India being a labour-surplus economy, protects its workers through a framework of specialised labour laws. However, complexity in some of these laws make it difficult for businesses to operate, hinder business growth and limit employment opportunities. The parliament has revamped the labour laws as they were obsolete and needed serious update. In September 2020, the parliament approved three new labour codes—Industrial Relations Code, 2020, Code on Social Security, 2020, Occupational Safety, Health and Working Conditions Code, 2020, along with previously announced Code on Wages, 2019. Together, these four codes consolidate 44 pre-existing labour laws and aim to avoid multiplicity of laws. The new codes will ensure better use of technology for various compliances and enable effective enforcement. For the three new codes announced in 2020, the Ministry of Labour and Employment released draft rules, which are explained as follows:
Industrial Relations Code, 2020
The Industrial Relations Code, 2020 repeals and replaces three national labour laws—the Industrial Disputes Act, 1947, the Trade Unions Act, 1926 and the Industrial Employment (Standing Orders) Act, 1946.
Most central labour laws were applicable to firms with 100+ employees and in order to escape their complexities, firms preferred to remain small. For instance, the Industrial Disputes Act mandated firms (with 100+ employees) to obtain government approval before retrenchment of employees, whereas firms (with >100 employees) were exempted from this requirement. Given the transaction costs for such a mandate, numerous firms preferred to stay below the threshold of 100 employees. Also, firms avoided falling under the Factories Act by keeping their number of workers below 20 (10 without power). Moreover, under the new rules, firms (having 300+ employees) will be allowed to pursue actions such as closure, layoffs and retrenchments without any government approvals.
In addition, the bill requires all employees to share/provide a notice of 14 days before a strike or lockout. This particularly dilutes the power of trade unions.
Previously, firms had to apply for location-specific licences for hiring employees at multiple/various locations. However, the new law allows firms to operate on a single licence for hiring contract workers across different locations.
Social Security Code, 2020
The Code on Social Security, 2020 repeals and replaces nine existing national labour laws. An ideal labour law provides social security to employees; however, in the earlier regime, most labour laws protected workers in the minority formal sector (having relatively stronger bargaining power), while overlooking workers in the informal sector.
Gig and Platform Workers
Social Security Code 2020 intends to provide universal social security to all workers, including unorganised, gig and platform workers who account for >90% of India’s total workforce. Under the new labour laws, the central government aims to set up a ‘Social Security’ fund for gig and platform workers. The new laws recognise the gig economy and platform workers, along with aggregators such as cab sharing and food delivery services, including Swiggy, Zomato, Uber and Ola. Gig firms will be required to make an annual contribution for the social security of its workers, while Gig workers will pay 1-2% of their monthly income towards the social security benefits pool. By including gig and platform workers, the new laws cover millions of self-employed persons, including those on contract with service sector entities. In order to avail benefits by the central government, the code mandates gig and platform workers to register with the company. The state governments will set up a social security fund for unorganised workers, requiring contributions from employers, comprising a minimum of 1-2% of their annual turnover.
Under the new law, the term ‘wage’ will include all monetary components expressed in the salary such as provident fund and gratuity. Specified parameters such as HRA, conveyance, statutory bonus, overtime allowance and commissions have been excluded under the wages category and should comprise at least 50% of the total salary. If these specified components cross 50% of the salary, the excess remaining amount will be considered as ‘wage’. Moreover, the scope of Employees Provident Fund Organisation (EPFO) has been widened and now, will include/cover all organisations with 20+ workers.
In addition, gratuity criteria for an employee has now been reduced from five years to one year, which means that any fixed-term employees will now be eligible for gratuity just after one year of their service in an organisation. Whereas permanent employees—who are not hired for a fixed period—will continue to be eligible for gratuity after five years of their service. Moreover, workers can demand leave encashment at the end of each calendar year. With the new laws, companies are likely to see 3-10% increase in wage costs with a retrospective increase in gratuity and leave encashment.
Occupational Safety, Health (OSH) and Working Conditions Code, 2020
This code will consolidate and amend laws regulating occupational safety, health and working conditions of workers. For the first-time in OSH Code, annual health check-up has been provided for workers above a certain age. Technological upgrades will be supported by the National Occupational Safety & Health Board to provide a safe environment for workers. Also, the bill allows payment of at least 50% of the penalty imposed on an employer for any injury or death at the workplace, to the aggrieved worker, along with other benefits.
In an attempt to promote gender equality, a provision has been made for women to work in night shifts as per their choice and the employer is required to provide all security arrangements.
Under the new labour laws, workers may soon have the flexibility to have four working days instead of five or six days. While the weekly 48-hour work limit will stay, employees may be offered options to work four days, 12-hour workdays per week; or five days, around 10-hour days; or six days, 8-hour days. Labour and Employment Secretary Apurva Chandra said, “We are not forcing employees or employers. It gives flexibility. It’s an enabling provision in sync with the changing work culture."
The government has also set up an expert group to gather data of all scattered migrants and suggest ways to improve their work conditions and job opportunities. According to a December 2020 policy document on internal migration, estimates of temporary labour migrants in the country range 15-100 million workers. The interstate migrants will now include any person who moves on his own to another state and obtains employment. These workers will receive benefits of the public distribution system either in their hometown or the state of employment, benefits under the building and other construction cess fund in the state of employment and insurance and provident fund benefits.
Code on Wages, 2019
The Code of Wages was passed in August 2019 and mandates timely payment of wages to all workers in India. It consolidates four laws relating to wages and bonuses, namely—Payment of Wages Act, 1936; Minimum Wages Act, 1948; Payment of Bonus Act, 1965 and Equal Remuneration Act, 1976. The code states that floor wages will be fixed by the central government by considering the minimum living standards of workers. It applies to all companies, irrespective of their size and no. of employees, and all organised and unorganised sectors.
The Road Ahead…
The Economic Survey 2018-19 revealed that small firms dominate the Indian economy, holding back job creation and productivity. While these firms hold a majority share (by number) in the organised manufacturing sector, their share in employment generation is barely 14.1%. Since small firms are not able to achieve economies of scale, they cannot efficiently compete in the market. The new labour codes include more firms and employees under its ambit, along with a simplified regulatory framework and reduced compliance costs for firms.
The reformed laws have been a new turning point for India, which is one of the most labour-intensive countries of the world. Simply said, these laws not only make hiring and firing easier for employers and restrict strikes and curtail power of the trade unions, but also extend social security benefits to all employees, beyond the permanent workers. While prima facie pro-employers, these laws will effectively reduce compliance and boost employment.
As per Union Labour and Employment Ministry officials, the four labour law codes are likely to be implemented before April 2021. While the effective date to implement the new labour codes is to be announced, employers have been advised to assess the impact of changes on employees’ compensation structures, HR and payroll policies and third-party contracts, so that an organisation can effectively align itself with various requirements of the new labour codes.
While India is gathering itself from the technical recession in wake of the pandemic, which rendered millions of employees jobless, the new relaxed labour laws would arguably accelerate job creation and boost investments.