Merging the wants of employers and employees into law reforms palatable to both sides is no easy task, writes Sanjoy Ghose

Businesses view Indian labour laws as a growth inhibitor, cumbersome, discouraging investment and expansion, and sustaining corruption, while workers’ unions have hailed the same as insulating the vulnerable working class from the laissez-faire economics of hire and fire.

Suffice to say, neither party has been satisfied and the evolution of labour laws has been a perpetual struggle between management and the workers, with the state playing the role of referee. In the socialist ‘80s, it was felt that this referee’s sympathy lay with the working class, but the new millennium changed that perception.

Certain crucial factors must be noted at the outset:

  • More than 85% of the Indian labour market is informal and totally unregulated by labour laws. In 2008, legislation was enacted on “unorganized workers”. Until that year, most Indian states had not even framed rules for implementation;
  • Labour laws have two components: (1) substantive law; and (2) procedural law. In the former, most of the law is “judge made” i.e., evolved through judicial precedents, which may or may not have been subsequently codified. For example, the right of a worker to get his/her job back with backpay, in the event that the termination has been found unlawful by a labour adjudicator, is completely evolved through case law and to date no statute codified it. As a result, there is great uncertainty as various courts have given divergent judgments: (i) granting reinstatement with full backpay; (ii) granting reinstatement with partial backpay; (iii) granting only reinstatement; or (iv) granting only compensation. This flux also hampers companies from planning effective exit strategies;
  • Labour laws fall within the “concurrent list”, meaning that both central and state governments have the power to legislate on labour issues. Even many central enactments are left to the state governments to enforce;
  • Labour law enforcement is tripartite. The legal regime has an important role for the state, which has been statutorily given the mandate to conciliate disputes between employers and unions, including strikes and lockouts. Often this neutral role becomes a challenge when powerful interests are on one side, or the employer itself is a government body; and
  • Most labour law enforcement is through an inspectorate system, which has been widely criticized as being at best incompetent, and at worst collusive. This also assumes criticality as under Indian law, the labour authority, in cases where employee strength is above the stipulated threshold, has the authority to sanction or decline approval for closure of the industrial unit, or termination of surplus workers.

More often than not, the government of the day has shied away from substantive labour reform, fearing an electoral backlash. A case is point is when the Narasimha Rao government (1991-1996), which otherwise boldly carried out far-reaching reforms in the Indian economy, left labour laws untouched even after trying to create a case for an exit policy that would be fair to both employers and workers.

Even prior to this was the classic case of undoing the Bangalore water supply case, 1978, when the Supreme Court gave such a broad and expansive interpretation to the definition of “industry” in section 2(j) of the Industrial Disputes (ID) Act, 1947, that it brought almost everything under the sun, from temples to clubs to hospitals to road-side tyre repair shops, within the regulatory ambit of the ID Act.

The government, by amendments to the ID act in 1982, sought to curtail this. However, this amendment is still to be notified by the government, after 37 years. The judicial challenge to reconsider the Bangalore water supply case by a larger bench has also been pending adjudication by the Supreme Court since 2005.

Through the period of the late 1970s and ‘80s, the case law, as well as legislative intervention, built up a magnificent (at least on paper) welfare structure for workers. There was a palpable feeling in the industry that the legal regime had become tilted in favour of workers, affecting the rights of employers to efficiently run their operations.

