India’s New Labor Codes: A Brief Note for Foreign Investors

• India’s new labor codes make hiring decisions more flexible for companies, reduce the labor compliance burden, and ensure that labor unions give 60 days’ strike notice. 
• The government has deferred the implementation of the four labor codes – Code on Wages, 2019, Industrial Relations Code Bill, 2020; Code on Social Security Bill, 2020; and the Occupational Safety, Health and Working Conditions Code Bill, 2020 – till key industrial states notify rules of implementation. This was to previously come into effect April 1, 2021 and is likely delayed due to elections in some states.

India’s parliament approved three new labor codes on September 22-23, 2020 in a historic move to consolidate the country’s labor legislation and compliance norms. The codes are – Industrial Relations Code Bill, 2020; Code on Social Security Bill, 2020; and the Occupational Safety, Health and Working Conditions Code Bill, 2020.

The respective bills bring gig workers and inter-state migrant workers into the ambit of social security for the first time.

Businesses will find that the new codes make it easier for them to be flexible in their hiring and firing decisions as well as in shutting down operations in the country. For example, firms with up to 300 workers can now fire staff without seeking government permission. Conditions restricting worker’s right to strike have also been introduced.

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The labor codes, according to the Labor Minister Santosh Gangwar, will “provide a transparent system to suit the changed business environment.” To labor activists, the new codes appear to be introducing a ‘hire and fire model’ to the Indian economy.

The three new labor codes were preceded by the first code, the ‘Code on Wages’, which was approved by parliament last year. The Code on Wages consolidated existing laws relating to minimum wages, bonus payments, equal remuneration, among others.

Together, the four codes consolidate 29 central labor laws, and deliver on Prime Minister Narendra Modi government’s long-standing promise to disentangle Indian’s convoluted labor legislation framework and improve the ease of doing business in the country.

The successful implementation of these labor reforms will be key to attracting more foreign investment and to get India’s GDP growth trajectory back on track after an unprecedented contraction in Q1 2020-21 due to the extended lockdowns under COVID-19.

According to the World Bank, if India’s laws were less restrictive, the country could approximately add “2.8 million more good quality formal sector jobs” on an annual basis.

What are the new labor codes and how will they impact businesses?

Businesses in India will benefit from the reduction in licensing requirements and paperwork as well as the costs associated with multiple compliance obligations, which in turn could incentivize their capital invested into core business operations, thereby enabling the creation of new jobs or sustaining employment.

India’s labor ministry supported the framing of the new codes based on changes in technology, work methodology and nature of work, and workplace facilities in recent decades. The government held that these transformations had warranted changes to India’s labor regulation. Industries and workers depend on each other to progress and the new codes aim to balance their rights and obligations.

A unique aspect of how these bills were quickly passed after previous delays is linked to the boycott of parliament by opposition political parties on another matter.

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Labor law reforms in India have been a critical component of the Modi government’s efforts to improve the country’s business environment for foreign investors. As per the World Bank’s ‘Doing Business 2020’ report, India jumped 14 spots to rank 63 in the ease of doing business rankings. Over a period of five years, India has improved its rank by 79 positions (2014-19).

The new labor codes hopes to establish a labor compliance regime that is based on “one labor return, one license, and one registration”. Currently, employers must maintain eight registrations and four licenses to run a business. Under existing labor laws, they must file eight labor returns, including to the EPFO, ESIC, and Chief Labor Commissioner.

The new codes also direct the digitization of the labor compliance regime in India, which should ease doing business. Maximum punishment for violations has been reduced from seven years to three years. Workers will benefit from receiving 50 percent of the penalty imposed on employers by the courts – in addition to the compensation awarded to them by the court. The test for eligibility for workplace compensation will include scenarios where employees have met with an accident or injury while traveling to or leaving the workplace. Currently, such compensation is limited to injuries sustained during work hours at the workplace.

Below we briefly discuss the three new code bills.

Industrial Relations Code Bill, 2020

This Code will consolidate and amend laws relating to trade unions, employment conditions in industrial establishments or undertakings, and the investigation and settlement of industrial disputes. The new Code raises the threshold for the requirement of a standing order – which pertains to the rules of conduct for workmen employed in industrial establishments – to over 300 workers. This means that establishments employing fewer than 300 workers will enjoy greater flexibility in their labor management, that is, without needing government assessment and approval.

16 states in India have already increased the threshold for closure, lay-offs, and retrenchment in establishments that employ up to 300 workers without needing government approval.

