In India, the scope of non-profit organisations (NPOs, also known as non-governmental organisations or NGOs) is wide and diverse. Their contribution to society is significant. Such organisations are usually set up to serve a specific cause, vocation, or community which they address through their charitable objectives.
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. Assuming an average of 20 employees per NGO, this means more than 33 lakh resources employed in this sector. As such, NGOs are fast emerging as competitive employers.
As per an Institute which identified the ten best NGOs in India, the average strength of employee in these NGOs was around 466 and 53% of them were women. Many of the NGOs are being run as rigorously as for-profit organizations, incorporating practices such as compensation benchmarking, performance management and training-need analysis for all employees. 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 in India
Labour laws regulate the employment relationship between employer and employee in an organization. By and large these cover industrial relations, labour management relations, and unfair labour practices, as well as holidays, annual leave, working hours, unfair dismissals, minimum wage, layoff procedures and severance pay, and many other issues related to employer and employee, as well as the various connected compliance requirements. Currently, there are about 29 laws covering the above aspects. With the objective of consolidation and labour reform to facilitate the ease of doing business the government has enacted four new labour codes which subsumes the 29 labour laws. However, the codes are yet to be implemented.
Are non-profit organizations exempt from labour laws?
As many judgments (including one of the Madras High Court discussed below) show, a common defence that is used by NPOs in India is they are exempted from adhering to key compliances as they are working for the larger good of the society, and that they are engaged in philanthropic activities and are not earning any profits from their activities. These contentions have been presented before courts on multiple occasions. However, the judiciary’s view of applicability of labour legislation, especially The Industrial Disputes Act, 1947 to NPOs is worth examining.
The Industrial Disputes Act is applicable only to an Industry as defined by it in Section 2 (j), as any business, trade, undertaking, manufacture or calling of employers and including any calling, service, employment, handicraft, or industrial occupation or avocation of workmen.
The Supreme Court considered the interpretation of Industry in Bangalore Water Supply & Sewerage Board vs. A. Rajappa and ors, in which it set up a triple test to determine whether an enterprise is an ‘industry. This test was (i) systematic activity, (ii)organized 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 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 organization is trade or 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 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 the labour laws. The High Court also held that professions, clubs, educational institutions, cooperatives, research institutes, charitable projects and other kindred adventures would also fall within the definition of industry.
The result of the Court rulings and the provisions of the legislations themselves is that most labour laws apply to NPOs. Some of these are discussed below.
Applicability of the Payment of Wages Act:
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 organizations 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 organization employs workers and pays them wages, it can be deemed an establishment, irrespective of its profit-making nature. Therefore, the Payment of Wages Act is likely to apply to non-profit organizations that have employees and pay them wages for their services.
Applicability of the Shops and Establishments Act (Karnataka):
The Karnataka Shops and Establishments Act, which regulates the working conditions of employees, defines an establishment as any place where commercial, trading, banking, or insurance activities take place, or services are rendered to customers. Non-profit organizations, 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. Although the Karnataka Act is a state legislation, similar legislations exist in all States.
While the act does not specifically mention non-profit organizations, it broadly covers establishments where individuals are employed to carry out various functions. Consequently, if a non-profit organization employs workers to perform tasks related to its objectives, such as administration, accounting, or project management, it may be considered an establishment under this act, thus making the provisions of the act applicable to the organization and its employees.
The Act deals with crucial aspects of labour and employment like appointment orders, working hours, rest hours, overtime work and compensation, holidays & leaves. Establishments must obtain a registration under the Act and must comply with the provisions of the Act even if it does not necessarily employee anyone.
Applicability of Social Security Legislations:
In addition to the Shops and Establishments Act and the Payment of Wages Act, various social security legislations are in force in India to protect the welfare of workers. These legislations include the Employees’ Provident Funds and Miscellaneous Provisions Act, the Employees’ State Insurance Act, and the Maternity Benefit Act, among others.
The applicability of these social security legislations to non-profit organizations largely depends on the number of employees they have. For instance, the Employees’ Provident Funds and Miscellaneous Provisions Act applies to establishments employing 20 or more employees, while the Employees’ State Insurance Act applies to establishments with 10 or more employees. Therefore, if a non-profit organization has the requisite number of employees, regardless of whether or not it is an organization for profit, it will fall within the purview of these legislations, and the organization would be responsible for complying with their provisions.
Notable Implications of Labour Law Applicability:
- Service conditions to be on par or better than the ones prescribed in standing orders or law.
- Employees can approach appropriate labour forums in case of industrial disputes, such as non- payment of retrenchment compensation, unilateral change in service conditions etc.
- Employees will have the right to be compensated for any injury incurred during employment.
- Employers must contribute 3.25% of gross wages of eligible employees to the Employee’s State Insurance fund.
- Employers must match the provident fund contribution made by the employee which may not exceed 12% of provident fund wages.
- Employers should extend 26 weeks of paid holiday (maternity benefit) to eligible women employees. Provision of creche facility to employees.
- Employers should account for payment of gratuity to employees who render continuous service of five years.
- Employees will be eligible for sick, earned, national and festival holidays / leaves.
- If women employees are engaged for work between 8pm and 6am in Karnataka, door to door transportation with adequate security at the cost of employers should be provided.
- If employees are required to work beyond nine hours in day or forty-eight hours in a week, overtime wages at double the rate of regular wages should be paid.
Labour Laws and CSR
It is essential for NGOs to comply with labour laws to attract CSR funding as such compliance is an indicator that the NGO is a suitable option for investment of CSR funds. Below are some of the reasons why companies can consider labour law compliance of NGOs as a crucial aspect of their due diligence process before providing CSR funds.
- Labour law compliance by NGOs supports United Nation’s Sustainable Development Goals (SDG) 8, which focuses on decent work and economic growth. By supporting NGOs that promote fair employment practices, companies contribute to sustainable development in line with global objectives.
- CSR activities serve as a means for companies to build their brand reputation and enhance their image. 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.
Non-compliances and its repercussions
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 / authorized 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 organizations to carefully analyze their operations and consult legal experts to ensure compliance with relevant labour laws and safeguard the rights and welfare of their employees.