and employees through Work Councils.
4. Improves Transparency: Digital monitoring enhances accountability and reduces corruption.
5. Boosts Efficiency: Reduces administrative costs and allows enterprises to focus on productivity.
6. Facilitates Inclusive Growth: Formalising MSMEs leads to broader social security coverage and stable employment.

Challenges in Implementation

1. Digital Divide: Many small enterprises, especially in rural areas, lack the infrastructure and skills for digital compliance.
2. Administrative Capacity: Labour departments may face difficulties transitioning from enforcement to an advisory role.
3. Awareness and Training: Both employers and workers may require capacity building to understand and utilise the ER framework.
4. Resistance to Change: Informal enterprises accustomed to minimal regulation might initially resist registration and digital procedures.
5. Uniform Adoption: Ensuring consistent implementation across States could be challenging due to differing labour practices.
6. Resource Constraints: Establishing and maintaining Work Councils may require financial and institutional support for smaller units.

Way Forward

1. Pilot Implementation: Launch the ER Code in selected MSME clusters before a national rollout to refine its structure.
2. Digital Enablement: Provide low-cost digital tools and training for MSMEs to file compliance records and maintain employee data.
3. Capacity Building: Train labour officers and MSME owners to adopt a facilitative, partnership-based approach.
4. Incentivise Compliance: Link good employment practices with tax credits, easier credit access, and procurement advantages.
5. Collaborative Governance: Encourage continuous dialogue among government, industry bodies, and workers’ associations.
6. Gradual Expansion: Once successful, extend the ER Code framework to larger enterprises to foster participatory and collaborative labour governance.

Conclusion: A differentiated Employment Relations Code can serve as a cornerstone of India’s next labour reform wave — one that acknowledges the unique rhythm and character of MSMEs. By blending digital transparency, flexible compliance, and partnership-based governance, it can formalise employment without burdening small enterprises. Such reform aligns with the Shram Shakti Niti 2025’s vision of transforming the Ministry of Labour from a regulator into a facilitator of inclusive growth. Strengthening MSMEs is ultimately about strengthening labour protection itself — ensuring that economic growth and worker welfare progress together.

Question: Discuss how a tailored Employment Relations Code (ER Code) can strengthen labour protection while promoting flexibility and growth in India’s MSME sector.