Labour reforms in India – upcoming labour codes

published on 12 October 2022 | reading time approx. 4 minutes

by Apoorva Singh

In India there is no single code on the labour and employment laws covering all aspects of labour and employment related matters. India’s labour regulatory framework is on the path of being substantially revised in line with adopting Indian labour reforms which have been due for implementation for long. The Code on Wages, 2019 is one of the first of four(4) labour codes which received the Indian Parliament’s nod and the Presidential assent on 8th August 2019. Subsequently, 29th September 2020 marks the passing of the long awaited three(3) Labour Codes i.e. the Code on Social Security, 2020, the Occupational, Safety, Health and Working Conditions Code, 2020 and the Industrial Relations Code, 2020 by both the houses of Indian Parliament and having received Presidential assent. This marks a step towards major boost and the first major milestone to the labour reforms in India.

Tracing journey towards labour reforms

With the introduction of New Economic Reforms which took place in 1991, rested on three(3) pillars: Liberalisation, Globalisation and Privatisation. These New Economic Reforms paved way towards removal of various restrictions in doing business in India and strengthening the international competition. With this the nation witnessed unfolding changes in the Indian economy growth dynamic.
In as early as in 2002, the Second National Commission on Labour emphasised on rationalisation of existing laws relating to labour laws and cited that multiplicity of labour laws and the difficulty in their compliance has always been cited as an impediment to the industrial development. It was then recommended by the Second National Commission on Labour to codify the Central level multiple labour laws into consolidated codes.
It was not until the Goods & Services Tax, as One Nation One Tax, was implemented, initiatives towards Labour Codes had begun. The recent initiatives taken by the Indian Government through “Make in India”, “Skill India”, “Startup India”, “Digital India” are all a stepping stone and attribute towards expediting the “Vision of Indian Government” with respect to introducing bold labour reforms. This is ultimately aimed towards ease of doing business and making India as an attractive investment destination and to further boost the Indian economy.

All about labour codes: A Bird's eye view

In line with the recommendations of the Second National Commission on Labour, the Indian Government has taken a step in the right direction towards amalgamating, simplifying and rationalising 29 current central labour laws relating to wages, social security, occupational safety & industrial disputes into 4(four) Labour Codes.
Some of the key changes introduced under these new Labour Codes vis-à-vis the existing labour regulatory framework are directed towards bringing transparency and accountability in enforcement of Labour Laws. The Labour Codes attempt to strike a balance between the expectations of employers to facilitate employment growth, by way of flexibility in employment, reducing compliance burden but at the same time without compromising on protecting workers’ rights.

Uniform definition of Wage

One of the most important changes brought is the introduction of revised definition of “wage” which will be uniformly applicable. Under the current labour laws there are almost 12 definitions of wages under often leading to litigious and ambiguity. One of the condition which has been newly introduced is with respect to certain components which are excluded from the ambit of definition of wages: statutory bonus, allowances like House Rent Allowance (HRA), conveyance allowance, contribution towards pension and provident fund by the employer and overtime allowance. The condition stipulates that if these excluded components exceed one-half (50 per cent) or such other per cent as may be notified by the Central Government, of all remuneration calculated under this clause. Such exceeded amount shall be accordingly added in the wages.

Role on Inspector to Facilitator: End of Inspector Raj

Under the new Labour Codes there is an introduction of Inspector-cum-Facilitator which is in fact intended to bring a change in the inspection system to set to form a conducive environment for enforcement of labour laws with transparency and accountability. In addition to conducting inspection, the Inspector-cum-Facilitators are now obliged to advise the employers and employees relating to compliance with the provisions of new Labour Codes and the employer shall be given reasonable opportunity to comply with the Codes.

