Layoffs, Contracts and Lawyers: Connecting the Dots

In recent weeks, there has been a lot of news about startups laying off employees. Edtech companies like UnAcademy and Vedantu, used car sales companies like Cars 24 and E-commerce players like Meesho have all reportedly laid off people. As many as 8000 people have been laid off in the first four months of 2022. The irony is that this is happening even as the startup ecosystem raised more than US$10 Billion in capital during the Jan-March 2022 quarter. IVCA-EY data indicates that in April 2022, the capital raised was around US$1.6 Billion- less than half the sum in the corresponding period in 2021. Last year saw a record number of Indian unicorns emerge.

It is not that there is a sudden scarcity of risk capital. What is happening is that VC funds and other investors are taking a long hard look at business models and valuations. Cash burn rates and unit economics, which were always important elements of valuation, have become front and centre again, after a prolonged period of time that saw some investors take their eyes off the ball as they frenetically looked for ventures to invest in. This long bull run for startups also encouraged many executives to throw their hats into the ring; they relied on their personal expertise and experience to attract investors.

There are also external factors whose unfortunate confluence in the last couple of months has contributed to this situation and exacerbated the stressors. The Ukraine invasion has undoubtedly impacted energy prices; the lockdown of large Chinese cities including Shanghai and Beijing has further disrupted global supply chains that were already affected due to the pandemic. These have thrown unit economics out of gear. Inflation rates around the world have soared- in some countries, the prevailing inflation is at the highest level in over a decade or even longer. In response, central banks around the world have raised interest rates; in India too, the RBI raised interest rates more than anticipated and ahead of when such action was expected. Further increases in interest rates are expected, as central banks seek to suck out the money supply to cool inflation. This means that in the short term, growth expectations will need to be moderated. This affects valuations (something that is also visible in how stock prices of listed companies are fluctuating).

Investors and company managements are therefore looking for ways to cut costs. Rationalizing the workforce is one way to achieve this goal. During a euphoric phase, businesses tend to hire more than they need, often at higher compensation levels than are sustainable. Many companies that have laid off their people continue to advertise extensively on national television. Logically, cutting down on TVCs and using lower-cost digital marketing will be another cost-cutting lever. As the market tightens, business plans will need to be revised. Growth will moderate, and high valuations will get harder to defend. The lack of clarity surrounding when various events will be resolved adds to the uncertainty around when an economic rebound will occur and what the new operating environment will look like. Indeed, Y Combinator, the highly successful Silicon Valley accelerator has advised founders of the companies in its portfolio to “plan for the worst” and focus all efforts in the next month on extending their runway. They are advising ventures to ensure survival even if fresh funds cannot be raised for 24 months.

Sometimes, there are contractual constraints on implementing cost-cutting actions. While some of these clauses may be legitimate and the result of deliberate negotiations between the parties, I have also seen “cut-paste” clauses in contracts; these are taken directly from other contracts downloaded from the internet or obtained in other ways. Many entrepreneurs succumb to taking this shortcut because it saves them the lawyer’s fees for drafting customized contracts. While some money can be saved, doing so creates risk because the business context in which a contract is drafted varies- and blindly lifting clauses can render the entire contract meaningless, hard to implement or leave entities open to expensive litigation.

Founders and leadership teams need to make better-informed decisions around every facet of their business strategy and operations. This includes the kind of capital to be raised, the timing, quantum and terms. Depending on the nature of business, expensive office space may not be needed; the savings on rentals/lease payments can be deployed elsewhere. Hiring frenzies must be avoided just because someone good is available. If the candidate is indeed likely to add value to the venture, maybe the compensation can be structured differently, so that risk of losing a good resource is reduced. Lawyers and Business Advisors who understand business- especially in the world of startups- can guide entrepreneurs so that they don’t pay a high price later, since a stitch in time saves nine!

Image Credits: Photo by aymane jdidi from Pixabay 

Founders and leadership teams need to make better-informed decisions around every facet of their business strategy and operations. This includes the kind of capital to be raised, the timing, quantum and terms. Depending on the nature of business, expensive office space may not be needed; the savings on rentals/lease payments can be deployed elsewhere. Hiring frenzies must be avoided just because someone good is available. If the candidate is indeed likely to add value to the venture, maybe the compensation can be structured differently, so that risk of losing a good resource is reduced. 

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Being COVID Sanguine: Some Silver Linings to the Pandemic

Given the devastating effects the COVID 19 pandemic has had on the world in general and India in particular, you’re probably wondering about the title of this blog. Don’t get me wrong- I am in no way trying to diminish the massive damage to life, livelihoods and health that the pandemic has brought upon millions of people in India and around the world. Had I seen a similar title even 4 months ago, I too would probably have experienced thoughts similar to what you felt. 

So what has changed in a matter of a few weeks? There has been a major drop in the number of cases around the country; instances of serious infections requiring ICU care have also declined. The vaccination drive is going from strength to strength, with as many as 10 million people being vaccinated across India on a single day.

