The need for a microenterprise labour law

There is a need for a standalone simplified labour legislation for microenterprises

Pakistan is home to millions of microenterprises that employ less than ten workers each. Microenterprises employ nearly 45 percent of the employed labour force or 81 percent of Pakistan’s non-agricultural private sector workforce - 27 million workers.

Since more than 70 percent of the non-agricultural workforce is employed informally, most microenterprises are part of the informal economy. The Small and Medium Enterprises Development Authority (SMEDA) survey of 820 MSMEs in 2020, at the start of the Covid pandemic, also corroborates these numbers, indicating that more than 50 percent of surveyed enterprises have less than ten workers.

Micro, small, and medium enterprises (MSMEs) contribute 40 percent of Pakistan’s GDP as well as a similar percentage to its export earnings. Microenterprises help in the reduction of unemployment and poverty, especially in rural areas. Microenterprises also serve as central avenues to promote female labour force participation and women empowerment. However, labour laws in Pakistan either do not cover microenterprises or are too taxing to comply with.

The ILO has identified four fundamental approaches in regulating the working conditions in microenterprise. These approaches are a) equal or complete application of general labour law; b) special provisions in general labour law excluding enterprises below a specific threshold; c) special regimes with separate labour legislation for microenterprises; d) complete exemption of microenterprises from the application of labour laws. Pakistan follows the selective exclusions model, whereby it places its microenterprises under its taxing labour law regime, depriving workers of their labour rights. The same Shops and Establishments legislation applies to all enterprises, irrespective of the number of workers.

In most cases, the application of fundamental labour rights, such as freedom of association, does not increase the cost of doing business. However, labour rights such as working conditions, including the minimum wages, working hours (limitations on hours of work and overtime), occupational safety and health, and social security, formally referred to as cash standards, do increase the cost of doing business. Therefore, the adoption of legislation that assigns limited responsibilities to microenterprises, reducing the cost of business and maintaining minimum employment standards is fundamental to ensure decent working conditions for all and widespread compliance of labour standards. This article focuses on applying cash standards to microenterprises.

Because of the current selective-exclusions approach, millions of so-called formal sector workers in Pakistan do not have the statutory right under the labour law to employment contracts or appointment letters. The Punjab requires employment contract provision to workers in enterprises employing 20 or more workers. In Sindh, the threshold is ten workers. Workers in microenterprises have no statutory right to severance payment or gratuity on termination of employment.

While employment is being generated in microenterprises, such as startups, Pakistan needs a special and separate labour law for microenterprises with the following key features:

Employment contract

A common obstacle regarding formal employment is often employers, especially those in microenterprises, are unable to provide workers with employment contracts due to a lack of knowledge and resources. To promote compliance and the provision of employment contracts in microenterprises, the government can provide an employment contract template as has been done elsewhere, eg, Gulf countries. Such a template has been devised for domestic workers under the Punjab Domestic Workers Act as well.

Minimum wage

In Pakistan, the minimum wage is uniform for all establishments, regardless of their size, except that the provincial governments can notify minimum wage rates based on skill level and industry level. This leads to problems in compliance, for microenterprises are unable to comply as they may find paying the same minimum wage as larger enterprises too burdensome. Introducing a special minimum wage regime for establishments with less than ten workers will allow for easier compliance for microenterprises.

In its labour law reform of 2020, Indonesia also exempts micro and small enterprises from minimum wage provisions.

Working hours

Working hours in microenterprises tend to be long and without overtime pay. However, considering the detrimental impact of longer working hours on workers’ health, the general working hours must be retained as 48 hours per week while allowing a maximum of six hours of overtime per week. Under the Shops and Establishments legislation, the overtime wage currently in Pakistan is 200 percent of the hourly salary. A reduced overtime rate of 150 percent of the standard hourly rate would benefit microenterprises, ensuring compliance and reducing the financial burden.

Employment termination

Currently, collective dismissals or economic dismissals are not regulated for the microenterprises. As regards individual dismissals, employers are required merely to serve a 30-day termination notice. In the event of collective dismissals in Pakistan (involving more than 50 per cent of the total workforce), approval must be sought from a labour court. However, requiring a microenterprise to seek government approval before closure is quite cumbersome. Nonetheless, such closures or collective dismissals should not occur without any form of supervision. Therefore, it should be mandated that at least one month before closure or collective dismissal, the microenterprise should inform the concerned Labour Department and seek its approval which must be granted within a month.

Under the standing orders legislation, the severance pay requirement is equivalent to 30 days wages per year of service. The severance pay requirement for microenterprises may be reduced to the equivalent of 14 days wages per year of service.

Social protection

The current social protection legislation (Social Security and Employees Old-age Benefits) is only applicable to an enterprise with five or more workers. To provide social protection benefits, ie, paid sick leave, work injury benefits and various other social security benefits, different options can be used to cover the microenterprises.

One way would be to impose a sectoral levy through which social protection for microenterprise workers can be funded. India has provided social security to the gig economy workers by imposing a levy of 1 percent of total digital labour platform revenue.

Another way could be through the initiation of a reduced contribution-reduced benefit system. Currently, the employer has to contribute 11 percent of a worker’s wage to ensure registration with Social Security and EOBI in Pakistan. A reduced contribution system or a discounted contribution system can provide microenterprise workers with minimum social security rights, as identified under the ILO Convention 102.

Freedom of association

While the industrial relations legislation does not require a minimum number of workers for forming a union, a trade union needs at least seven members to fulfil the roles of the trade union executive. Labour Force Survey 2018 data indicates that 24 million workers are engaged in enterprises with less than six workers.

Similarly, microenterprises are often excluded from the mandatory creation of a works council. In Pakistan, a works council is only obligatory for establishments with 50 or more employees. This will require a change in legislation, proposing the establishment of statutory works councils in all workplaces, including microenterprises. Moreover, workers in microenterprises may be allowed to join sectoral or area-based unions. They can be covered under sectoral collective agreements.

As regards other fundamental labour rights, including the abolition of child and bonded labour and elimination of workplace discrimination and harassment, the current legislation is applicable to all enterprises, irrespective of the number of workers.

It would make sense to learn from the experience of neighbours. Under MSME regulations in India, startups can submit a self-certification form which allows them an exemption from labour inspection for five years. Considering that startups can create employment, regulations, such as the above facilitating their growth should be a high priority. Other than focusing on access to financial services, there is a need for standalone simplified labour legislation for microenterprises.


The writer is the Founder of the Centre for Labour Research. He can be reached at [email protected]

The need for a microenterprise labour law