The day September 23, 2020 the monsoon session of Parliament ended abruptly, Modi – government passed three bills on labor reforms enshrined in three labor codes viz. The Industrial Relations Code, 2020; The Occupational Safety, Health and Working Conditions Code, 2020; and The Code on Social Security, 2020 in Rajya Sabha (these were passed by Lok Sabha on the previous day).
Along with The Code on Wages, 2019 passed by the Parliament last year, these four reform of labor laws are being bandied as the most crucial second-generation reforms that will make it easier to do business, improve competitiveness of Indian industry, make India a manufacturing hub and pursuing “Make in India”. This is a bold move when viewed in the backdrop of successive governments in the past have refrained from dabbling into this politically sensitive area.
Even as the landscape of these legislations is vast, there are four areas which will have far reaching implications for the way the Centre and the states will be regulating the businesses and ensuring welfare of the workers. These include (i) consolidation (call it merger) of existing 29 Central Labor Acts in to 4 Codes; (ii) increase in the threshold for retrenchment, closure or lay off for a firm (without government permission) from existing 100 to 300 workers; (iii) giving greater flexibility to the states in enacting legislation and (iv) providing for universal social security for workers.
At the outset, let us recognize that labor is on the concurrent list of the Constitution; therefore both the union government and the states have the power to legislate on the subject. Hitherto, there were 29 Central Labor Acts besides 200 state enacted laws and amendments. This meant that a company was required to take a number of licenses, registrations, permissions, renewals and file numerous returns periodically under different Acts. For instance, it had to file one annual return each under Payment of Wages Act (1936), Minimum Wages Act (1948), and Payment of Bonus Act (1965).
Shockingly, even a MSME (micro, small and medium enterprise) is required to maintain at least 10 different formats of wage registers, four different formats of accident registers and four different formats of muster rolls under different Acts.
The regulations at the state level are even more complex. Each state enjoys the right to formulate specific rules with respect to applicability thresholds, forms, formats, calculations, dates, frequency of submissions, filing types (paper-based vs. digital) etc. This results in different due dates, multiplicity of forms and formats, duplication in record-keeping requirements, redundancies, complex procedures, ambiguous interpretations and so on. As a result, companies which operate in several states face a nightmare.
Consolidation of the extant 29 laws into 4 Codes should help firms in getting rid off this nightmare. They can look forward to significant a reduction in the number of licences, registrations, renewals, returns and registrations earlier required under different Acts (read: 29). As a result, the compliance burden will go down. For instance, under The Code on Wages, 2019, a firm needs to file a single annual return against three different annual returns earlier. Correspondingly, at the state level too, businesses will be unshackled.
As regards (ii), under the extant law, employers of industrial establishments such as mines, factories and plantations etc with at least 100 workers were required to take prior permission of the central or state government before lay-off, retrenchment or closure. Together with a myriad of regulations and compliances which increase in proportion to the scale of operations, this was a major impediment in the way of firms growing in size and creating more jobs.
The imposition of this arbitrary threshold also takes away the flexibility of firms to adjust their labor deployment in sync with changing demand conditions. It affects their ability to stay afloat in a competitive environment especially when the economy is in a downward phase. It also prompts them to hire contract workers, which is not good omen especially for their social security.
This has seriously impacted formalization of the economy. Out of about 63 million enterprises, only one million or 1.5% are in the formal sector. This preponderance of the so called ‘unorganized’ informal economy (it accounts for roughly 50% of GDP and 80-90 % of workforce) is the inevitable outcome of imposing such restrictions.
The increase in threshold under The Industrial Relations Code, 2020 should come as a big relief, as firms having workers up to 300 will get much needed flexibility to firms adjust to the changing business environment. But, what is the sanctity of fixing the threshold at 300? Why enterprises employing workers in excess of this should be subjected to approval?
In contemporary economic milieu wherein the ability of firms to compete depends largely on the scale of operations (even the start-ups in matter of few years get into the position of giving jobs to thousands of workers), imposition of such arbitrary thresholds viz. 100 or 300 or even higher – a legacy from the socialist era – is totally out of place. This needs to be done away.
The Code provides for ‘fixed-term employment’ through contract workers on a pan-India basis. Currently, companies hire contract workers through contractors. With the introduction of fixed-term employment, they will be able to hire workers directly under a fixed-term contract, with the flexibility to adjust its tenure based on the seasonality of industry. These workers will be treated on a par with regular workers. It will be a win-win for both the companies and those aspiring for jobs.
The Code does not take away the workers’ right to go on strike. However, it has been made mandatory to give 14 days’ notice for giving time to sort out differences through harmonious discussion during this period. Doing away with multiplicity of unions and introduction of the concept of ‘negotiating union’ is a welcome move.
Coming to (iii), under the present law, states have limited powers to exempt factories from labor laws. For instance, The Factories Act, 1948 allowed exemption from its provisions in cases of public emergency only for a period of three months. For making changes or giving exemptions from the law for longer duration, they had to approach the central government.
Now, the union government has given lot of flexibility to states while implementing these Codes. For instance, The Occupational Safety, Health and Working Conditions Code, 2020 empowers the states to exempt new factories from any of the provisions of the new law for more economic activities and employment opportunities. No timeline for giving exemption to factories is prescribed as against 3 months at present. It also exempts existing establishments from any of the provisions of the new Code in case of an emergency provided that certain conditions are fulfilled.
Under the Industrial Relations Code, 2020, states can allow easier retrenchment, layoff or closure norms for more firms through a notification, without the need to seek Centre’s approval. For instance, unlike in the past when they could increase the threshold only after seeking the approval of the President and then getting it passed by the legislature (16 states had hiked the threshold to 300 workers following this lengthy procedure only), now a state can do it by issuing an executive order.
The state can also exempt new establishments from “any or all provisions” of the law dealing with industrial disputes, retrenchment and trade unions “unconditionally” for a specific period of time as it thinks fit. This can be done in “public interest”.
Though, prompted by the dire need to press the accelerator for industrialization at a fast pace, these provisions may have given too much discretionary power to state bureaucrats. They need to use these judiciously; while granting exemptions, they should ensure that workers interests are not compromised.
As regards (iv), The Code on Social Security, 2020 provides for universal social security for workers by expanding the ambit of Employees’ Provident Fund Organization (EPFO) and Employees’ State Corporation of India (ESCI) and setting up of a social security fund to cover around 400 million unorganized sector workers; However, some clauses are a bit restrictive. For instance, only sites with 10 or more building and other construction workers are covered. Likewise, for Provident Fund, only establishments with 20 or more workers are covered. This will result in exclusion of millions of MSMEs.
To sum up, enactment of the 4 Codes is a big leap forward in labor reforms. As for the outcome, a lot will depend on how the states respond as they are ones who have to implement, frame and notify the rules and do the follow up. If, they don’t and keep the regulations complex, the intended benefit won’t percolate.