The Indian regulatory context is more complex than most founders realise.
India has some of the most layered labour legislation in the world. The four new Labour Codes — the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code — consolidate over forty central laws but introduce new compliance obligations at the same time. State-level rules add another layer. For an SME operating across two or three states, the compliance matrix is genuinely complex.
Yet the majority of companies between 30 and 200 employees are running on informal arrangements: verbal understandings, email threads, and whatever the founder said at the time. That works until it doesn’t. And when it stops working — a wrongful termination claim, a PF inspection, a sexual harassment complaint — the absence of documented policy is the first thing that hurts you.
What “having HR policies” actually means.
A policy is not a document. It is a documented decision. The difference matters. Most policy libraries fail because they are copied from large companies, translated into legalese no manager can use, and uploaded to a shared drive nobody reads. That is not a policy. That is theatre.
A working HR policy does three things:
- It sets a clear expectation that every employee can understand and act on.
- It gives managers a consistent frame so decisions do not vary person to person.
- It creates a defensible record in the event of a dispute — statutory, contractual, or reputational.
The foundation layer that every Indian SME must have in place before it crosses 30 employees includes: an appointment letter template with proper terms of employment, a leave policy aligned to the Shops and Establishments Act of the relevant state, a grievance redressal mechanism, a Prevention of Sexual Harassment (POSH) policy with a constituted Internal Committee, a code of conduct, and a termination and exit process. Everything else is secondary to these six.
“The companies that get into trouble are not the ones who had the wrong policy. They are the ones who had no policy at all when the situation arose.”
Where Indian SMEs go wrong — repeatedly.
After working with companies across manufacturing, technology, logistics, and professional services in Tier-1 and Tier-2 India, the failure modes are remarkably consistent.
1. Treating policies as a one-time exercise.
A policy written in 2019 for a 35-person company does not work for a 120-person company in 2025. The business has changed. The workforce has changed. The law has changed. Most SMEs write their policies once — during a compliance scare or an investor due diligence — and then leave them untouched for years. The result is a policy library that is simultaneously too rigid and too vague: specific about things that no longer matter, silent on things that have become live issues.
2. Not communicating policies to employees.
A policy that employees have not read does not protect you. It does not protect them either. Distributing an employment handbook during onboarding and getting a signed acknowledgement is not bureaucracy — it is the minimum standard of fair dealing. Without it, you cannot enforce a policy you claim to have, and employees cannot rely on a promise you claim to have made.
3. POSH compliance as a checkbox, not a system.
The Sexual Harassment of Women at Workplace Act, 2013 requires every organisation with 10 or more employees to constitute an Internal Committee, display a notice of the policy, conduct annual awareness programmes, and file an annual report. The penalties for non-compliance range from fines to cancellation of business licences. More importantly: if a complaint arises and your IC is not constituted or has not met in three years, the organisation — and the employer personally — is exposed. This is the single area of HR compliance where Indian SMEs are most consistently non-compliant, and the consequences are the most severe.
4. Inconsistent application by managers.
Policy documents mean nothing if managers do not apply them consistently. When one manager approves a three-week work-from-home arrangement and another refuses two days, the policy is irrelevant — what governs is managerial discretion. Inconsistency is not just a culture problem. It is a legal risk. Discrimination claims, constructive dismissal arguments, and wrongful termination disputes almost always hinge on inconsistency of treatment.
5. No separation between policy and process.
The policy says “employees are entitled to 18 days of earned leave per year.” The process says how leave is applied for, who approves it, what happens when it is denied, and how it is tracked. Most SMEs have neither, or confuse one for the other. The result is that the stated entitlement and the actual experience of employees are completely different. That gap is where resentment, attrition, and disputes are born.
The right sequence for building a policy library from scratch.
If you are starting from nothing, sequence matters. Trying to build everything at once produces a library that is comprehensive on paper and unusable in practice. The right order is:
- Statutory compliance first: Employment contracts, PF and ESI registration, POSH IC constitution, Shops and Establishments registration. These are not optional and carry direct legal liability.
- Leave and attendance: The most frequent point of friction between employees and managers. A clear, written leave policy eliminates a disproportionate number of daily HR problems.
- Code of conduct and disciplinary process: The frame within which all misconduct and performance issues are handled. Without it, every disciplinary action is contested.
- Onboarding and exit: The two moments that most shape how employees feel about the organisation. Both are routinely under-designed in SMEs.
- Compensation and rewards: What is in the CTC, how increments are decided, what governs variable pay. Ambiguity here drives attrition among your best people.
- Performance management: How goals are set, how feedback happens, how underperformance is handled. This is the policy that managers use most and understand least.
What good looks like for an Indian SME.
A functional HR policy framework for a 50–150 person Indian company is not a 200-page handbook. It is a set of ten to fifteen documents that are written in plain language, reviewed by a legal professional familiar with Indian labour law, communicated to employees at joining and updated annually, and applied consistently by managers who have been trained on them.
The company that invests in this at 40 employees builds a foundation that carries it to 400. The company that waits until something goes wrong pays two to three times as much to fix the damage — in legal fees, in management time, in reputation, and in the talent it cannot retain because the environment feels unreliable.
Policies are not about controlling employees. They are about making the implicit explicit — so that everyone in the organisation, from the founder to the newest joinee, is working from the same set of understood rules. That clarity is the foundation of trust. And trust is the foundation of everything else.
