India’s employment laws are among the most stringent in the world. They hurt not only domestic and international businesses, but also the workers they are designed to protect

On the outskirts of New Delhi in the industrial town of Noida, a manufacturing unit of Italian auto-component maker Oerlikon Graziano had been struggling with labour unrest for several months. On 23 September things spiralled out of control. Around 120 of the company’s recently sacked employees violently forced their way onto the premises.

In the dramatic chain of events that followed, Lalit Kishore Choudhary, the company’s 44-year-old Indian CEO, hurriedly ended a meeting and tried to escape by jumping from a first floor balcony. He received a sharp blow to his head with a metal rod and died on the spot. Many of his colleagues suffered serious injuries as the agitated mob went on a rampage.

The incident manifested the most gruesome face of management-worker relationships in a country where antiquated and investor-unfriendly labour laws hurt not only industrial progress, but also the majority of workers.

The shock to India’s corporate leaders was magnified by political reactions to the incident. Labour Minister Oscar Fernandes stated that the tragic incident should serve as a warning to other corporations. Although he was later forced by his party to apologize for the statement, Fernandes and other politicians are often said to take pride in employee backlashes such as the one executed by Graziano’s employees.

“It is a lesson for the industry,” warns Doraiswamy Raja, national secretary of the Communist Party of India. “[Industrialists] should not trample on the rights of workers.”

Doraiswamy Raja National Secretary Communist Party of India

Such warnings are unsurprising. Left-wing politicians are frequently blamed for perpetuating unreasonable rigidity in the country’s labour laws. The present legal structure favours a small section of the organized labour force, which plays an active role in rallying mass support for one party or another.

Excessive legalities

There are currently 45 laws at the national level and almost four times as many at state level that govern India’s labour markets.

No time for tea: Casual labourers are in high demand.
No time for tea: Casual labourers are in high demand.

The Industrial Disputes Act, 1947, is the most significant of the central legislation. It outlines the procedure for employees looking to raise industrial disputes or challenge the termination of their services. The act stipulates that any such dispute should be resolved within three months. But in reality, they often drag on for years and sometimes even decades.

A crucial provision of the Industrial Disputes Act relates to the compulsory requirement for government permission prior to the closing of an industrial unit or the dismissal of even a single employee at a unit with more than 100 regular employees on its rolls. According to Lalit Bhasin, president of the Society of Indian Law Firms, this provision makes it extremely difficult for companies to downsize since permission to do so is granted in less than 1% of cases.

“Hire and fire is an extreme part of the problem posed by Indian labour laws,” says Darshan Lal Sharma, managing director of Vardhaman Yarns and Threads, and a member of the labour law reform cell of the Confederation of Indian Industry. “Even for a change in work done by labourers or changes in their working conditions, we are supposed to get an approval from the government.” The act stipulates a 21-day notice period for any change in the job description of an employee.

Darshan Lal Sharma Managing Director Vardhaman Yarns and Threads

In times of rapidly changing manufacturing technology and the consequent need to train, retrain and redeploy labour, the regulations are often criticized for preventing employers from gaining optimum productivity from their employees.

“The [trade] unions and politicians are looking into the short-term gains rather than the long-term advantages,” says Sharma. “We need to understand the common interest of employee and employer, which is to create more employment.”

The situation becomes particularly critical when a company wants to terminate or scale down production due to a financial crisis, weak demand or the unavailability of raw material. The absence of government approval can theoretically force a company to continue operating a loss-making unit indefinitely. In practice, however, most company owners simply stop production and strip the assets from sick units, leaving only the land and some scrap for workers and creditors.

Archaic laws exacerbate inefficiency

The strength of employee protection has prompted companies to become more capital intensive in an industrial environment where labour is cheap and plentiful. Some even force themselves to work below the optimum levels of their plant capacity, just to keep the number of workers under 100.

According to a report released in August by the Organization for Economic Co-operation and Development (OECD), the average size of businesses in India is highly skewed towards small units, with visible peaks in the distribution of plant sizes at 10 and 20 workers. As the report states: “Considerable anecdotal evidence illustrates the extent to which entrepreneurs deliberately disintegrate their business activities into numerous small-scale units, which reduces the efficiency of the economy and limits the productivity and incomes of businesses and workers.”

The report explains that Indian labour laws are much more stringent than those in most OECD countries and several major developing countries. One reason for this, says Sharma, is because much of the legislation dates back to the British colonial era when it was introduced to regulate the coal mining, textile and steel industries that dominated the market at the time.

According to Bhasin, many of these laws overlap and lack clarity. For example, there is no consistency in the definition of simple but important terms such as wages, employees, contract labour, workman, factory or even industry.

Sharma echoes this concern and points out that the introduction of new legislation often throws up conflicting definitions for existing terms resulting in even greater convolution within the labour law framework. “Many court cases continue to linger on because employers and employees choose the definition that favours them,” he says.

The rigorous employee protection regime, compounded by inefficiencies in the judicial system, exerts considerable strains on foreign and domestic investors running operations in India. Although the country boasts a vast English-speaking population with scientific, technical and business acumen, foreign investors may be reluctant to manage Indian operations due to the overwhelming and outdated legal conditions that must be fulfilled.

Bureaucratic obligations pose another headache. In today’s electronic age where record-keeping has been computerized in most companies, factories are still expected to maintain manual records in registers for various enforcement authorities which have separate inspectors making uncoordinated visits. “This sucks a lot of energy and time,” says Sharma.

To make matters worse, many of these requirements are obsolete and even archaic. The Factories Act, 1948, for example, compels employees to keep a “register of lime washing” to document the frequency with which they paint their factory walls.