But the biggest change is in my own perspective. Earlier, I always saw only the negative and the bleak, but now I am beginning to see some positives. And that’s what prompted me to write this piece. Here are five specific areas in which I see positives.

Our people exhibited phenomenal resolve and resilience

The second wave (March-June 2021) was especially brutal on India. Our healthcare infrastructure was stretched beyond breaking point. Oxygen was in short supply, as were critical drugs. Medical experts were trying to firm up treatment protocols. Although vaccinations had begun for some people, the Cowin portal was glitchy and even vaccine supply chains were far from streamlined.

But we saw hundreds of self-help groups come up on platforms like Whatsapp and Telegram. Volunteers would man them 24×7 to ensure that across India, patients and their families got access to critical resources including food, oxygen cylinders and medicines. These supplemented (and often replaced) government measures. Technology was used to the fullest, to ensure that people knew where vaccine doses were available, so they could quickly register.

The pandemic has powered a surge of innovations

Almost every day, there were/are media reports around some innovative activity in India. Some emanate from the government sector: for example, in many cities, stadia and large school buildings were converted into makeshift hospitals or Covid Care Centres.

There are many examples of innovation emerging from private enterprise too. For example, given the large quantities of PPE waste being generated, someone came up with a way to convert used PPE kits (which would otherwise have to be incinerated or buried safely in landfills) into briquettes that can be used for constructing low-cost housing.

Around the country, different teams developed prototypes of low-cost oxygenators and ventilators. This will be a source of great benefit to the country because it reduces dependence on imports. And as we have seen, geopolitical triggers or maritime issues (like the ship getting stuck in the Suez Canal) can wreak havoc with global supplies.

Recently, I read about a woman-led team in Hyderabad inventing a fabric that has anti-virus and anti-bacterial properties. Imagine the wide range of applications at home, in workplaces and public spaces for such a versatile invention.

 

Public-Private Partnership (PPP) redefined

The notion of Public-Private Partnerships too has changed in the last 18 months or so. Whether this is a direct result of the pandemic or more the outcome of policy changes is perhaps hard to separate. But India as a nation is seeing much higher levels of collaboration between government laboratories and infrastructure and the private sector. DRDO collaborating with start-ups for developing drones that can be used for vaccine delivery is one example. Another is ISRO encouraging startups and even students to design satellites. A third is ICMR collaborating with Bharat Biotec in the development of Covaxin, India’s first indigenous Covid vaccine.

Passions are changing into professions, creating employment opportunities

On the one hand, the pandemic has killed many livelihoods. But with many people looking at new, home-based business ventures- and using digital channels to market themselves and deliver their products (and in some cases, services too), one can hope that they will be able to scale and over time, some job losses can be offset. Examples include food delivery, baking, making pickles etc.  Of course, India still needs contact-based industries, such as construction and manufacturing, to pick up and get back on track.

Attempts to harness the creative talent of our youth

This may not be directly linked to the pandemic, but I believe that greater participation will result because of the restrictions imposed by it. The government is looking for innovative ideas from our youth. The Bureau of Police Research and Development (BPR&D) and The All India Council for Technical Education (AICTE) recently announced Manthan 21, a “hackathon” aimed at getting our country’s youth to come up with innovative solutions to address the challenges faced by our intelligence and security agencies. Specific areas have been identified. (more details are available here: https://manthan.mic.gov.in/about-intellithon.php).

 

Experts say that the world around us has changed for ever, and there’s a “new normal” in the wake of the pandemic. There is no doubt about that. But hybrid working models or other changes visible in the organized sector (especially in larger firms and companies) are not the only changes to our world resulting from the pandemic. The impact of the less visible changes described above too will be felt by India and the world in the years ahead.

 

The second wave (March-June 2021) was especially brutal on India. But we saw hundreds of self-help groups come up on platforms like Whatsapp and Telegram. Volunteers would man them 24×7 to ensure that across India, patients and their families got access to critical resources including food, oxygen cylinders and medicines. 

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Highlights Of The Code On Social Security

The Code on Social Security, 2020 (“SS Code”) was passed by the Lok Sabha on 22nd September 2020, the Rajya Sabha on 23rd September 2020 and received Presidential Assent on 28th September 2020.

The SS Code consolidates the various employee welfare legislation such as:

 

  1. The Employees Provident Fund and Miscellaneous Provisions Act, 1952 – this law provided for contributions by employer and employee towards post-retirement savings.

 

  1. The Employees State Insurance Act, 1948 – this law requires contributions from employers and employees towards insurance that covers medical, disability, and maternity.

 

  1. The Maternity Benefit Act,1961 – paid leave to employed women in the event of childbirth.

 

  1. The Payment of Gratuity Act, 1972 – statutory payment for long-service by an employee on non-stigmatic separation from employment.

