Are There Legal Protections for Start-Ups Facing Financial Crises and Delayed Payments?

Legal Support for Companies During Financial Crises

There are many laws that are pro-employee or in favor of the employee. I just want to understand if there are any laws that favor a company, especially a start-up. When a company is facing a crisis in terms of fund generation but is still supporting its employees by arranging salary releases as funds are received, even though it constitutes a slight delay, are there no laws that can support a company during this period?

HR's Role in Balancing Employee and Company Interests

Is the role of HR only to support employees, irrespective of what the company faces and how bad the situation is? In any way, can the company defend itself in legal terms as accepted by the labor court if an employee wants to take legal action due to delayed payment?

Let me know what's in support of the company. It is common, I feel, for a start-up to face these ups and downs before stabilizing itself to a much better position.

Dear Aishwarya, there are different rules and laws applicable to different categories. Your concern relates to laws in favor of a company. In some cases, there are exemptions for startups. For example, if a new establishment is facing losses, the company is not bound to pay a bonus (applicable only for the first five accounting years).

The role of HR in company challenges

The HR role can be vital by recruiting and deploying adequate employees as per the company budget. If any employee wants to proceed legally with mutual understanding, then it is fine (unless an employee lodges a complaint for delayed salary and other compliance issues).

Tax implications for companies not making a profit

If you are not making a profit, you need not pay income tax, and you can even carry forward your losses as per the Income Tax Act. When you start earning a profit, you should first adjust your initial losses before being liable to pay income tax.

Understanding fund crisis vs. losses

It seems your concern is related to a fund crisis. Please note that facing losses and facing a fund crisis are different scenarios. If the fund crisis is related to non-collection from clients or expenditure on huge capital items, then you can’t avail of the above exemptions.

There could be numerous problems, so I suggest going for the basic reasons. Seniors can shed more light on the matter.

It is a fund crisis. The clients have not released payments to us on time, citing some issue of theirs. As and when we get funds, we are paying off resources. But when we don't get paid on time, what can the company do?

If an employee starts demanding bank interest that would have been paid to her by the bank if we hadn't delayed the salary and asks the company to pay that interest or legal action will be taken, what kind of right path is that? I am not able to understand where the big issue lies to create chaos. The salary is only delayed by a month/30 days. It's not like it has been stopped entirely.

Dear Aishwarya,

In today's dynamic market scenario, after completing the operational part (successful service/material delivery), it is equally important to collect funds promptly. It is a common practice for many establishments to seek optimized services from startups and delay their payments by citing trivial issues.

The importance of timely payments

The most reliable and best solution is to obtain a Bank OD and ensure timely payment of employee salaries. This practice will enhance the company's reputation among its employees. As soon as funds are available, make the OD current. By doing so, you will only incur interest for a limited period. When providing quotes, include an additional amount in your costing as "Finance Charges" (representing the interest borne on the Bank OD during the interim period).

Alternative strategies for managing payments

Alternatively, you can delay payments to your vendors (related to operations, marketing, administration, etc.). Strengthen your product/service contracts according to client requirements to prevent clients from raising trivial concerns. Ensure that clients adhere to agreed-upon payment terms.

Your perspective may be biased towards the employer, considering "Delayed salary" a minor issue. However, for employees, receiving their monthly salary on time is a fundamental right and a legal obligation for the employer.

Exploring cost optimization and fund flow systems

Explore other opportunities for cost optimization and establish an effective fund flow system to navigate challenging situations. I hope you find my points agreeable. Senior management can provide further insights on this matter.

Kind regards