Flexibility in employment

A new provision of “Fixed Term Employment” allows engagement of a worker for a fixed period based, on the basis of requirement and without restriction in any sector on a written employment contract. However, all statutory benefits will be given to fixed term workers at par with permanent workers including gratuity based on the term of their employment contracts on a pro-rata basis. Industrial Relations Code permits companies/employers with up to 300 workers to retrench them without prior government approval. Currently threshold of 100 or more workers need government permission for closure, layoffs or retrenchments. The Occupational, Safety, Health and Working Conditions Code, 2020, prohibits employment of contract labour in the core activities of any establishment. However, at the same time there are certain exceptions with respect to prohibition on engagement on contract labour-if the normal functioning of the establishment or activities carried out are such that there is no requirement of full-time workers or if there is sudden increase in volume of work in the core-activity which needs to be accomplished in a specified time.

Welfare measures and Statutory Benefits

Under the Labour Codes there are certain changes introduced in line with expanding the coverage of social security benefits to all workers of organised, unorganised and self-employed sector. Additional obligations have been imposed on employers for providing better and safe environment along with occupational health and safety to workers at the workplace. There are changes introduced in terms of leaves, for example, eligibility to earn annual leave has been reduced from 240 days to 180 days in a given calendar year, revised conditions have been introduced regarding leave encashment. Further, an obligation is casted on employers on providing journey allowance in case of every inter-state migrant worker, every year, a lump sum amount towards his travel to his native place.

The Ministry of Labour & Employment has also developed eSHRAM portal for creating a National Database of Unorganised Workers (NDUW) for optimum realisation of their employability and extend the benefits of the social security schemes to them in line with the Social Security Code.

Industrial Relations

The Industrial Relations Code proposes to protect the workers right to form union, to minimise the disputes between the employers and the workers. With regards to the Trade Unions, where there is more than one trade union in an establishment, the sole negotiating union status will be given to the one that has 51 per cent of the workers employees as its members. Under the Industrial Relations Code, 2020, the industrial establishments/ companies employing less than 300 workers are not required to obtain prior permission of the appropriate government for the purpose of lay off, retrenchment and closure of establishments as opposed to the current framework where such permission is required for the industrial establishments with more than 100 or more workers. Further, under the Industrial Relations Code, 2020, the companies employing 20 or more workers must constitute a grievance redressal committee.

Status quo

All four(4) Labour Codes have been passed and received Presidential assent. However, the implementation date of Labour Codes have been a work in progress since quite sometime. Although the Central Government has notified the Labour Codes, it is still pending with the states to notify rules under these Codes to bring into force into their respective jurisdiction. Since “Labour” is a subject enlisted in the Concurrent List of the Constitution of India, the State Governments are empowered to finalise and notify rules under these Codes to bring into force into their respective jurisdiction.

Key take aways

With diluting the rigid compliance requirements, the Labor Codes also ensure transparency and higher accountability. The Labour codes for the first time introduces compounding of first offence however such offence must not be an offence punishable with imprisonment only or with imprisonment and fine. Further, if the violation of a similar nature is repeated with a period of 5(five) years from the date on which the violation was committed, the repeated offence cannot be compounded.
The Labour Codes, especially the Wage Code, 2019 could potentially increase the employer’s costs towards calculating statutory benefits which are calculated on wages for provident fund, gratuity, leave encashment etc. The possibility that the take-home salary will be less, as higher contribution on provident fund may entail but it will give an added advantage to retirement fund of the employees. It is necessary that employers look at the implications of keeping specific salary structures in mind and determine the impact.
Although the Labour Codes are yet not implemented, similar to any nascent law, these Codes will have a significant impact on industry, both commercially as well as operationally. Every business person remembers during the first year of implementation of GST, which created to an extent apprehension in the minds of many, queries towards correct implementation. Therefore, it is high-time for companies to start reviewing the impact of these Codes and conduct labour and HR compliance health check, to align their current practices and processes with the Labour Codes.

The content of this article is intended to provide a general guide to the subject matter. This disclaimer informs readers that the views, thoughts, and opinions expressed in the text does not constitute any advice.