Labor Reforms: A Paradigm Shift

On November 21, the Government of India issued gazette notifications bringing into effect four labor codes—the Code on Wages (2000), Industrial Relations Code (2000), Code on Social Security (2020) and Occupational Safety, Health and Working Conditions Code (2020)—aimed at “streamlining compliance, modernizing outdated provisions, and create a simplified, efficient framework that promotes ease of doing business while safeguarding worker’s rights and welfare”. These codes, however, will become fully functional once the rules regarding administrative and procedural issues are framed and notified. Nevertheless, these reforms are the most consequential structural changes to have occurred in a long time. 

These reforms indeed promise a simpler compliance for employers by consolidating 29 central legislations into four comprehensive Labor Codes. Replacing the existing overlapping statutes and the accompanying fragmentation and inconsistency with a unified architecture—the existing 1400 rules are reduced to 365—duly supported by single registration, consolidated returns, and electronic filings—the reforms are likely to minimise administrative friction and inspection delays, which is a great relief to businesses. Such a simplification not only reduces transaction costs but also improves ease of doing business by minimising the role of ‘rent-seeking’ agencies. With the rise in the threshold for seeking prior government approval for layoff, retrenchment, and closure of factories, mines and plantations from the earlier 100 to 300 workers, along with a provision for state governments to increase this limit further, flexibility in hiring by employers stands enhanced. Introduction of fixed-term employment facilitates hiring for shorter tenures in sync with the industry’s seasonality. And all this makes investors’ expansion decisions more timely and attractive.

The Industrial Relations Code states that workers cannot strike without giving notice within 60 days before going on strike or within 14 days of giving such notice. Even a mass casual leave program of more than 50% of workers is considered a strike. These norms are hoped to discourage flash strikes, which are indeed instrumental in disrupting productivity. Defining the core and non-core activities of an establishment, OSH code gave flexibility to employers to employ contract labor even in core activities. These reforms are set to enable India Inc. to align staffing with demand curves and execute projects speedily. 

The code on wages prescribes a national floor wage that guides states in setting minimum wages to cover all employees, which is likely to reduce disparities and offer more predictable earnings for workers. Issuing appointment letters is made mandatory. Wage is defined as basic pay, dearness allowance and retaining allowance, and is to be the basis for the calculation of other benefits and social security contributions. Working hours are also specified: 8-12 hours per day, and no employee shall be required to work for more than 48 hours a week. Overtime wage must be at least twice the normal wage for any work beyond normal working hours. Payment timelines are also made explicit with a direction to issue wage slips to every employee by employers, either in physical or digital format. These measures are likely to reduce disputes between the employer and employees, leading to enhanced trust in the workplace that is essential for improved productivity. 

The codes also elevate workplace safety by prescribing periodic health checks to all employees above 40 years at the cost of employers. Every factory employing 500 or more workers, employers employing 250 or more construction workers, and employers hiring 100 or more workers in mines are required to constitute safety committees with employers’ and workers’ representatives. Regardless of the industry type, Employees Provident Fund Organisation coverage is extended to all establishments having 20 or more employees. In contrast to the present norm of 10 employees, Employees’ State Insurance Corporation (ESIC) coverage is made mandatory even for a single worker employed in a hazardous occupation. Significantly, these codes recognise new work models for the first time by offering social security schemes for gig and platform workers. Aggregators for gig workers are required to contribute 1-2% of their annual turnover for social security. Fixed-term employees appointed for shorter terms are to be treated on par with permanent workers for all statutory benefits, including gratuity after one year of continuous work. Women are permitted to work at night, subject to their consent and provisions for safety. The net effect of these reforms on workers is improved income certainty, defined entitlements, and safer, more inclusive workplaces. 

There are, of course, resentments from unions about liberalisation of retrenchment norms and restrictions on workers’ right to strike. Similarly, employers are concerned about rising payroll costs. They are, of course, the obvious reactions. Still, the pertinent question is: How friendly are these reforms to strengthening the foundation for sustainable development and improving the capacity to generate employment for absorbing the growing youth population? 

The true impact of these codes, however, squarely rests on their implementation in right earnest. This calls for framing rules about administrative and procedural issues at the earliest in consultation with state governments, employees and employer representatives. Thereafter, regular tripartite meetings are necessary to identify bottlenecks early and take timely action to keep the reforms on track. Only then can the reforms deliver their intended outcomes.

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