Abstract
The Indian startup ecosystem has grown rapidly in the last decade, contributing to job creation and economic development. However, startups often face uncertain markets, shifting business strategies, and funding challenges. These pressures frequently result in large-scale layoffs, raising important questions about labour law compliance.
This article explores the legal dimensions of layoffs in startups. It explains relevant labour law provisions, uses case laws to highlight judicial views, and discusses the practical challenges startups face in balancing business survival with employee protection. The article also reflects on recent examples of mass layoffs in Indian startups, analyses compliance issues, and suggests ways forward for ensuring both innovation and worker security.
Introduction
Startups are often described as the backbone of India’s innovation story. They bring new ideas, attract investors, and provide fresh opportunities for young professionals. But behind this bright picture lies a darker reality: instability. Unlike large companies, startups depend heavily on investor funding, fast-changing business models, and high growth targets.
When these expectations are not met, the first area where startups cut costs is their workforce. In recent years, we have seen big names like BYJU’S, OYO, Unacademy, Zomato, and Swiggy laying off employees in large numbers.
According to reports, more than 50,000 employees in Indian startups lost their jobs between 2022 and 2024. Many of these layoffs happened suddenly—sometimes employees were informed only a day before termination, and in some cases, even through emails or Zoom calls.
This has created widespread concern: Are startups following Indian labour laws while conducting such layoffs? If not, what are the legal consequences? And how can employees protect themselves?
Key Legal Jargon
Layoff (Section 2(kkk), Industrial Disputes Act, 1947): When workers are temporarily not given work because of reasons like shortage of raw material, breakdown of machinery, lack of funds, or low demand. Layoffs are usually temporary.
Retrenchment (Section 2(oo), Industrial Disputes Act): Permanent termination of a worker by the employer for reasons other than punishment, retirement, or voluntary resignation.
Notice Period: A minimum time period that an employer must give before ending an employee’s service.
Severance Pay/Compensation (Section 25F, IDA): Money that the employer must pay when retrenching a worker. Generally, it is 15 days’ average pay for each year of service.
Standing Orders: Rules about working conditions, discipline, and employee rights which companies with 100+ employees must officially adopt.
Contractual Employees: Workers hired on a fixed-term contract. Startups often use such contracts, but labour laws may still apply depending on the nature of work.
The Proof
1. Data on Layoffs in Indian Startups
As per industry trackers, more than 50,000 employees in Indian startups were laid off between 2022–2024.
Sectors most affected:
EdTech – BYJU’S, Vedantu, Unacademy (due to fall in online learning demand post-pandemic).
E-commerce – Flipkart and others during restructuring.
FoodTech – Zomato and Swiggy cut jobs to reduce operational costs.
2. Why Startups Resort to Layoffs
Funding Winter: When investors reduce funding, startups struggle to pay salaries.
Pivot in Business Model: Startups often change their focus—e.g., moving from B2C to B2B—making some roles redundant.
Cost-Cutting: Salaries form a big part of startup expenses; layoffs are seen as the fastest way to cut costs.
High Attrition Culture: Startups often believe in “hire fast, fire fast” to stay lean.
3. Why Employees Oppose Such Layoffs
Sudden Terminations: Many employees are given only 1–2 days’ notice, violating labour law.
No Severance Pay: Workers often complain that they are removed without the legally required compensation.
Mental and Financial Stress: Layoffs not only affect income but also cause anxiety and reputational harm.
Unfair Labour Practice: As per Schedule V of the Industrial Disputes Act, terminating employees abruptly is considered an unfair practice.
4. Legal Framework & Compliance Issues
Industrial Disputes Act, 1947 (IDA): Main law regulating layoffs and retrenchment.
Section 25F: Requires notice and compensation before retrenching employees.
Section 25N: Requires prior government approval for large-scale retrenchments in certain industries.
Shops and Establishments Acts: State-specific laws regulating working conditions, termination, and notice periods.
Payment of Gratuity Act, 1972: Employees with 5+ years of service are entitled to gratuity even if laid off.
Contractual Clauses vs Law: Even if contracts allow quick termination, courts often rule in favour of statutory protections.
