Labour Reforms: Ease of Doing Business – 2020-2021

Emergence of Four Labour Codes.
Gains, Challenges and concern of Employers arising out of the Labour Reforms through Labour Codes.

K.Vittala Rao
Management Consultant, Bangalore

The buzz words, “Labour Reforms”,  are not unfamiliar to the Business Community as well as the Trade Unions for the last over 3 decades. The Central Government brought “Economic Reforms” all of a sudden in the year 1991, resulting in Globalization of  Trade & Business . Economic Reforms calls for immediate Labour Reforms to provide a helping hand in terms of eliminations of legal constraints & hurdles to the Indian Industry. Indian Industry was saddled with multiple legal restrictions causing hurdles for organizing /reorganizing/ rationalization of process & methods and most importantly the productivity etc. This was not attended to.  Ever since, the Indian Business Entrepreneurs have been consistently pressurizing and pursuing the Central Government to bring out “Labour Reforms” to ease of doing Business due to global competitiveness with cost, quality and delivery.  The Business constantly urged upon the Central Government, in order to invite Foreign Direct Investment, the productivity coupled with international quality as also the cost effectiveness which are the main criteria’s, and insisted on the  Central Government that  flexibility in engagement of human resource, and to eliminate  the legal hurdles and restrictions pertaining to  modernization, adaptation to the latest technology, rationalizations and method improvements etc are the primary essentials.  As we have witnessed, the Central Finance Ministry would talk of the word “Labour Reforms” during the Finance Budget presentation every year. Indian Business would get motivated and attracted towards the steps to be taken with eagerness. The Trade Unions, upon hearing the word “Labour Reforms” would get emotionally charged and call for protest including organizing & inciting a “Bhart Bundh”. Next, the Central Government, watching the protest, no further initiatives, and the year is gone. These are the chain of events, going on year on year.

Indian Business, for survival, expansions and to invite foreign direct investments, had to pass through plenty of hurdles by the Labour, coupled with legal restrictions. Business learnt over a period and consistently adopted systematic approaches to bring in “Change Management”.  Approaching the Labour, educate and convince them of the advantages in the Change Management from the points of view of security of employment, adequate remuneration and creating plenty of employment opportunities. Here, one must acknowledge the reciprocation by the Labour and their cooperation in all the endeavors. Thus, the Indian Business moved from “Confrontation to Collaboration”.

We have seen tremendous growth in the Business, entry of MNCs,  job growth etc  for the last  decades. Both Business & Labour accepted the concept of Change Management without relying upon any legal hurdles etc. The Central Government although no Reforms were brought in, did not take any initiative. But, the words “Labour Reforms” did not miss in any annual financial budget.

Second Labour Commission was formed and was entrusted the task of Labour Reforms from the point of view of eliminating/ simplifying the labour laws.

The Second National Commission on Labour, which submitted its report in June, 2002 had recommended that the existing set of labour laws should be broadly amalgamated into the following groups, namely:––
(a) Industrial relations;
b) Wages;
(c) Social security;
(d) Safety; and
(e) Welfare and working conditions
 
Here again, for nearly  17 years, after the submission of Report in 2002,  the Indian Business did not  see  any initiative or progress or plans of actions to take up implementation of the Recommendations by the Central Government.
Now, we have been witnessing since, 2017, the initiatives taken by the Central Government to take up the Recommendations and accordingly, Labor Codes have come into place. The Draft Bills, consolidating various Labour Laws into Four Codes were published for debate amongst all stake holders in the year 2017. After suitable modifications in the Bills, the revised Bills were finally circulated in the year 2018 & 2019.

Now, all the Bills have been passed in the Parliament and after the assent of the President of India, now Four Codes have become Acts and the date of effectiveness is awaited.
​
The table shows the macro details of consolidation of the Labour Laws.

The Draft Bills of all Four Codes were published for opinions, suggestions or modifications if any by all the stake holders, namely, Industry, Trade Unions, consumers, & general public in the years,  2018, & 2019
But, it is unfortunate that the Industry did not availed the opportunity of addressing its issues, challenges, and concerns arising out of the Codes. No proper representations were made before the Government.  Finally all the Bills are enacted as Acts and effective dates are awaited.

Now, there have been plenty of debates amongst the Business and many concerns are expressed as well as some challenging issues that may crop up resulting in increase in the legal petitions etc.
Let us examine the overall positive and advantages for the Industry, Trade Unions and in particular those engaged in unorganized sectors.

