Labour and Labour-Related Laws in Micro and Small Enterprises : Innovative Regulatory Approaches

This paper examines the application of labour law in micro and small enterprises (MSEs) by comparing the practices in various member States of the ILO. Extending the coverage of labour law to numerous MSEs has been problematic in several countries largely due to practical reasons of the limited state capabilities and the number of enterprises involved. While the enterprises make 'strategic choices' of which legal provisions to comply with, States have the choice of 'responsive regulation' as well. The role of the State in creating a level playing field for all enterprises is being increasingly recognized as critical for bringing about an enabling business environment. Such role of the State in formulation and application of policies and regulations has been debated in terms of their effect in business growth as well as workers' protection as enshrined in the ILO's Fundamental Principles and Rights at Work and other conventions. Although doubts have been raised about legislating the labour market without effective State wherewithal to implement such laws, the rush to deregulation in some countries has also raised the apprehension of the market anarchy in the absence of rules. Many countries have labour law provisions applicable to all enterprises whereas many others have parallel labour law regimes or simply exemptions for the MSEs from application. Hence, a multitude of MSEs is found operating in an informal economy outside the legal purview with dim prospects of growth, poor working conditions and low productivity. During the discussion on the informal economy in 2002, the International Labour Conference concluded that the growth of the informal economy can often be traced to inappropriate, ineffective policies coupled with the lack of conducive legal and institutional frameworks and the lack of effective implementation of policies and laws. Based on the policy reviews carried out by SEED of the ILO in ten countries, labour legislation has been identified as one of the important elements of the regulatory environment affecting the performance of MSEs. A conducive policy and regulatory environment reduces excessive administrative burdens and costs for enterprises; and at the same time, the long-term productivity gain is feasible only with workers' protection. There has been much debate about lowering the cost of doing business, including the arguments put forward in the Doing Business reports of the World Bank Group. Nonetheless, minimizing regulation to the extent of deregulation may not be the answer since the market does not operate efficiently without a legal framework; and the exploitative 'race to the bottom' under the competitive pressures in the absence of such a legal framework only damages long term survival of enterprises and jobs. Appropriate and effective regulation is necessary for reducing the burden and cost for enterprises in complying with the regulatory requirements while maintaining workers' protection. 'Responsive regulation' by the State means taking into account the attraction and incentives for the enterprises in complying with the labour regulation while the State maintains the threat of sanction as the last resort. This means an interplay of how enterprises make 'strategic choices' in complying with various regulations and how the State encourages such decisions through innovative regulatory approaches including education and awareness raising in collaboration with the ILO's social partners. This working paper provides such country examples as references for the constituents to debate their own reform processes