India is a complex jurisdiction in context of labour laws which, being a concurrent list item, are weaved into more than 38 archaic central and several state specific labour legislations. The complexity could be understood by the statement of the former vice-chairperson of Niti Aayog and a distinguished economist, Shri Aravind Panagariya, given in 2014:

The labour situation is incredibly complicated: when you go from six workers to seven in a firm, the Trade Unions Act kicks in. When you go from nine to ten, the Factories Act kicks in. And when you go from 19 to 20, something else kicks in, as happens again when you go from 49 to 50 and 99 to 100. The biggest killer is the Industrial Disputes Act, which says that if you are a manufacturing firm with 100 workers or more, you cannot dismiss any of them under any circumstances unless you get prior approval from the government. This is rarely given, and it applies even if you go bankrupt, in which case you still have to pay your workers. This has important consequences, because investors are not going to enter into an industry if they can’t exit. So, India has a very pernicious set of labour laws and that really, to me, is the reason why Indian firms have remained so small on average.”

Unlike the USA or China, we are neither a capitalist nor a communist state, rather, our constitution calls us a socialist state, which ought to strike a balance between the interest of employers and workers. While all stakeholders have recognised the need of labour reforms in spirit, the letter of such reforms and any tilt in the said balance is bound to give rise to social and political discord. Despite many such discords, during the recently conducted controversial Monsoon session, acting upon its promise to rationalise labour laws, the NDA government has passed 3 labour codes, viz. the Occupational Safety, Health and Working Conditions Code, 2020, the Industrial Relations Code, 2020 (“IR Code”), and the Code on Social Security, 2020. The Code on Wages, 2019 had already been passed in August 2019.

The consolidation of the labour laws into 4 codes was first recommended by the National Commission on Labour in 2002 and it has taken India almost 18 years for acting upon the recommendations. With this pandemic having an adverse impact on the economy, the need of the hour is to revive the economy by facilitating ease of doing business and attracting foreign investment. These reforms appear to have been passed to further the same, with the aim of catalysing the creation of ample employment opportunities in the country.

The IR Code deals with industrial disputes, regulation of trade unions and standing orders in industrial establishments. The IR Code subsumes the Industrial Disputes Act, 1947 (“ID Act”), the Standing Orders Act, 1946 (“Standing Orders Act”) and the Trade Unions Act, 1926 (“Trade Unions Act”).  The effective date of the IR Code and the rules to be framed thereunder are yet to be notified. The IR Code aims at creating a formal and conducive industrial relations system by doing away with the ambiguities and uncertainties and ultimately aiding economic progress, employment generation and labour welfare. Following are the key changes made by the IR Code:

Industry

Under the ID Act, the definition of ‘Industry’ did not explicitly cover or exempt the charitable, social or philanthropic institutions within its ambit. The Supreme Court in the case of Bangalore Water Supply and Sewerage Board vs. A. Rajappa and Ors. (AIR1978SC548) had held that if an institution involves co-operation between employers and employees to produce and/or supply goods and/or services, it will fall under the ambit of the term ‘industry’, regardless of whether it was for a charitable purpose. On the other hand, in the case of Tirumala Tirupati Devasthanam vs. Commissioner of Labour (1979 ILLJ 448 AP), it was held that if the crucial, substantial and substantive aspects of institutional life, the nature of the relations between the participants is non-industrial, the institution cannot be held as an industry. Now, the IR Code proposes to bring about clarity and exempt institutions owned or managed by organisations wholly or substantially engaged in any charitable, social or philanthropic service from the purview of the term industry. This would have the impact of excluding educational institutions, which employ thousands of workers, from the purview of IR Code. 

Worker

The nomenclature of ‘workman’ which was at the core of applicability of ID Act has been changed to ‘worker’ in the IR Code. Its scope has also been expanded so that rights provided under the IR Code are made available to larger group. The definition of ‘worker’ now includes persons in supervisory capacity getting salary up to Rs. 18,000/- per month or an amount as may be notified by the central government from time to time. The ID Act, excludes a person in supervisory capacity, getting salary more than Rs. 10,000/- per month from the definition of a workman. The term ‘worker’ also excludes apprentice engaged under the Apprentice Act, 1961 from its ambit, which was not the case under the ID Act.

Employer

The IR Code aligns the definition of the term ‘employer’ with other labour laws. It has been expanded to include contractor and the legal representative of deceased employer as well. As per the revised definition, ‘employer’ now means and includes the head of the department, occupier of the factory, manager of the factory, managing director, contractor and legal representatives of a deceased employer. These provisions were missing in the definition of ‘employer’ under the ID Act.

Bipartite Forums

The ID Act provided that the appropriate government may by general or special order require the employer to constitute a Works Committee for promoting amity and good relations between the employer and workmen. Since there was a lack of a compulsory internal mechanism, the IR Code has introduced the mandatory formation of a ‘Grievance Redressal Committee’ for all industrial establishments having 20 or more workers and a ‘Works Committee’ for all industrial establishments having 100 or more workers, for the purpose of resolution of disputes between the employers and employees. The committees are to comprise of at least 50% representation from the workers and proportionate representation of women workers as well.

Trade Unions

Apart from retaining the provisions in relation to the formation of trade unions in as was done under the Trade Unions Act, the IR Code introduces a provision for recognition of a ‘negotiating union’ or ‘negotiating council’ in industrial establishments having registered Trade Unions for negotiating with the employer of the industrial establishment, on such matters as may be prescribed. The employer will be required to recognize the negotiating union which has the support of at least 51% of workers on the muster roll. The introduction of these negotiation bodies will assist in the voices of the workmen being heard by the employers.