1. All the Labour Laws are unified under the Four Codes.
2. Aims at uniform application of Health, Safety, Occupational Health, welfare & working conditions to all Establishments, be it be commercial, manufacturing, plantations, Mines etc.
3. Submissions of returns are centralized and digitalized.
4. Aims at Social Security Schemes to be extended to Un-organized sectors.
5. Recognition of Trade Union has been legalized, after 94 years of Trade Unions Act came into force.
6. Most of the existing provisions related to Social Security Schemes like, Provident Fund, ESIC, and payment of Gratuity, Payment of Bonus, and Compensation in cases of employment injuries etc are retained in the Codes. This avoids conflicts between Industry, Labour & the Governments.
7. Applicability of Standing Orders has been enhanced to 300 workmen as against 100.
8. Earlier concept of “Public Utility Services” is eliminated. Notice of 14 days is mandated for Strikes / Lockouts. Any sudden or lightning strikes are illegal.
9. An Industry can layoff, retrench or close in case the employment strength of workers is less than 300 without seeking permission from the Central/ State Governments.
10. Fixed Term Employment has been introduced which is aimed at employment of persons due to sudden demand or service by an Industry.​

Let us examine the negative or disadvantages for an Industry and also the concerns with challenges to be faced.
How far the Four Labour Codes addresses the main objective & intention of the Central Government “Ease of doing Business” ?
 
1. Wage Administration and employee cost.
Employee Cost is highly significant to an Employer at all times includes forecasting. Employee Cost includes the direct and indirect outflows and more importantly it is very closely inter-related with the productivity or the output by an employee.

Let us examine each of these costs with reference to the Labour Codes.
Definition of “Wages” has been drastically redefined to make sure the “Contributory wages” shall be Fifty Percent of the total gross salary. Contributory wages to be taken for the purposes of payment of contribution to PF, payment of Gratuity and Payment of Bonus etc.  This results in sizable financial additional liability to an Employer. The question is how to neutralize to additional liability either overall cost savings measures for the product or service or by way of increased productivity or output?. Any attempts or efforts by the Employer to neutralize the additional financial burden, call for “Change Management”. There is no relief provided under the Code and will have to prevail upon the Trade Union & workmen which are again matter of challenge. Let us discuss this in detail in the subsequent paragraph.

Fixation of Natinal Floor Level Wages under the Chapter of Minium Wages.
The fixation has been evolved on the basis of evidence based fixation. Here, we may recall the Hon’ble Supreme Court judicial pronouncement endorsing the fixation of minimum wages based on evidence based one.

1. 2700 calories per head per day – 3 units are taken for a Family.
2. 66 metres of cloth per annum for the Family.
3. HRA @ 10% of sl.1.& sl.2.
4. Fuel, electricity,& misl @ 20 % Sl.1. 2. & 3.
5. Children education, medical, recreation etc @ 25 % of 1,2,3.

The above base has been endorsed by Supreme Court :  
“The recommendations assumed a 2400 calorie diet, while a 1992 Supreme Court judgment and the Indian Labour Conference of  1957 recommended setting the national minimum wage on the basis of a 2700 calorie diet”.

This revised fixation aims at “Need-based Minimum Wages” as envisaged by the Central Government. The Industries may not be against  this enhancement, in case, the same is linked to productivity of labour. Now, in its absence, this poses another additional financial burden on the Employer. In addition, there is half yearly revision of Dearness Allowance. Wage theories propagates “Need Based Wages” depends on the productivity of labour.
 
2. Bipartite Machinery under the Code.
Firstly Works Committee consisting of representatives of Employer & Employees to discuss and resolve issues pertaining to working conditions like, ventilation, sanitations, water, restrooms cleanliness, sitting facilities etc.  Although, generally, disputes or conflicts are not encouraged to discuss in this forum including individual / any group grievances.

Secondly, Greivance Redressal Machinery.
Here again, the Machinery is a team of representatives of Employer & Employees limiting to maximum Ten members. Chairman of the Committee shall be on rotational basis every six months. Any grievance by a worker or even group ,may bring up any grievance before the Committee. The decision by the Committee is based on majority votes. But, there is a raider. Majority vote’s means at least 50 % of the worker’s representatives must endorse the decision along with the Employer’s.  How far can any Employer accomplish this?  This is next to impossible.  Another major jolt. In case the worker / group of workers do not accept the decisions of the Committee, they can straight approach the Conciliation officer thus raising an Industrial Dispute through the Union. This is a major concern for any Employer since it would result in sharp rise in Industrial Disputes.

Here, the challenges for an Employer is the Proactive measures to be taken, namely, forecast any grievance, strategize the plans of actions, preventive steps to avoid any grievances and even, if there are, then, resolve the same either way and must prevent the grievance reaching the Committee. Once the grievance reaches the Committee, it is out of control as explained above. Managerial Effectiveness is the essence for any preventive and resolution steps.
 
3. Change in Service Conditions.
This continues to be a challenge for an Employer to alter or change in service conditions without due process of Law as mandated at present under Sec.9A of the Industrial Disputes Act. What concerns any employer is that – any rationalization process, methods, improvement in the process, increase in productivity, redeployments, flexibility in engaging or deployments etc are all included under the head “Service Conditions”. In fact, for the last three decades, particularly after the Economic Reforms and Globalization in 1991, the Employers have been continuously urging for modification, relaxation or even elimination.

