MSMEs: Different Labor Codes | Photo credit: Siva SaravananS
The recently launched Shram Shakti Niti 2025 highlights the place of MSMEs at the heart of India’s employment and production system. These businesses keep supply chains moving, nurture local skills and employ more than 70 percent of the country’s workforce. Their strength lies in their ability to stay organized, make quick decisions and build teams that work in close contact.
Consolidation of almost 50 laws into four labor codes; on wages, social security, industrial relations and occupational health and safety (OSH) is an important reform. But at the next stage, it is necessary to recognize that the nature, rhythm and limitations of MSMEs are different from the nature of large enterprises. MSMEs rely on trust relationships and operate with limited administrative bandwidth. Their needs are not exemptions, but proportionality – rules that protect workers while providing flexibility for businesses to survive and grow.
MSMEs operate in an ecosystem characterized by personal involvement, short production cycles and fierce competition. For many, the owner is simultaneously the head of the human resources department, and the accountant, and responsible for compliance with the law. Applying the same compliance procedures to businesses with 10 or thousands of people creates a structural inconsistency.
A differentiated approach would help to formalize employment without stifling entrepreneurship. It would also help to secure workers’ rights in the very segment where informality is highest. Strengthening MSMEs is, in fact, a way to strengthen labor protection.
The next logical step in India’s labor reforms could be the Industrial Relations (ER) Code, a special framework for businesses employing up to 50 people. It will not replace existing laws, but will work within them, adapting procedures to the size and capacity of small firms.
The ER Code will focus on partnerships at enterprise level. This would encourage employers and employees to jointly address issues of wages, safety and welfare within an accountability framework.
How could it work
Under the ER Code, small businesses will be registered under a formal system. Each of them will establish a Labor Council consisting of representatives of employers and employees. These boards will discuss and record mutual agreements on working hours, safety standards and benefits. The role of the Department of Labor will be consultative rather than punitive, focused on guidance, feedback and mentoring support.
Digital integration would make this process transparent and efficient. Every enterprise and its works council can be linked with EPFO, ESIC and DGFASLI databases. Since every worker already has a Universal Account Number (UAN), work records and benefits can move with workers when they change jobs. Institutions will then transform from inspectors to mentors, helping businesses comply, mediate disputes and build workplaces based on trust.
In this model, enforcement will rely on self-regulation supported by technology. Audited digital records of works council agreements can serve as both evidence of compliance and the basis for incentives such as easier credit or tax breaks for businesses with strong employment practices. Linking incentives to compliance will reward good behavior and promote gradual formalization.
Although the ER approach is designed for smaller units, it can eventually affect larger enterprises as well. Over time, labor governance can move from coercion to cooperation, from uniform rules to flexible frameworks that achieve the same goals with greater participation.
A reforming spirit that is worth deepening
Shram Shakti Niti 2025 already reflects this evolution in thinking. It positions the Department of Labor as an employment enabler, not just a regulator, and promotes digital integration and risk-based verification.
The next leap in the Indian MSME story lies in scalable policies. The real test of reform is the creation of institutions that are worthy of the trust of small businesses. The proposed Labor Relations Code could be that bridge, turning the promise of self-reliance into a living foundation where entrepreneurship and capital grow together.
Prakash is the Regional Provident Fund Commissioner working in Kochi; Tiwari is the Regional Labor Commissioner (C), Thiruvananthapuram. Views are personal
Posted on November 8, 2025
