Wednesday, October 14, 2015

India - India's Changing Winds of Employment Law

By Poorvi Chothani, Esq. and Zeenat Phophali, Esq., LawQuest, Mumbai, India

In a recent move to strengthen economic ties between India and the United States, the leaders of the two countries pledged to deepen economic cooperation and set up a joint program to boost investment. The Indian Prime Minister Narendra Modi and United States President Barack Obama have targeted a five-fold jump in Indo-US trade to 500 USD. During Modi’s recent visit to the United States, he said "any bottlenecks which should not be there, will not be there." Among other things, labour law reforms in India emerged as one of the key areas for facilitating business growth in India during the Prime Minister’s talks with business leaders in the U.S. Moreover, with the launch of the ‘Make in India’ initiative by the Prime Minister, labour law reform has inevitably become the need of the hour.

The industry demand is for flexibility in terms of freedom to hire contract labour, the freedom to retrench workers and close down undertakings without prior government permission, and the freedom to introduce technological changes that involve loss of employment. Further, businesses want a liberal labour inspection system and a rational and modern system of records compliance.

The present government proposes to loosen strict hire-and-fire rules, make it tougher for workers to form unions but raise by three times the severance package to protect employee interest, as stated by an officer of the Ministry of Labour and Employment.

Labour Landscape in India

Currently India does not have a robust and comprehensive labour law governing employment in India, but has a plethora of complex and antiquated laws that govern various aspects of employment related matters such as employment conditions, wages, lay-offs and so on. Under the Constitution of India, labour falls under the domain of both the Central (federal) Government and the State Governments. At present, there are 44 labour related statutes enacted by the Central Government dealing with minimum wages, accidental and social security benefits, occupational safety and health, conditions of employment, disciplinary action, formation of trade unions, industrial relations, etc. The labour laws comprise statutes, statutory regulations, administrative rulings, and judicial precedents. Government policies in this area have not been evolving fast enough in response to the changing needs of economic development and social justice, thus stifling business growth especially in labor-intensive industries.

The World Bank has said that India needs to have more flexible laws rather than restrictive in order to encourage employment growth and investment . Some of the labour laws are restrictive in nature and pose an impediment to business growth. For example, the Industrial Disputes Act (1947) has certain provisions that mandate obtaining prior government approval in the case of layoffs, retrenchment and closure of industrial establishments employing more than 100 workers. This provision is applicable even in situations where there is good cause to close down an establishment or in cases where job performance is reasonably poor. Another example of an antiquated labour law is the Trade Unions Act (1926) which needs to be updated and brought in line with changing labour and industry requirements. Cast in the colonial period and constructed along the lines of the then prevailing British law, the Trade Unions Act merely provides for voluntary registration of trade unions, affords certain kinds of protection and regulates rather severely the internal affairs of the trade unions. With far too many complex labour legislations, employers have often had to grapple with compliance related issues and employees have often found it difficult to identify the protections available to them under the different laws.

Labour Law Reforms

In a step to simplify labour laws, the present Indian government proposes to subsume and consolidate 44 of the labour laws into five broad codes relating to industrial relations, wages, social security, industrial safety and welfare. The new law will not only be applicable to all establishments in the organized and unorganized sectors but will also ensure minimum wages to all workers. The new law is expected to replace the existing Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act and Equal Remuneration Act, among others. Under it, the fixation and revision of minimum wages will now be left to the states - earlier it could have been done by both the Centre and the states. The states will also be empowered to multiply the minimum wages depending upon how difficult the task is.

Each code will address specific issues and include or eliminate relevant statutes. For example several industrial safety and welfare laws such as the Factories Act, the Mines Act and the Dock Workers (Safety, Health and Welfare) Act, will be merged to create a single code on industrial safety and welfare; while the Minimum Wages Act, the Payment of Wages Act, the Payment of Bonus Act, the Equal Remuneration Act and a few others will be merged to create a “single legislation called the Wage Code Act”. Additionally several laws related to social security, including the Employees’ Provident Fund and Miscellaneous Provisions Act, Employees’ State Insurance Corporation Act, Maternity Benefits Act, Building and Other Construction Workers Act and the Employees’ Compensation Act, will be merged to create a single social security code.