The Industrial Relations Code introduces new conditions that must be met to conduct a legal strike. A time period for arbitration proceedings has been included in the conditions – this must be observed by workers before they embark on a legal strike; presently, the only consideration is time for conciliation. This may be a source of relief to many businesses in the country.

Thus, if arbitration proceedings are pending before a labor tribunal or the National Industrial Tribunal, workers cannot go on a strike for 60 days after they are concluded. The new conditions will apply to all industries. Earlier, workers could go on strike after giving between two weeks and six weeks of notice. Under the new code, flash strikes have been outlawed.

Code on Social Security Bill, 2020

This Code amends and consolidates laws pertaining to social security, including provident fund, insurance, and maternity benefits. The goal of this Code is to extend the social security net to all employees and workers – both in the unorganized sector (which includes the bulk of India’s enterprises) and the organized sector (registered factories, offices, and corporate establishments).

The Social Security Code has proposed the setting up of a National Social Security Board to formulate suitable schemes for unorganized workers, gig workers, and platform workers. The Code brings these workers under the ambit of social security schemes that include life and disability insurance, provident funds, health and maternity benefits, and skill upgradation. The Code also proposes establishing a social security fund. Some of the compliance areas under the Code relate to provision of appointment letters to workers, digital payment of wages, and free annual medical checkup.

There are around 500 million workers in the country, including 100 million who are employed in the organized sector.

Occupational Safety, Health and Working Conditions Code Bill, 2020

This Code seeks to regulate the health, welfare conditions, and industrial safety of workers in establishments with 10 or more workers as well as all establishments in the mining and dockyard industries. The Code subsumes and replaces 13 labor laws, including the Factories Act, 1948; Mines Act, 1952; Dock Workers Act, 1986; Contract Labour Act, 1970; and Inter-State Migrant Workers Act, 1979.

The Code permits a single license for staffing firms to hire workers contractually from different locations instead of the current system that requires multiple licenses. Further, the threshold limit of contractor employees has been increased from 20 to 50 under the Occupational Safety, Health and Working Conditions Code – the relaxation of norms to allow hiring of contract workers in all areas will ease compliance for employers. The Code also directs the central government to provide data from relevant agencies and states to facilitate a full-fledged survey for migrant workers. After the Code Bill is enacted (signed by the president), this survey will have legal backing and no state government, or agency, or organization can deny data sharing.

Moreover, the Code empowers a state government to exempt any new factory from its provisions if that will result in more economic activity and jobs. It also fixes the maximum daily work limit at eight hours a day and states that women can be employed in all establishments for all types of work. If the work is hazardous, the employer is expected to have adequate safeguards in place. 

Some observations on labor law compliance during the 2020 lockdowns

Some of India’s states had amended their labor legislation and compliance obligations to offset the impact of the COVID lockdowns in 2020 – a move that was sharply criticized by opposition political parties like the Congress.

Labor activists and unions were concerned that the pandemic would enable the curtailment of human rights of workers – and while these could result in temporary gains for businesses, they would unsettle working conditions over the long-term. An example of the controversial changes made to labor laws by some of the states involved increasing work shifts to 12-hours and cuts to overtime pay. Labor regulation is a concurrent subject under India’s constitution, which is why the central government and state governments can both frame laws on labor.

In keeping with a polarized political environment in the country, the ruling dispensation – the Bharatiya Janata Party (BJP) – saw to it that states where it led government, such as Uttar Pradesh and Madhya Pradesh – labor laws were suspended to ensure flexibility in hiring and firing industrial workers, wage compensation, etc. Gujarat, Haryana, and Himachal Pradesh also made similar moves. Some states like Rajasthan, which has a Congress government, extended working hours for three months but rolled back the order after one month due to criticism.

The suspensions of state labor laws were done to combat the crisis of worker capacity as migrant labor in cities had returned to their hometowns due to the loss of jobs and wages during the early lockdown period. Moreover, several businesses reported their inability to pay their workers.

On October 1, the Supreme Court (SC) quashed the Gujarat state’s order, which had allowed all factories in the state to extend work shifts from eight hours to up to 12 hours and slashed overtime payment to half. The SC also directed the state government to pay overtime that was due to workers – at the original rate. In its verdict, the Supreme Court stated that the pandemic “cannot be called an internal emergency threatening the security of the nation to do away with requirements of the law”.

This article was originally published October 2, 2020. It was last updated April 12, 2021.

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