Industry and the state reacted in the following manner:

  1. As most of the laws on reinstatement, abolition of contract workers, backpay, etc., were determined by rulings, not only did the government find it convenient to use the judicial route to water down some of the safeguards and protections enjoyed by workers, but the courts also reviewed and ensured corrections. Since the late 1990s, courts became increasingly less liberal in granting relief to workers. A big blow was when a series of decisions from the top court mandated that after litigating in India’s three-tier legal system over the years, workers could be sent away with paltry compensations of ₹50,000 (US$705), denying them the right of reinstatement and backpay. Also, past decisions on regularization of temporary and contract workers were reviewed and subsequent decisions added several riders, limitations and restrictions;
  2. As a national consensus was elusive and central governments had slender majorities, certain states such as Andhra Pradesh, Gujarat, Haryana and Rajasthan, through state-level labour law amendments, permitted easier exits and more autonomy to employers. For example, Andhra Pradesh in 2003 relaxed the Contract Labour Law to facilitate easy engagement of contract labour, while Gujarat (2015), Rajasthan (2014) and Haryana (2016) increased the threshold from 100 to 300, exempting units below the threshold from requiring prior state approval for closure of operations or retrenchment of employees;
  3. To secure flexibility in matters of deployment and exit, and to avoid the rigours of labour law compliance, in terms of the inconvenience as well as additional financial burden, employers have increasingly been transferring non-core work to contract workers. This phenomenon in India has been termed the “contractualization of labour”.

The rights and obligations of the contractor and the contract labour are governed by the Contract Labour (Regulation and Abolition) Act, 1970. By hiring contract workers, many establishments are able to technically operate within the threshold level. Such contract workers are usually paid minimum wages, and a wide disparity exists between the wages of a contract worker and his regular counterpart.

There are currently about 45 national and 200 state labour laws. The Modi government, in its first term, had initiated the process of simplification and codification. All the laws were to be simplified into four codes: 1) wages; 2) industrial safety and health; 3) industrial relations, and 4) social security. While consultations with stakeholders were undertaken, these laws could not be legislated.

In its second term, the government seems to have accorded priority to labour reform. The most non-controversial one, the Wage Code, was enacted. Unfortunately, this legislative exercise missed a golden opportunity to address real issues that plague both employers and workers.

The code rebirths the dreaded inspector as a facilitator, but retains most trappings of power. It is unable to take that leap of faith to a voluntary compliance regime in totality.

Viewed holistically, the Wage Code is nothing but old wine in a new bottle, with no perceptible change in the approach towards industrial relations from the lens of “ease of doing business”. The major issues in respect of wages to date in India are: a) how to ensure actual payment of minimum wages; b) how to ensure maintenance of records; and c) how to ensure compliance in the event of default.

The Indian employer has often complained that, on account of the plethora of legal compliances, including maintenance of registers, schedules and records under various legislation, often half the energy and efforts of management are frittered away on compliance rather than in actual production and manufacturing.

By contrast, workers and unions have complained that compliance with various requirements under wage laws is only followed when they are breached and, more often, especially in small establishments, records are falsified and many workers are not shown on regular rolls, as that would attract the obligation to deduct provident fund, state insurance contributions, payment of gratuity, bonus and other statutory entitlements.

Even in the payment of wages, many workers and unions have alleged that this is only in the records, and in actuality many workers get a pittance, way below the statutorily notified rates.

While the Wage Code attempts to require the payment to be made electronically through bank transfer, it underestimates the Indian genius and fails to note that in many establishments workers are made to immediately withdraw from the banks a portion of their transfer of minimum wages, and pay them back to their employer, or a middleman.

The Wage Code fails not only to address this technical issue, but also does not seem to make use of new technology to ensure effective compliance of wage norms. It could have statutorily mandated a “single window of compliance”, doing away with multiple record keeping. It could also mandate a unique employment ID for each worker, which would register all employment details such as date of joining, and wages payable.

One revolutionary step would have been to give every employee a statutory right to receive a contract of employment. It has been observed that most employers, especially in small establishments, make the workers sign on the dotted line of a blank/standard format of a resignation letter, even on the very first day of employment. They are also not issued proper letters clearly setting out the terms or the period of employment, which becomes crucial in computing wages and benefits.

Yet, it is a beginning. Law reform, to misquote Robert Frost, in this crucial sector has “miles to go”.

Sanjoy Ghose is a labour and employment lawyer practising in New Delhi, India.