Labour Law Compliance in India: Factories Act, Shops & Establishments & Modern Codes

India's 4 Labour Codes: The Framework Transformation

The Government of India has undertaken the most significant reform of labour law since Independence by amalgamating 29 central labour laws into four comprehensive Labour Codes. All four Codes have received Presidential assent; however, implementation is staggered as states frame their rules.

Current compliance reality: Until the Labour Codes are formally notified and state rules are published, the underlying legacy Acts continue to apply. Most states have only partially finalised their draft rules. HR-finance professionals must therefore track both the existing Acts and the future Code provisions to prepare for transition.

Key Changes Under the Codes vs Legacy Laws

• Definition of "wages" standardised across all Codes: basic + dearness allowance + retaining allowance, with a requirement that these components are at least 50% of total CTC. This directly impacts PF contribution base and gratuity calculations.
• Fixed-term employment formalised: Fixed-term employees entitled to gratuity on a pro-rata basis even without completing 5 years.
• Retrenchment threshold raised: Under Industrial Relations Code, establishments with up to 300 workers can retrench without prior government approval (up from 100 workers under the Industrial Disputes Act).
• Gig and platform workers to be covered under the Social Security Code — a first in Indian labour law history.

Factories Act 1948: Coverage, Registers & Compliance

The Factories Act 1948 is the foundational law governing working conditions in manufacturing establishments. It applies to:

• Any premises employing 10 or more workers using power in a manufacturing process, or
• Any premises employing 20 or more workers without power.

The Chief Inspector of Factories in each state administers the Act. The occupier of the factory (typically the managing director or authorised person) bears primary compliance responsibility.

Key Provisions

Registers and Returns

The Factories Act mandates maintenance of several registers and submission of annual returns:

• Register of Adult Workers (Form 12): Name, date of employment, nature of work, weekly rest day.
• Register of Child Workers (Form 14): Certificate of fitness, working hours.
• Leave Register: Leave availed, wages for leave period.
• Overtime Register: Hours of OT work and wages paid.
• Annual Return (Form 21): Filed by 31 January for the preceding year with the Chief Inspector of Factories.
• Half-yearly Return (Form 22): Filed by 31 July and 31 January respectively.

Shops & Establishments Act: State-specific Compliance

The Shops and Commercial Establishments Act is state legislation — there is no central law governing shops. Each state has its own Act governing trading establishments, commercial offices, restaurants, hotels, theatres and other places of business. Key states and their Acts:

Common Requirements Across State Acts

• Registration: Every establishment must register within 30 days of commencement and display the registration certificate prominently.
• Working hours: Typically 8-9 hours per day, 48 hours per week, with mandatory weekly off.
• Overtime: Usually permitted up to 2 hours per day at double wages.
• Leave: Earned leave (12-15 days), casual leave (8-12 days), sick leave (8-12 days) — varies by state.
• Annual return: Most states require an annual return by January 31.
• Notice of closure: Advance notice required before closing the establishment.

Wages, Minimum Wages, Gratuity & Key Statutes

Minimum Wages — Representative State-wise Table (2024-25)

Minimum wages are revised by states every 6 months or annually. The following table shows indicative daily rates for reference:

Note: These are indicative figures. Always verify current rates from the respective state Labour Department notification before payroll processing.

Payment of Wages Act — Key Rules

• Wage day: Wages must be paid before the 7th of the following month (establishments with fewer than 1,000 employees); 10th for establishments with 1,000 or more.
• Mode of payment: Coin, currency note, bank transfer, or cheque — employer can specify with employee consent.
• Permissible deductions: Limited to fines (not exceeding 3% of wages), deductions for absence, house accommodation, recovery of advances, deductions for amenities. Total deductions cannot exceed 50% of wages (75% if including PF and LIC).

Payment of Gratuity Act 1972

Gratuity is a statutory retirement benefit payable to employees who have completed at least 5 years of continuous service. The formula is:

Gratuity = (Last drawn basic salary + DA) × 15/26 × Number of completed years of service

• 15 = 15 days' wages per year of service
• 26 = working days in a month (denominator for daily wage calculation)
• Maximum ceiling: ₹20,00,000 (₹20 lakh) for private sector employees (tax-exempt under Section 10(10) of the IT Act)
• 5-year vesting: Gratuity vests after 5 years of continuous service — except in case of death or disablement, where it is payable regardless of tenure.
• Accounting: Gratuity liability must be actuarially valued and recognised under AS 15 / Ind AS 19 (Employee Benefits) in financial statements.
• Payment timeline: Within 30 days from the date the gratuity becomes payable. Interest at 10% p.a. for delays beyond 30 days.

HR-Finance Compliance Calendar

Penalties Reference Table

Digital Compliance Tools

Several HR technology platforms help automate Indian labour law compliance:

• GreytHR: Automates PT slabs, PF/ESI calculations, statutory registers, pay slip generation, and multi-state compliance calendars.
• Darwinbox: Enterprise HRMS with built-in compliance workflows, leave management per state rules, and audit-ready statutory reports.
• Keka: Popular with mid-market firms; integrates statutory compliance, payroll, and performance modules with automatic wage revision alerts.
• Spine HR: Strong compliance module for manufacturing sector, including Factories Act registers and contractor management.

Role of CA/CMA in Labour Law Compliance Audits

As Indian businesses scale, the intersection of finance and labour law creates a growing practice area for Chartered Accountants and Cost & Management Accountants:

Specific CA/CMA Roles

• Gratuity actuarial review: While actuaries certify the valuation, CAs audit inputs, review discount rate assumptions, and ensure correct disclosure in financial statements under Ind AS 19.
• Minimum wages compliance audit: Verify that every employee category in every state is being paid at or above the applicable minimum wage notification. Shortfalls create contingent liabilities.
• EPF/ESI wage base audit: Verify that the PF wage base definition aligns with the statutory definition and that allowances are not being improperly excluded.
• M&A due diligence: Labour law liabilities (unpaid bonus, under-provisioned gratuity, non-compliance with Factories Act) are material in acquisition due diligence and must be quantified and disclosed.
• Contract labour audit: Verify that principal employers have proper CLRA registrations, contractor licences are valid, and wages to contract workers are not below minimum wages.
• Internal audit: Periodic compliance audits of statutory registers, return filing status, and penalty exposure assessment under each applicable Act.

CMA qualifications are particularly valued in this space because of the Cost Accounting background that naturally aligns with labour cost analysis, absorption costing, and the granular per-unit-per-employee calculations required for compliance verification in manufacturing environments.