Standing Orders

The IR Code, like the Standing Orders Act, provides for the adoption of the standing orders in line with the model standing orders to be made by the Central Government. The IR Code provides that each industrial establishment, to whom these provisions are applicable, shall draft the modifications required in the model standing orders, within a period of 6 months from the date of commencement of the IR Code. If the industrial establishment, to whom these provisions are applicable, does not get the modifications certified, then the model standing orders shall be deemed to be applicable to them.

The IR Code provides that all industrial establishments, with 300 workers or more must prepare standing orders on matters such as classification of workers, manner of informing workers about work hours, manner of informing workers about work hours, holidays, paydays, and wage rates, termination of employment, and grievance redressal mechanisms for workers. The Standing Orders Act, 1946 had capped the applicability to industries with 100 or more than 100 workers only. However, labour laws being a subject of the concurrent list, various states such as Rajasthan, UP etc., had already increased the said threshold to 300.

The IR Code has further removed the provision for the Central Government making the provisions related to standing orders, applicable to establishments with less than the statutory threshold i.e. 300 workers. Additionally, as a move beneficial towards the employers, the IR Code has removed the requirement of application of the provisions relating to standing orders, even when an industry previously covered is no longer fulfilling the minimum workers threshold.

Closure Lay-Off and Retrenchment

The ID Act provided that an industry having more than 100 workers was required to seek prior permission of the government before closure, lay-off, or retrenchment. However, certain states such as Andhra Pradesh, Assam, Haryana, Jharkhand, Madhya Pradesh, Rajasthan, Uttarakhand and Uttar Pradesh had already enhanced this threshold to 300. Now, as a step favourable to the employers, the IR Code has uniformalised the stance and provides for prior permission requirement only for establishments with at least 300 workers. The state government may fix a higher threshold through a notification and accordingly, the cumbersome process of amending a concurrent list union law will not be required to be followed.

It is pertinent to note here that the notice period and the monetary benefits which an employee was entitled to receive on lay-off closure, retrenchment compensation have been retained. However, the aforesaid change in threshold would mean that that workers in industry having workers between 100 to 300 will now be entitled to 1 months’ notice or wages in lieu thereof as compared to earlier position as per the ID Act (in certain states) where they were entitled to 3 months’ notice or wages in lieu thereof.

Section 25-H of the ID Act provided that any worker who has been retrenched shall be preferred to be hired by the employer. While this right has been retained in the IR Code, the preference period has been limited to 1 year only. This implies that the employer may hire any new person after waiting for a period of 1 year.

Strikes and Lockouts

The IR Code requires all persons to give a prior notice of 14 days before a strike or a lockout. As per the ID Act, this criterion was only applicable for public utility services such as railways, transportation, postal, telecommunication and other notified services. This will impact the ability of workers to strike and employers to lockout workers and curtail ‘flash strikes’. On the other hand, the IR Code has increased the validity of the notice of strike from the earlier 6 weeks to 60 days.

The definition of ‘strike’ has been amended to include within its ambit, ‘concerted casual leave on a given day by 50% or more workers employed in an industry’. The rationale appears to be that mass casual leave not only hampers production but also deteriorates the employer-employee relations.

Industrial Disputes

Originally, the definition of ‘industrial dispute’ under the ID Act did not expressly include disputes arising out of discharge, dismissal, retrenchment or termination of workers within its meaning and the same was includes by way of addition of Section 2A. Under the IR Code, for better clarity, disputes arising out of discharge, dismissal, retrenchment or termination of workers have been added in the definition of ‘industrial dispute’ itself.

In place of multiple adjudicating bodies like the Court of Inquiry, Board of Conciliation and Labour Courts under the ID Act, only Industrial Tribunals have been envisaged as the adjudicating body to decide appeals against the decision of the conciliation officer, making the process of dispute resolution streamlined and less complicated.

Fixed Term Employment

The IR Code introduces ‘fixed term employment’, which may allow employers the flexibility to hire workers for a fixed duration on need basis and for work that may not be permanent in nature. It may also benefit workers, since fixed term employees would be entitled to the same benefits (such as social security, medical insurance and pension) and conditions of work, as are available to permanent employees even if the period of such employment does not extend to the qualifying period of employment required in the IR Code. The IR Code also requires fixed term employment to be included as a category of employment in classification of workers in the schedule for matters to be provided in Standing Orders. Further, to bring clarity, a clause has been added that termination of the service of a worker as a result of completion of tenure of fixed term employment would not amount to retrenchment.

Government’s Power to Exempt

The IR Code provides the government with a more diverse power to exempt any new industrial establishment or class of establishment from any or all of its provisions based only on public interest, as opposed to the earlier requirements of such exemptions being in relation to a public emergency or for promotion of economic activities.

Penalties

The penalties under the IR Code for different types of violations have been rationalized to be commensurate with the gravity of the violations and provisions for compounding of offences have also been introduced.

Way Forward

The provisions of the IR Code are aimed at incentivising employers for increasing the size of their undertakings, in turn, increasing the employment opportunities for workers. The recent economic survey, 2019-20 too had indicated that greater flexibility is labour laws leads to higher quintile of entrepreneurial activity. However, in past experience, various reports[1] over the pro-employer amendments made by Rajasthan and other states, had indicated that similar labour reforms did not result in boosting industrialisation or job creation owing to reasons specific to the particular states. Nonetheless, the scale of amendments is substantially different this time and thus, it remains to be seen whether these reforms will be able to contribute to our economy’s revival or not.

It would also be interesting to see how the government handles the enforcement of these labour reforms, checks evasion by employers and breaks the shackles of poor implementation and administrative hurdles. Nevertheless, it’s now time for establishments to start preparing for the enforcement of this new regime.