The three labour codes recently passed by parliament propose to bring about a much-needed overhaul of the Indian labour law regime. Whilst these codes are yet to come into effect and the fine print yet to emerge, in this note we discuss some of the key changes proposed under these codes. Given that amending labour laws is always a delicate balancing act between providing impetus for economic growth and adequately safeguarding workers’ rights, we also discuss some of the amendments which have been the focal point of debate over the past few months.
A. Background
In India, labour laws are within the legislative competence of the Indian parliament and various state legislatures. In theory, this should have resulted in a body of laws that enjoyed the best of both worlds – the restraint and uniformity provided by central legislation combined with the sensitivity and localization found in state laws. The reality has somewhat been different. What we have had so far, instead, is a complex maze of dated and ill coordinated legislations that failed to keep pace with the changing profile of the Indian workforce as well as hampered the push to make India a global manufacturing hub.
The first tangible steps to streamline the existing labour laws were made in circa 2015, with a plan to make sweeping reforms to the Indian labour law regime by integrating around 29 existing central labour laws into four labour codes pertaining to industrial relations, wages, social security and safety. After a gap of almost five years, these codes finally passed muster with the Indian parliament (the code on wages was approved in 2019 and the remaining three in September 2020).
Whilst the government notification to bring these codes into effect and the fine print by way of the underlying rules and regulations is awaited (they are expected to be finalized and brought into force by April next year), when enacted, these codes are expected to finally (and some may say much belatedly!) make navigating the labyrinth of regulatory framework simpler for employers, potentially also making it easier to do business in India. Rooted in India’s protective socialist outlook for the first several decades after independence, labour laws in India have, traditionally, been considered to favour the employee’s interests over those of the employer. These reforms represent a more balanced approach. This note looks at the key changes that have emerged as a result of this recent legal overhaul i.e. the introduction of the three codes on industrial relations (the Industrial Relations Code), social security (the Social Security Code), and occupational safety, health and working conditions (the OSH Code).
B. Key changes
Introduction of “fixed term” employment
In the Indian context, retrenchment of blue-collar workmen is an extremely arduous process and is generally difficult to implement in practice. Firstly, the retrenchment process involves costs in the form of retrenchment compensation to be paid to workers. Secondly, due to cultural reasons consensual separation is the norm in India barring cases of misconduct. Thirdly, in certain cases, prior approval of the state government may be required for retrenchment. The consequences of breaching these provisions can be quite onerous. Given these restrictions around termination of permanent blue collar workmen, employers have historically relied heavily on onboarding “contract workers” through labour contractors to meet their labour requirements. This comes with its own set of issues (please see the section below on the contract labour regime for more details in relation to contract workers).
With a view to provide employers the flexibility to directly employ workers for a fixed duration, the concept of fixed term employment1 has now been codified under the new labour codes. Employers are now entitled to engage workers for a fixed term (with an ability, once such term is over, to renew the contract of the fixed term worker). Earlier this concept had limited applicability in specific states and for certain limited purposes. However, this concept has now been uniformly included in all the relevant codes without imposing any restrictions on the type of work for which such fixed term employees may be hired or on the number of terms for which such contracts may be renewed.
Balancing this with the interests of workers, the provisions aim to provide such fixed term employees with the same wages, benefits and conditions of work (other than retrenchment compensation) as are available to permanent workers (including the right to receive pro-rata gratuity2 on completion of one year of service under a contract – a right which has historically been available only to “employees” who have completed five years of continuous employment).
Whilst on the one hand this legislative move could mean better working conditions for temporary workers, this could also mean that gradually organizations may prefer hiring fixed term employees or convert existing permanent roles to fixed term ones. This potential shift to a preference for fixed term employees could result in a higher level of job insecurity and has therefore, been opposed to by trade unions across India. It is interesting to note that when the government had first introduced the concept of fixed term employment it had also contemplated a safeguard prohibiting the conversion of permanent roles to fixed term roles. This language, however, did not find place in the final form of the code meaning that even existing permanent roles can be amended to fixed term contracts with the consent of the employees (since such a conversion may be seen as an amendment to the existing employment agreement).
Changes to the contract labour regime
Generally speaking, contract labour refers to workers who are hired by a company (known as the “principal employer”) through an independent intermediary or agent (known as the “contractor”) for a finite period and / or for a specific project. The key advantage of hiring contract labour for companies is to circumvent the need to employ workers directly and add them on to the rolls of the company. Historically, contract labour has been widely used in the Indian labour ecosystem as it is perceived to be cost-effective and provides flexibility in terms of engaging and downsizing of the workforce. Whilst there is a specific legislation regulating the use of contract labour, the rights and obligations of the parties involved has been the subject of extensive litigation, with contract labour often claiming “regularization” of their employment as well as benefits similar to those available to regular employees. Further, state governments were empowered to notify activities for which contract labour cannot be employed. This resulted in different standards across India, with a number of states prohibiting engagement of contract labour for performing “core activities” of the establishment.