 

  1. The Building and Other Construction Workers Cess Act – a fund for providing benefits to construction workers and their dependents.

 

  1. The Employees Exchange (Compulsory Notification of Vacancies) Act, 1959 – requires notification of job vacancies.

 

  1. The Cine Workers Welfare Fund Act, 1981 – the welfare of certain cine workers.

 

  1. The Unorganized Workers’ Social Security Act, 2008 – welfare measure for the unorganized sector including self-employed, work from home, and daily wage workers.

 

  1. Employees Compensation Act, 1923 – payment of compensation of injuries causing disablement/death arising in the course of employment.

 

Salient Features of the SS Code

 

This section points out some of the key provisions in the SS Code with a focus on the aspects which are different from applicable law.

 

  1. Applicability and Beneficiaries – The section on Provident Fund (PF) is applicable to all establishments with 20 or more employees as opposed to certain scheduled establishments. Employee State Insurance (ESI), Gratuity, and Maternity Benefit are applicable to all establishments with 10 or more employees & establishments carrying on hazardous activities. Building or other construction work now additionally excludes works employing less than 10 workers or residential construction work of up to INR 50 lakhs. Social security is also intended to be extended to the unorganized sector, gig, and platform workers. Also allows for voluntary adoption of the provisions where establishments do not meet the thresholds mentioned for PF and ESI.

 

  1. Wages DefinitionWages, which is being made uniform now, include all remuneration except for certain specific allowances such as conveyance, HRA, overtime, commission, bonus, and the consistent social security contributions and gratuity with a caveat that the excluded components cannot exceed 50% of the total salary paid. Any exclusions in excess of 50% shall be treated as wages. This concise definition of wages now removes the ambiguity in the earlier definition, especially in PF, on what components are required for purpose of calculating contributions. Employers will find this particularly welcome, in view of last year’s Supreme Court judgment which increased the PF contribution drastically by including the most regularly paid allowances for calculation purposes.

 

  1. PF Contribution – The employer and employee contribution have been reduced from 12% to 10%, with options for different percentages to be notified by the Central Government as and when it deems fit.

 

  1. Gratuity – While gratuity is still payable to all employees who have completed at least 5 years of continuous service with the company, the SS Code also allows for payment of gratuity on a pro-rata basis for fixed-term employees. Further, the threshold years for working journalists have been reduced to 3 years. Gratuity payments could increase if the basic salary amount in salary structures is not 50% of the gross salary.

 

  1. Authorities under the SS Code – The authorities under the SS Code are: Board of Trustees of Employee Provident Fund, Employees’ State Insurance Corporation, National Social Security Board for Unorganised Workers, State Unorganised Workers’ Social Security Board, and State Building Workers Welfare Boards.

 

  1. Creche Facilities – SS Code clarifies that common creche facilities may be opted for by establishments having 50 or more employees.

 

  1. Unorganized Sector, Gig and Platform Workers – The SS Code requires the National and State Social Security Boards to specifically create schemes/funds for providing benefits (life and disability cover, health and maternity benefits, old age protection, education, and discretionary benefits) to workers in the unorganized sector (self-employed or home-based), gig workers (workers outside the traditional employer-employee relationship) and platform workers (who access organisations or individuals through an online platform and provide services or solve specific problems). They are required to register themselves with self-declaration and AADHAR.

 

  1. Aggregators – The concept of ‘Aggregator’ has been introduced and means a ‘digital intermediary or a marketplace for a buyer or user of a service to connect with the seller or the service provider’. Aggregators are intended to help fund schemes for the unorganized sector, gig, and platform workers with a 1-2% contribution of their annual turnover. Identified Aggregators in the SS Code are:
  • Ridesharing services
  • Food and grocery delivery services
  • Logistic services
  • E-marketplace (both marketplace and inventory model) for wholesale/ retail sale of goods and/or services (B2B/B2C)
  • Professional services provider
  • Healthcare
  • Travel and hospitality
  • Content and media services
  • Any other goods and services provider platform

 

  1. PF Appeals – The deposit for filing an appeal has been reduced from 75% to 25% of the ordered amount.

 

  1. Penalties – Stricter penalties have been imposed, especially for repeat offenders. However, an opportunity is provided for rectification of non-compliance prior to initiation of any proceedings.

 

SS Code Implications

 

With regards to the Rules and Schemes developed, specific implementation will have to wait. However, the SS Code does appear to be a sincere attempt towards broadening the net and covering a much larger section of the workforce by recognizing unconventional work models as well as formal ones. While there could be an increased financial burden on employers, there is also an easing with respect to compliance requirements.

Image Credits:  Photo by sol on Unsplash

With regards to the Rules and Schemes developed, specific implementation will have to wait. However, the SS Code does appear to be a sincere attempt towards broadening the net and covering a much larger section of the workforce by recognizing unconventional work models as well as formal ones.

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