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Overhaul of Indian Employment Laws: A step forward but a missed opportunity?

Contributed by: Samvad Partners


The consolidation of the existing Indian labour legislations by streamlining significant labour laws in India into 4 four codes, has been an instrumental step undertaken by the Government of India to facilitate labour law compliance by companies. This article explores the recent changes brought about by the introduction of such ‘Labour Codes’ in India and addresses if such codification has the potential to increase the ease of doing business in India. Further, it also considers if it is a missed opportunity for the Government to tackle realities of corporate business operations in a merger, reorganisation or business transfer and its effect on employees – possibilities of which have been deeply intensified by the onslaught of the COVID-19 pandemic and the resultant volatility in the labour market, with many States amending extant labour legislations to dilute certain compliance related provisions of the existing legislations to increase the ease of doing business and ensure growth in the market.

In an instrumental step to streamline and consolidate the existing labour laws, the Government of India has proposed an overhaul of the existing employment legislations in India into 4 codes, i.e. the Code on Wages, 2019 (“Wages Code”), the Code on Industrial Relations, (“IR Code”) the Code on Occupational Safety, Health and Working Conditions Code, 2019 (“Occupational Safety Code”) and the Social Security Code (“Social Security Code”), (collectively the “Codes”). Presently, the Parliament has passed the Wages Code, and the Standing Committee on Labour (“Committee”) has provided its report on the draft of the Occupational Safety Code on February 11, 2020 and the IR Code on April 23, 2020 to the Central Government. The Committee is yet to provide its comments on the draft of the Social Security Code.

In a monumental effort, this consolidation, proposes to bring together over 40 employment legislations, of varying applicability and operation, into 4 main subject areas, i.e., wages, social security, industrial safety and welfare, and industrial relations, which are each to be governed by the proposed Codes. For instance, the Wages Code subsumes 4 wage related legislations, i.e. (i) the Payment of Wages Act, 1936, (ii) the Payment of Bonus Act, 1965, (iii) the Minimum Wages Act, 1948, and (iv) the Equal Remuneration Act, 1976. The Occupational Safety Code consolidates 13 labour laws relating to safety, health and working conditions, which include important legislations such as the Factories Act, 1948, and the Contract Labour (Regulation and Abolition) Act, 1970. The Social Security Code, arguably the most extensive one to be codified, has consolidated a majority of the employee benefit laws such as the Employees Provident Funds and Miscellaneous Provisions Act, 1952; Employees State Insurance Act, 1948 and the Payment of Gratuity Act, 1972. The IR Code, would touch upon the current laws applicable to industrial disputes such as the Industrial Disputes Act, 1947.

In India, the current labour legislations provide a complicated framework to employers as they navigate a labyrinth of legislations with differing applicability based on the nature, state-wise location of an establishment, the number of employees in an establishment and the wage threshold of employees in the establishment. There are additional compliance requirements in the event an employee falls within the category of a ‘workman’, which is a protected category of employees in an establishment. The federal nature of labour laws and the arguments in favour of reworking of the labour legislations, has been further catalysed due to the COVID-19 pandemic and the resultant repercussions of the country-wide lockdown on businesses and industries in every sector. It has severely impacted business continuity and revenue generations for industries trying to cope with the burgeoning labour costs and dwindling business generation. Against this backdrop, the failure of the existing labour laws was also highlighted in the context of a lack of flexibility relating to working hours, labour reorganisation and stringent compliance. The recognition of this factor has provoked various States to rely on enabling provisions under the Disaster Management Act, 2005 and other State legislations, such as the local shops and establishments acts to assist labour laws to keep pace with the changing landscape of the labour market.

States such as Madhya Pradesh, Uttar Pradesh, Gujarat and Karnataka have amended labour laws to provide more flexibility to employers during this pandemic to cover losses suffered by businesses, by increasing the threshold for retrenching workers without government consent, increasing the overall working hours and overtime hours for employees and reducing compliance. In certain States, like Karnataka, by ensuring that such amendments are effective for only a limited duration of time, employee interests are addressed as well. States like Telangana as well, by ensuring that employees who could not work in establishments due to the closure of establishments during the lockdown, be considered on paid holidays, have tried to protect employee interests. Therefore, States have recognised the balancing act that is required for effective labour law implementation vis employer interest.

It is to be noted that a primary reason for the overhaul of employment legislations into the aforementioned Codes, is aimed towards ensuring simpler and more structured compliance by companies to further the cause of ease of doing business in India. This consolidation is likely to dramatically improve the current compliance followed by Indian companies with regard to labour legislations. However, a point of contention in the existing employment framework is the lack of guidance provided with regard to common business transactions such as mergers, business transfers and restructuring operations – which are potentially going to become more common place as the financial and economic impact of the pandemic and the lockdown are brought to the fore. The existing law which touches upon such transfers is the Industrial Disputes Act, 1947 which provides that during transfer of employees, employees are to be transferred to a new establishment, inter alia, on no less favourable terms that are currently being provided to the employees. However, nuances of such transfer, i.e. the operation of myriad employee benefit laws, such as those outlined above are less detailed during such transactions. This has been a source of confusion for practising lawyers due to the lack of clarity of the operation of these laws during a transfer of ownership of an establishment.

At present, it appears that the clarity sought in this regard, is remiss even in the codification exercise, which could have been one of great relief to struggling business owners. It therefore could be seen as a missed opportunity for the Indian Government to provide guidelines relating to such transfers/ corporate reorganisations etc. in the new codified framework. Further, in light of the new insights that the pandemic has revealed, States must also be mindful of enabling provisions that would allow State Governments to amend labour laws to the benefit of the labour market. This would ensure that that the Codes continue to remain dynamic in the current climate as companies begin to look at takeovers, business reorganisations and employee transfers to stay afloat.

Given the State governments adoption of these amendments and the heightened focus on the revival of the economy post the pandemic, the Government’s view and adoption of the Codes would have to bear in mind the competing interests of both, the employers and the employees. The balance of power between the States and the Central Government, due to the federal nature of the laws, underpinned with the idea of harmonising compliance in the interest of ease of doing business has also been recognised. India has recognised that labour welfare and laws and business continuity have a direct co-relation and this nuance has been brought to the forefront due to the pandemic and prudence dictates that all stakeholders be mindful of the rapidly evolving needs for a dynamic framework of employment laws in India, while assessing the effect and potential outcomes of the Codes.

Contributed by Samvad Partners

The above article has been authored by Ms. Poornima Hatti (Partner) and Ms. Nivedita Udupa (Associate).

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