The OSH Code provides much needed clarity on the ambit of contract labour and specifies as a general rule that contract labour cannot be engaged for performing core activities i.e. activities for which the establishment has been set up (including activities which are essential or necessary to it). It also sets out an exhaustive list of activities which will be considered as “non-core” (such as civil, construction and sanitation works, housekeeping, catering and security services etc.). This will establish uniform parameters pan India and reduce the scope of regularization claims from contract labour engaged in non-core activities going forward.
While the above changes are geared towards making hiring of contract labour easier, interestingly the primary liability for a number of welfare and social security benefits re the contract labour has been shifted from the contractor to the principal employer. Though the principal employer has been given the statutory right to recover the costs of such social security benefits from the contractor, there is no such recovery provision for gratuity, raising the question whether this has been deliberately left out (on the basis that if the contract labour has worked for the same establishment for five years, the principal employer should be held responsible for payment of gratuity irrespective of the hiring arrangement) or if it is an oversight.
Given these changes and the formal introduction of another class of fixed term employees, it may well be that the employers revisit their workforce categorization to arrive at an optimum balance between regular and short term workforce keeping in mind the obligations associated with each type of labour class.
“Gig” and “Platform” workers
The recent advent of the gig economy in India has caused a steep rise in the informal workforce, highlighting lacunae in the existing archaic labour laws to provide adequate protection and benefits to this new class of workers. In a first, gig and platform workers have now been recognized under the Social Security Code and have been defined to mean persons who are engaged in a work arrangement outside of a traditional employer-employee relationship. While platform workers are intended to cover persons who are engaged by organizations which use an online platform to provide services (i.e. aggregators such as e-market places, ride sharing platforms, food and delivery service providers etc.), the term gig workers has been left open ended. The Social Security Code empowers the central government to notify suitable social security schemes for gig workers and platform workers on matters relating to accident insurance, life and disability cover, health and maternity benefits etc. The specifics of such schemes will be notified by the government in due course, and such schemes may need to be funded through sources notified by the government including through contributions of such class of aggregators as may be decided from time to time. The contribution required from the aggregators could vary between one to two per cent. of their annual turnover, but not exceeding five per cent. of the amount paid to the workers. In addition to these schemes, a social security fund is also proposed to be set up the government for the welfare of such workers.
Whilst the provision of social security benefits to the gig workforce is a laudable attempt, there are many issues which currently remain unanswered such as how will contribution work in cases where the workers have multiple jobs, will the employers be entitled to reduce the basic pay of the workers to offset this additional financial obligation and whether the workers will need to be engaged for a minimum time period to avail of the benefits3. According to press reports, it is expected that the aggregators will be required to make contributions from April 2021. Though the contours of the scheme are awaited, labour costs for aggregators such as Uber, Ola, Swiggy etc. are likely to go up as typically until now the drivers / delivery personnel were being engaged as contractors without any significant social security benefits. One apprehension is that the employers may cut down on contractual incentives and schemes that are currently being offered to these workers to balance this additional obligation.
Increase in threshold limits
The applicability of various Indian labour laws to an entity / employer is generally dependent on the number of workers engaged by such an establishment. Dovetailing with the objective of increasing the ease of doing business, under the new labour codes, these thresholds have (mostly) been raised as a result a number of small establishments will be exempt from complying with various (often onerous) obligations. For instance, the threshold for a premises to be categorized as a “factory” and to comply with the relevant requirements (such as obtaining a valid registration, maintaining appropriate health safety and welfare conditions, providing leave and other benefits to the workers employed in the factory etc.) has been increased from the existing threshold of 10 workers to 20 or more workers. This seemingly minor change could potentially declassify more than 50 per cent. of the factories and relieve them of the obligation to comply with the specified requirements.
Similarly, the thresholds for seeking prior government approval for retrenchment, lay-offs and closures in industrial establishments (i.e. factories, mines and plantations) and to adopt a set of employment terms (known as standing orders)4 have also been raised from 100 to 300 workers (with a discretion given to the appropriate government to notify a threshold even higher for retrenchment, layoffs and closure – previously only a few Indian states had increased this threshold to 300). These changes have been the focal point for much debate as while the government maintains that higher thresholds will spur job creation and prevent “dwarfism” (by taking away the perverse incentive for industries to remain small), workers fear that due to their inherent unequal bargaining power, they will be exposed to arbitrary service conditions and “hire and fire” policies. The requirement to obtain prior government approval for retrenchment (which was in most cases not forthcoming), to get the standing orders certified and to maintain prescribed working conditions for factories had so far provided the workers with an element of “de-facto” job security and certainty in relation to working conditions.