The Government also proposes to amalgamate three labour laws, including The Trade Unions Act, 1926, The Industrial Employment (Standing Orders) Act, 1946, and The Industrial Disputes Act, 1947, allowing easier retrenchment and closing down norms for firms with less than 300 workers. According to the proposal, firms employing up to 300 workers would be permitted to lay them off without prior government approval, as against the current threshold of 100 workers. In turn, workers would be given compensation for an average 45 days worked in a year as against the current practice of 15 days in the event that a factory is closing down.

Businesses will also have to give notice of three months to lay off workers or shut down a unit as against the prevailing one month period. The proposed bill also seeks to keep strikes and lock outs under control and has added new conditions when a strike or lockout cannot take place. Further, a proposed provision in draft code provides that 10 per cent of the total workers must come together to register a trade union. At present, 7 or more members can apply for registration of a trade union. In cases where 10 per cent of workers is less than 7, at least 7 workers are required (to apply) for the purpose and where the 10 per cent of workers exceed 100, 100 workers shall be sufficient for registering the trade union. These new provisions discourage formation of trade unions in India, which have historically been impediments rather than protecting employee rights.

While the Centre has amended the Apprentices Act, 1961 and the Labour Laws (Exemption from Furnishing Returns and Maintaining Registers by Certain Establishments) Act, amendments to the Factories Act, 1948 are pending with Parliament. It has also finalised changes to the Child Labour (Prohibition and Regulation) Act, 1986 and is working on umbrella legislation for small factories as well as easier laws of retrenchment of workers.

Changes at the State Level

The State Government of Rajasthan has taken the initiative in introducing changes to labour laws to attract investment and foster employment growth. In November 2014, the government of Rajasthan enacted amendments to three central labour laws that will allow businesses operating in the state to employ and lay off workers more easily, while making it more difficult for workers to unionize. The Industrial Disputes Act as it stands requires a firm employing more than 100 workers to seek permission from its state government for retrenching or laying off workers. Rajasthan’s recent amendment raises this threshold to 300 workers. It also increases the threshold employment for registration of a firm under the Factories Act, a regulation that puts a number of stipulations on work hours and work days in addition to the minimum age requirement. The State is raising the minimum membership for the registration of a trade union from 15 per cent of the company’s total employment to 30 per cent, thereby attempting to reduce managerial and labour time lost in building consensus among multiple unions.

The steps taken by Rajasthan will facilitate flexibility in hiring and bringing more workers under the labour legislation. Other states are expected to follow Rajasthan, with the current Union Labour Minister Narendra Singh Tomar signalling states can amend labour laws to suit local conditions.

The state of Madhya Pradesh's Cabinet has also approved amendments on similar lines. The government of the state of Haryana is considering changes to the Industrial Disputes Act, the Factories Act and the Contract Labour Act, along the lines of changes brought about in Rajasthan.


It is certainly clear that the Indian labour law regime is in need of comprehensive and meaningful reform in order to facilitate ease of doing business, promote industry and employee harmony and boost investments. Apart from consolidation of the various labour laws into simplified legislation, what also needs to be scrutinized is multiple and often complex processes relating to government approvals and permissions, without adversely impacting employee rights and protections.

A mechanism both at the central and state levels needs to be put in place in order to streamline and expedite the obtaining of necessary approvals and licenses. Also most importantly, reforming the labour law regime would not be effective unless corresponding enforcement measures are simplified and strengthened. In appropriate cases, labour law cases should be put on fast track paths in order to avoid litigation delays and huge costs both to employers as well as employees.