Another farcical rule, lamented in an opinion column in the International Herald Tribune, states that “in every factory there shall be provided a sufficient number of spittoons in convenient places”. Even in the most modern factories, inspectors may turn up unannounced and demand to see spittoons.

The number of inspectors is on the rise due to an increase in the number of laws. “To maintain all the labour laws is really an uphill task,” says Sharma. “In some cases people may not even be aware that such laws exist, and once they take a wrong step they will be in trouble.”

Employers turn to casual labour

Despite robust job creation across the economy in recent years, according to the OECD’s report, the net increase in employment has occurred almost entirely in the least productive, unorganized, and often, informal part of the economy.

Driven by a desire to escape the onerous web of labour laws that apply primarily to permanent full-time employees, employers have turned to less formal methods of engaging staff. Traditional, full-time employment is being shunned in favour of casual labour arrangements.

It is therefore unsurprising to find that employment in the organized sector has dropped over the last decade from 7% to 6% of total employment, while it has more than doubled in the rest of the economy. Statistics show that the number of people employed in the informal sector (both organized and unorganized) is approximately 362 million while the figure is estimated to be a mere 35 million in the formal sector.

Hiring contract labourers instead of permanent employees is now a common practice. The Ministry of Labour defines contract labourers as “indirect employees; persons who are hired, supervised and remunerated by a contractor, who, in turn, is compensated by the establishment”. In spite of the fact that its policies have been partly responsible for the increasing use of contract labour, the ministry views it unfavourably, stating that it is often characterized by inferior labour status, a casual nature of employment, poor economic conditions and a lack of job security.

The use of contract labour in India is regulated by the Contract Labour (Regulation and Abolition) Act, 1970. In spite of its name, the act does not prohibit the practice. It merely grants the government the power to disallow and regulate it in specific industries. There are also regulations at state level, some of which prevent companies from engaging contract labour for core business activities. In such states, the hiring of contract labour is restricted to non-core activities like gardening, loading and unloading, security, canteen work and seasonal activities.

Trade unions and communist parties have long opposed the hiring of casual and contract labour. Indeed, it was the decision by Graziano’s Noida factory to replace sacked employees with contract labourers that prompted politicians and unions to speak out in favour of the protesting workers.

“Contract labour has become a hated word,” admits Sharma.

Failed attempts at reform

Many observers argue that reforms to India’s labour law framework are long overdue. A failure to streamline the regulations, they believe, will threaten productivity levels, professional development, labour efficiency and industrial growth.

In 2002, the second National Labour Commission (the first one was formed back in 1929) issued various recommendations, including the need to consolidate the existing labour laws into four or five groups pertaining to industrial relations, wages, working conditions, social security and safety and welfare. However, as with most of its other recommendations, these have yet to be implemented.

Also in 2002, the Union Cabinet approved a proposal to amend Chapter V (b) of the Industrial Disputes Act to allow companies with less than 1,000 workers (increasing the limit from 100) to lay off, close or retrench staff without seeking the government’s approval. Despite the decision, the proposal has yet to receive majority support in parliament, leaving any further restructuring in limbo.

Where politicians have stalled, the courts have taken the lead. In 2006, the Supreme Court maintained that there would be minimal restrictions on the renewal of temporary contracts, implying that temporary or casual employees would be unable to claim absorption as a matter of right. In prelude to this, in 2003 the central government had allowed the provision for standard fixed-term contracts, but mainly for hiring white-collar workers.

According to the Indian Express, the Labour Ministry is now considering a set of amendments to the Industrial Disputes Act on a fast track basis. This is expected to target grievance redressal mechanisms and expedite the pace of dispute resolution.

Compounding the complexity

Even if reforms do succeed at national level, local labour laws in different Indian states will continue to compound the labyrinth of legalities that domestic and international employers are expected to abide by.

Data collected by the World Bank in 2005 revealed that India, with a score of 48, was among the most stringent jurisdictions in the world for its rigid hiring and firing rules. China fared much better with a score of 30, while South Korea scored 34 points. Singapore came out on top, achieving a perfect score of zero.

Booming business: Faced with onerous regulations for full-time staff, employers turn to non-contract labour.
Booming business: Faced with onerous regulations for full-time staff, employers turn to non-contract labour.

Fortunately, some Indian states have made procedural and process-related reforms to the application of labour laws, according to OECD’s report. Gujarat, Uttar Pradesh and Andhra Pradesh are ranked by the OECD as the top three states, while Chhattisgarh, Goa and Bihar remain the lowest ranked. Although these state-specific reforms have been welcomed, the report explains that because the overall legislative stance is so rigid, state changes will, at best, allow only moderate improvements to the system.

Bhasin says the lack of any exit policy is a major deterrent for foreign investors. For the time being, he advises investors to exercise specific precautions through conducting legal audit reviews and proper due diligence with regards to the applicable labour laws. He also emphasizes the importance of executing clear-cut contracts with workers, wherever possible. These contracts, he says, should contain elaborate and well-drafted service conditions, including specific terms of employment such as the right to transfer an employee.

The need for contract flexibility, a suitable welfare net and effective labour conflict resolution mechanisms is urgent. But the chances of any substantial reforms being approved in the near future are bleak, as the focus towards voting in the upcoming assembly elections across five Indian states, takes precedence.

Lalit Bhasin President Society of Indian Law Firm

“The realization is there but all those good moves come to a knot when there is political resistance,” says Bhasin. “No one is willing to consider [the issue] in a dispassionate way”.