Power to exempt establishments
Under the new codes the central and the state government have wide discretion in providing exemptions to establishments from the various requirements under the codes. The exemptions could cover a wide range of provisions including those related to hours of work, safety standards, retrenchment process, collective bargaining rights, contract labour. For instance, the OSH Code provides the state government with the power to exempt any new factory from the applicability of its provisions in the interest of creating more “economic activity and employment” (it might be relevant to mention here that the Factories Act, 1948 permitted exemptions from its provisions only in cases of “public emergency”, for a period of up to three months).
Of late there have been several instances of state governments scrambling to relax restrictions relating to labour welfare (such as working hours, rest intervals, extra pay and leaves) to help spur commercial activity to tackle the slowdown caused by the COVID lockdown. This led to these notifications being challenged in the courts (the apex court even struck down a notification issued by one of the state governments exempting factories from paying overtime wages to workers, stating that the pandemic cannot be a reason to remove statutory provisions of labour laws). Whilst it may appear that such exemption provisions have been included in the codes to provide legitimacy to measures by the government to boost industrial productivity going forward, it remains to be seen if these wide ranging powers will stand good in the court of law and what fetters end up being imposed by the judiciary on these provisions.
Changes in the dispute resolution process
The Industrial Relations Code includes provisions for setting up of industrial tribunals for adjudication of industrial disputes (including a national level tribunal) replacing the multiple existing bodies (court of inquiry, board of conciliation and labour courts). Along with the introduction of this new composite forum, the Industrial Relations Code also dispenses with the current mechanism of “reference of a dispute” concept (which is essentially the requirement for an order of reference to be made by the appropriate government before an industrial dispute can be adjudicated by an industrial tribunal). This would allow aggrieved workers and employers alike to approach the appropriate industrial tribunal directly by making an application in the prescribed form to the tribunal in a scenario where the matters are not settled by conciliation.
Another key change is the explicit bar on the jurisdiction of civil courts to hear matters relating to the Industrial Relations Code, the OSH Code and some parts of the Social Security Code. This is a major development and leaves the aggrieved parties with no recourse to civil courts (for the sake of completeness please note that disputes arising between white collar employees and their employers continue to be under the ambit of civil court jurisdiction). Combined with the right of the aggrieved parties to directly approach the appropriate industrial tribunal in case of industrial disputes, this could well develop into a more efficient dispute resolution framework (and help reduce the burden of the already overburdened Indian civil courts).
Compounding of offences
With the object of promoting compliance over penalizing employers, all the codes have introduced provisions relating to compounding of offences (compounding is a process available in relation to certain penal provisions whereby the offenders get an opportunity to “settle” the offence by voluntarily accepting it and paying certain reduced monetary penalties). For instance, the Industrial Relations Code provides for compounding of offences either before or after an enquiry is held or prosecution is initiated, by paying between 50 per cent. and 75 per cent. of the maximum fine. However, the option of compounding is not available for repeat offences.
Focus on e-governance
Another common development across all codes which may be relevant from a compliance perspective is the introduction of electronic means for fulfilling various employer facing obligations (such as obtaining registrations and licences, filing returns and other documents and providing documents for inspection). This is a major shift from the current position where separate designated authorities were required to be manually approached under different statutes.
C. Conclusion
Along with overhauling the labour law regime, another bold move by the Indian government has been to slash down the corporate tax rates (as a result of this amendment the Indian corporate tax rate is now lower than the global average). These recent legislative changes are the ruling government’s attempts to stimulate economic growth and push India to the forefront as a manufacturing hub.
On balance, whilst the consolidation and codification of the labour laws are steps in the right direction, the new regime is not without its own set of deficiencies, and ambiguities and questions do remain. Pushed through the Indian parliament with little discourse and parley (as is becoming the norm!), these codes remain under constant public glare. Once enacted, it will be interesting to see if this new regime fulfils its intended objective of greasing the wheels for increased economic activity.
Endnotes:
[1] “Fixed term employment” has been defined as the engagement of a worker on the basis of a written contract of employment for a fixed period.
[2] Gratuity is a social security benefit payable to employees upon termination of their service, death or disablement. The employer is obligated to pay an amount equivalent to fifteen days salary (last drawn) for every completed year of service of the employee, subject to a cap of INR 2 million (unless the employment contract or the company’s policies provide for a higher amount).
[3] According to the draft rules released for public consultation, the workers should have been engaged for at least 90 days in the preceding year to become eligible and the central government will have the power to specify additional eligibility conditions.
[4] Standing orders are rules of conduct of an establishment relating to classification of workers, leaves, and more importantly, suspension, termination, and dismissal for misconduct. These terms need to be certified by a certifying officer, and once certified and adopted, can only be amended pursuant to an agreement between the employer and the workmen (or the employee representative body).
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This material is for general information only and is not intended to provide legal advice.
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