Case Laws
1. Workmen of Meenakshi Mills Ltd. vs. Meenakshi Mills Ltd. (1994)
The Supreme Court said layoffs must strictly follow the Industrial Disputes Act.
2. Sundara Money vs. Bank of India (1976)
The Court ruled that termination, even if based on contract terms, can amount to retrenchment and must follow legal rules.
3. Karnataka State Road Transport Corporation vs. M. Boraiah (1984)
Retrenchment without proper compensation is illegal.
4. Bangalore Water Supply vs. A. Rajappa (1978)
Defined “industry” broadly, meaning many startups also fall within the scope of the Industrial Disputes Act.
These cases show that courts generally prioritise employee rights over an employer’s “business needs.”
Practical Challenges for Startups
1. Ambiguity in Law
Labour laws like the IDA were drafted decades ago, before the startup culture existed. They don’t directly address modern work practices such as short-term contracts, freelancing, or gig workers.
2. Small Size and Informality
Many startups operate with less than 50 employees and no formal HR/legal team. They often ignore compliance out of ignorance or cost-saving.
3. State Variations
Shops and Establishments Acts vary from state to state, making compliance difficult for startups operating in multiple locations.
4. Investor Pressure
Investors often push for cost-cutting to improve financial results, which may conflict with legal compliance.
Real-Life Examples of Layoffs in Indian Startups
BYJU’S (EdTech): Laid off thousands of employees in 2022–23 citing restructuring. Reports suggested that many were not given proper notice or severance.
OYO Rooms (Hospitality): Reduced workforce during the COVID-19 pandemic. The company claimed to follow labour laws, but employees complained of unfair dismissals.
Zomato and Swiggy (FoodTech): Cut jobs as part of business restructuring and automation. Questions were raised on whether employees received proper benefits.
These examples show that while layoffs may be business-driven,
the process often lacks transparency and compliance.
Conclusion
The issue of layoffs in startups lies at the intersection of business flexibility and worker protection. On one hand, startups need freedom to restructure and survive in tough markets. On the other hand, employees deserve security, dignity, and fair treatment.
India’s labour laws, especially the Industrial Disputes Act, were written in a different time. While they provide strong worker protections, they often fail to match the fast-changing startup environment. Still, until reforms are made, startups are legally bound to follow existing rules.
The solution lies in building a balance:
Startups must adopt clear HR policies, follow notice and compensation requirements, and consult legal experts before layoffs.
Employees must be aware of their rights and approach labour courts or tribunals if unfairly dismissed.
Policymakers should consider labour law reforms that create flexible yet fair rules for startups.
In the long run, trust between startups and employees will be as important as funding for sustaining growth.
References
1. Industrial Disputes Act, 1947
2. Payment of Gratuity Act, 1972
3. Shops and Establishments Act (Delhi, Karnataka, Maharashtra, etc.)
4. Workmen of Meenakshi Mills Ltd. vs. Meenakshi Mills Ltd. (1994)
5. Sundara Money vs. Bank of India (1976)
6. Karnataka State Road Transport Corporation vs. M. Boraiah (1984)
7. Bangalore Water Supply vs. A. Rajappa (1978)
8. Business Standard, Economic Times, Inc42 layoff reports (2022–2024)
FAQs
Q1. Do labour laws apply to startups with very few employees?
Yes. Even if a startup is small, certain provisions of the Industrial Disputes Act and state laws still apply.
Q2. Are contractual employees protected by labour laws?
Yes. Courts have held that even fixed-term employees may be covered under retrenchment provisions if their termination is not as per law.
Q3. Can startups fire employees without notice?
No. Unless the termination is due to misconduct, notice and compensation are compulsory.
Q4. What happens if startups do not follow labour laws?
The layoffs may be declared illegal by labour courts. Startups can be ordered to reinstate employees or pay heavy compensation.
Q5. How can startups handle layoffs legally?
By giving written notice, paying severance compensation, consulting employees, and documenting reasons for retrenchment.
Also Read:
Rights of undertrial prisoners in India
How To Send A Legal Notice In India