Now, it a matter of disappointment and concern that even under the Codes, there are no changes envisaged.

Hence, this situation calls for a challenging task to neutralize the additional financial burden as we discussed earlier and continues to be so in case of any strategic plans towards technical developments, innovations, innovative practices  including expansions, generation of employments  etc.
 
4. Outsourcing & contract labour management.
As we are fully aware, the Contract Labour [Regulation & Abolition] Act came into effect from 1971 wherein regulatory measures have been mandated like registrations, licensing by contractors, payment of wages not less than the prescribed minimum wages as notified by Central and State Governments, working conditions, social security coverage etc . The Central / State governments have entrusted with the power of abolition of contract labour in any industry, class of industries etc in terms of Sec.10[1] of the Act. The Industry and the Trade Unions have been extremely familiar with their obligations and observing strict compliances. There have been number of cases of prohibitions in certain Industrial Establishments. Consequent to the rapid development of industrialization in the areas of Information Technology, BPO, ITES, manufacturing, service sector, hospitality and health care etc, there have been tremendous growth in employment opportunities and has contributed to reduce the unemployment in the Country. The contract labour engagement & outsourcing have been prominently dominated by all Central and State Government in all their activities and functions. At present, one can see tremendous growth in employment through outsourcing in the Industrial and Business circles.

Now, let us see what is in store for the Business.

THE OCCUPATIONAL SAFETY, HEALTH AND WORKING CONDITIONS CODE, 2020, defines CORE & NON CORE ACTIVITIES. While, this is welcome, Sec.57 of the Code prohibits engagement of contract labour in CORE AREAS.

NON CORE AREAS, no issues, engagements are permitted.

Definition of Core Areas has been very vague and highly debatable.

"Core activity of an establishment" means any activity for which the establishment is set up and includes any activity which is essential or necessary to such activity”

On close examination of various types of outsourcing like functions like finance, administrations, pay roll, wage administrations, talent acquisitions, marketing, sales , purchase,  IT / ITES / BPO sectors etc, these activities do fall under the definition of “Core Activities”. The question is how to face the challenge.

There is a small leverage for arguments to continue to engage contract labour. Following is the extract of the definition of “Contract Labour”.
 
Sec. 2 (m) "contract labour" means a worker who shall be deemed to be employed in or in connection with the work of an establishment when he is hired in or in connection with such work by or through a contractor, with or without the knowledge of the principal employer and includes inter-State migrant worker but does not include a worker (other than part time employee) who is regularly employed by the contractor for any activity of his establishment and his employment is governed by mutually accepted standards of the conditions of employment (including engagement on permanent basis), and gets periodical increment in the pay, social security coverage and other welfare benefits in accordance with the law for the time being in force in such employment;
 
But, this is highly arguable, debatable and interpretations can be either way. We can be sure that this will be a major litigation when the Code comes into effect and the Trade Unions or even the Authorities might start questioning and creates conflicts. It is too early to conclude that the employers have gained arising out the proviso.
 
5. Worker Reskilling Fund.
This is a newly introduced Chapter towards creating a Fund.  This Fund is aimed at Skilling / Reskilling of workmen who are retrenched. The Funds are generated by contributions by Employers as well as the Government. The intention and purpose of the Code under this provision is good.

Now the Central Government has published Draft Rules and some of the State Governments have also published the Draft Rules.
Under these Draft Rules, it is surprising to see that the Employer is directed to contribute the amount equivalent to 15 days of wages for every completed year of service in cases of retrenchment of a workman. The  amount to be credited to Central / State Authority online with details of name and bank details etc of the retrenched worker. In turn, the Authority will remit this amount to the retrenched workmen.

Now, here, where is the reskilling? The Employer has to pay retrenchment compensation under the Code which is a condition precedent at the time of retrenchment and then the Employer has to deposit the amount to the Fund. This is a double payment of retrenchment compensation. The purpose and intention of the Code is totally diluted.
 
6. Penalties.
The penalties under all the Codes are very severe for each and every contravention of the provisions. The Minimum Fine starts with Rs. Fifty Thousand and goes up to Rs 4 Lakhs.

The imprisonment starts with Three months and goes up to 3 years.

Under the Code On Wages, any employee who gets the salary delayed or gets less salary or deductions are in excess, the Employee can directly file a complaint before a Magistrate against the Employer. Hence, strict compliances under all the Four Codes is one of the challenge.
 
Finally, when we scrutinize the positive sides of the Four Codes with the dis-advantages, concerns, threat of increase of litigations, challenging issues, how far one can say it is a Labour Reform with a purpose and intention of “Ease Of Doing Business”??
 

K.Vittala Rao.
Management Consultant