Why fifty is the inflection point.
Companies grow through informal systems until those systems break. At ten employees, the founder knows everyone’s situation personally. At twenty-five, things still mostly work on trust and direct communication. At fifty, the organisation is too large for the founder to be the HR function, and too small to have built a formal one. That gap is where most of the damage happens.
Statutory thresholds cluster around this headcount. The Shops and Establishments Act, the Factories Act, POSH compliance, and the requirements of the new Labour Codes all have provisions that activate between 10 and 50 employees. Companies that cross these thresholds without realising it are accumulating liability without knowing it.
The non-negotiable compliance layer.
Before anything else, these need to be in place:
- Provident Fund registration: Mandatory for organisations with 20 or more employees. Contributions are 12% of basic salary from both employer and employee.
- ESI registration: Mandatory for organisations with 10 or more employees where any employee earns below Rs. 21,000 per month. Covers medical, maternity, and disability.
- POSH Internal Committee: Mandatory for all organisations with 10 or more employees. Must include an external member and meet at least quarterly.
- Shops and Establishments registration: State-specific, but near-universal for commercial establishments. Governs working hours, leave entitlements, and employment conditions.
- Gratuity readiness: Employees completing five or more years are entitled to gratuity under the Payment of Gratuity Act. This should be tracked and funded from the first year, not managed as a surprise liability.
“Most compliance failures in SMEs are not acts of bad faith. They are failures of awareness. The law moved, and the company did not notice.”
The people-management layer.
Compliance keeps you legal. The people-management layer is what keeps you functional. In order of priority:
Employment contracts that are actually defensible.
A three-page appointment letter generated from a template in 2018 is not a defensible employment contract in 2025. Review your standard contract for: garden leave provisions, intellectual property assignment, notice period enforceability, and confidentiality terms. Have it reviewed by a labour law practitioner, not just a general commercial lawyer.
A leave policy that employees can actually understand.
Most leave policies in SMEs are vague on the things that matter most: what happens to leave that is not taken, how leave is approved when there is a conflict, and what the process is for long-term medical leave. Write these down. Make them available to every employee. Apply them consistently.
A documented performance process.
This does not need to be elaborate. It needs to answer three questions: how does a manager tell someone what is expected of them, how does an employee know how they are doing, and what happens when performance is inadequate. Without a documented answer to the third question, every underperformance situation becomes an improvised negotiation.
An onboarding checklist.
First impressions are made in the first two weeks. A structured checklist — what happens on day one, who the new hire meets in week one, what they need to know by the end of month one — costs nothing and prevents the disorientation that causes new hires to leave before they have delivered any value.
An exit process.
Most SMEs have no exit process at all. The employee announces they are leaving, there is an uncomfortable two weeks, and then they are gone. A structured exit — a documented separation agreement, a proper knowledge transfer, a full and ful final settlement, a genuine exit interview — protects the company legally, preserves institutional knowledge, and occasionally surfaces the information needed to prevent the next exit.
The culture layer.
Culture is not a priority for most founders at this stage of growth, and that is understandable. But three things at the culture layer have a direct impact on business performance and cannot be deferred indefinitely:
- A code of conduct: Not a long document. A clear statement of what behaviour is expected and what is not tolerated. Referenced at onboarding, applied consistently.
- A grievance mechanism: Employees who cannot raise concerns internally raise them externally. A formal grievance process — with a named owner, a defined timeline, and a commitment to no retaliation — is not bureaucracy. It is a safety valve.
- Manager training: The manager is the primary determinant of whether a good employee stays or leaves. At the 30–100 employee stage, most managers are first-time managers who have been promoted because they were good at doing the work. Helping them become good at managing people is the highest-return training investment available to an SME.
What to prioritise if you can only do three things.
If you are reading this and have 45 employees and no formal HR, start here: statutory compliance (PF, ESI, POSH), employment contracts, and a leave policy. Everything else builds on this foundation. You will not regret getting these right. You will regret, at significant cost, not having had them in place when you needed them.
