Industrial Relations Code 2019 – Will It Help Kickstart The Economy?
Industrial relations in India have long been cited as a sore point for investors, with laws being viewed as unduly one-sided in favour of workmen and unions, and unnecessary restrictions being imposed on the running or closure of businesses. As part of the government’s initiative to rejig labour and employment laws, the latest development has been the introduction of the Industrial Relations Code, 2019, before Parliament. This seeks to amalgamate and revise some of the most significant legislations dealing with labour relations in India, namely the Industrial Disputes Act, 1947, the Industrial Employment (Standing Orders) Act, 1946, and the Trade Unions Act, 1926. This article assesses some of the significant changes being proposed by the IR Code and what impact they are likely to have on investor confidence and the economy.
Flexibility in running any business is probably the most valuable asset available to an enterprise. Market vagaries and fast-paced technological developments make it imperative for organisations to remain nimble to remain competitive. To this extent, industry has long sought greater flexibility in its ability to manage employee headcount or if necessary, to close-down undertakings. Globally, rare is it to see the need for prior government permission (which pans out to be more of an interference) to retrench a single workman in establishments with 100 or more workers, as is the case in India. Similar permission requirements apply to closure. These limitations alone are vastly responsible for the proliferation of contract labour in Indian industry (due to the flexibility they lend in managing headcount and operations). Unfortunately, that has also led to the abuse of labour in many instances.
The IR Code has unfortunately not made any change in this respect and continues to require factories, mines, and plantations with 100 or more workers to seek prior government permission before any retrenchment or closure. The only saving grace is that state governments can revise this limit, as many have already, to 300 workers.
This means that organisations will still be required to run from pillar to post seeking government permission which is often denied or delayed—and deal with difficult unions who use this as leverage—to restructure their operations, especially closures.
The government, therefore, continues to focus on protecting existing jobs rather than creating an environment that enables more job creation.
That said, the IR Code does offer some limited respite in the form of more express recognition of fixed-term employment. It must be noted that fixed-term employment is not a new concept. The definition of “retrenchment” under the existing law always stated that “termination of service ... for non-renewal of the contract of employment” does not amount to retrenchment, squarely covering fixed-term contracts. The IR Code makes this more explicit and also builds in protective provisions requiring employers to extend the same wage and benefits to fixed-term employees as they would to permanent workers, and also extend pro-rata statutory benefits irrespective of the qualifying period. Organisations can, therefore, use fixed-term employees with greater confidence, especially for project-based work or short-term demands. This is only limited respite, however, since most organizations won’t be able to rely entirely on fixed-term employees - they would run the risk of such arrangements being viewed as a sham.
So the hiring of fixed-term employees is not going to change the reality of government permission when it comes to large scale redundancies or closures.
The government could have done better to acknowledge market realities and omitted prior permission requirements, and instead offer the impacted workmen a more generous severance package compared to just 15 days wages per year of service, which anyway happens through voluntary retirement schemes implemented to avoid government permission.
Flexibility is also important in relation to the terms and conditions of service. The IR Code has made no changes on the requirement for industries with 100 or more workmen to create certified standing orders under the Industrial Employment (Standing Orders) Act, 1946, which the new Code will replace. Certain industries, like the IT/ITES sector, have long demanded exemption from these rules, which has been left for the appropriate government to decide.
Collective Bargaining And Strikes
The IR Code has done better to formalise rules relating to union recognition. Currently, most Indian states lack such rules, often resulting in multiple unions fighting for dominancy and bargaining rights. It is not uncommon to see multiple settlements being signed within the same establishment with different groups of workers. Now, where there is only one trade union, the IR Code requires the establishment to recognise it as the sole negotiating union. Where there are multiple unions, the one which represents 75 percent of the workers can be recognised. When no single union covers 75 percent of the workers, representatives from all unions with 10 percent or more worker membership must come together to form a negotiating council. Clear rules on this subject can go a long way in ensuring smoother industrial relationships. Although given that a trade union can be registered so long as it represents just 10 percent or 100 workers, whichever is less, it would be better to stipulate a larger membership requirement for recognition where there is only one union. For example, 30 percent representation is presently needed in Maharashtra for recognition.
The definition of a strike has also been expanded to include “conserted casual leave on a given day by 50 percent or more workers”, and the schedule defining unfair labour practices has lent greater clarity to what “go-slow” means.
Importantly, unlike the current law, workers in all establishments and not just public utilities will need to give 14-day notice of strikes, preventing flash strikes and unexpected work stoppages.
These are positive changes and will inspire greater investor confidence.
The IR Code has also done well to streamline the dispute resolution process. Labour courts, etc. will be eliminated and matters will go from conciliation to tribunals directly if a party wants, without government reference. Conciliation would be expected to be completed within 45 days (14 days in case of strikes or lock-outs), and conciliation officers will be barred from mediating matters that are older than three years. That said, a new provision has been proposed allowing the tribunal to rule on the costs of the proceedings and who should bear the same, subject to rules that may be prescribed. In some international jurisdictions, the employer could be forced to pick up the litigation costs of the employee in unfair dismissal claims (if the employee succeeds), and if something similar is implemented in India, it would significantly change the dynamics associated with employee terminations.
The IR Code has proposed a wide definition of “industry” on the lines proposed in 1982, but with fewer exceptions. The 1982 amendment had excluded hospitals, educational institutions, etc. which would now be treated as industrial establishments under the IR Code unless specifically notified as exempt.
Unfortunately, the IR Code has not made any significant change in how a “worker”, previously “workman”, is defined.
The Code continues to stipulate a subjective definition revolving around the roles and responsibilities of the individuals. This requires establishments to delve into complicated and often disputable assessments of who is a workman and create the scope for unnecessary litigation. The government should have additionally also proposed a clear and objective wage threshold for this purpose, as is the case in places like Singapore, so that well-paid employees in any role are not treated as workers.
There are several other changes proposed by the IR Code which will impact organisational decision making – such as treating termination for continued ill-health as retrenchment (entitling the worker to receive compensation), obligating organisations to pay 15 days wages towards a re-skilling fund (which can be a sore point when the retrenchment is on performance grounds or loss of faith), etc.
On the whole, the IR Code has made some positive leaps towards streamlining industrial relations and handling of disputes, but it still falls short on critical aspects required to ensure flexibility in operations in today’s dynamic economic environment.
Atul Gupta is a labour and employment law specialist and a Partner with Trilegal. Views are personal.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.