Implications of India’s New Labor Law Codes

It is easy to regard India’s present labor law framework as complex. With a myriad of labor laws in force across the country and also separately within individual states, business organizations – especially those with operations in different parts of India – encounter numerous compliances and procedures. With the aim to reform and amalgamate the current labor law framework in India following recommendations from the Second National Commission on Labor and as part of the Indian government’s wider aim of promoting ease of doing business in the country, the labor law framework in India is being consolidated primarily into four labor law codes covering different aspects of employment law in India.

The Changes

The Indian government recently approved the enactment of three new labor codes – the Code on Social Security, the Industrial Relations Code (“IR Code”) and the Occupational Safety, Health and Working Conditions Code (“OSH Code”). These labor codes have been approved by the Indian legislature and are on their way to becoming law; they are expected to come into force by early to mid 2021. These three labor codes, along with the Code on Wages (which is not in force yet, but was approved in 2019) will replace and consolidate a substantial number of labor legislations in India and will undeniably influence companies and their employment policies in India.

While the rules meant to operationalize these labor codes will be finalized by the government in the next few months through public consultations, a short summary of the key highlights from each labor code in its present form is presented below:

1. Code on Wages

This code primarily stipulates the minimum wages payable, governs the manner in which wages are paid, applies to all workers irrespective of wages drawn and covers all workers and employees in an organization, both in the organized and unorganized sectors.

The actual sector-specific floor wages will be fixed by government notifications (issued from time to time) after the code is brought into force. While certain types of wage deductions will be permitted, such deductions cannot exceed 50 percent of the total wages drawn by an employee or worker.

This code also makes specific provisions for timely payment of wages and payment of bonuses and overtime wages, and it enhances penalties (from current levels) for noncompliance.

2. Code on Social Security

This code primarily stipulates the mandatory employment benefits to be provided to employees and incorporates existing legislation related to maternity benefits, pensions, social security, etc., that remain unchanged and thus would require little re-evaluation by companies. This code enhances penalties for noncompliance but permits some offenses to be compounded (and settled by a monetary settlement).

The new aspect of this code is that it introduces new categories of workers who will be eligible for social security benefits – these include individuals who were not eligible for such benefits in the past, such as gig-workers (freelancers), workers accessing platforms to provide services (e.g., aggregators, ride-hailing services, delivery and courier providers, etc.) and other categories of unorganized workers (e.g., self-employed workers). While the code does not yet stipulate the specific benefits to be provided by the companies employing such “gig workers” and “platform workers,” the code broadly states that contributions by companies employing such categories of workers will be in the range of 1 to 2 percent of the annual turnover of the company (subject to a cap of 5 percent of the amount paid or payable to the such workers).

The Indian government has been entrusted with the power to frame the benefit schemes (such as health insurance, social security contributions, life and disability coverage, etc.) to be provided to such workers, who will be notified by the government after a consultative process with representatives of such companies.

3. Industrial Relations Code

This code primarily stipulates the provisions related to the handling of employment disputes, layoff and retrenchment of workers, recognition and operation of trade unions and minimum standards for formulation and registration of employment standing orders (policies).

As a measure to relax some of the requirements to be followed while retrenching employees, this code revises the rules for laying off and retrenching workers (e.g., prior governmental approval for retrenchment is now necessary only in case of industrial establishments employing at least 300 workers – an increase from the previous threshold of 100 workers or more). Although some experts have compared this to the American “hire and fire” model, this code retains certain safeguards to protect employees from being fired without notice and compensation and also obliges companies to contribute into a workers’ re-skilling fund for each employee who is retrenched.

This code permits employment of workers for fixed durations (fixed-term employment), with workers being entitled to receive all employee benefits on a pro-rated basis (including gratuity). Companies are obliged to set up dedicated grievance redressal mechanisms for all workers and employers (who meet pre-defined thresholds) and are obliged to create and register standing orders describing the working conditions of all workers.

This code also sets out new rules for identifying (sole) negotiating trade unions and enhances penalties for noncompliance.

4. Occupational Safety, Health and Working Conditions Code

This code will cover all mines and docks and all business establishments and factories employing a minimum of 10 workers, and it prescribes the standards to be followed by companies to ensure the safety and health of employees and workers.

Companies will have to provide certain benefits to employees, such as providing free annual health examinations and issuing a letter of appointment to all employees. After the code comes into force, companies will have to register their establishments within 60 days; registration is compulsory for all business establishments under purview of the code, and no employment is permissible without registration. Compulsory licenses are required to employ contract labor.

Employers as well as employees are obliged to maintain and follow good health and safety practices. Employers as well as employees will attract penalties for noncompliance.

As this code makes sector-specific provisions as well, companies will have to review safety policies according to the type of establishment. For instance, workers employed in factories are subject to different standards of leave and working hours. In general, this code mandates that working hours are to be for a maximum duration of eight hours a day and no more than six days a week. This code also permits overtime work with prior consent of employees and payment of overtime wages (calculated at twice the normal wages).

This code has given companies the flexibility to employ workers on a contractual or fixed-term basis, regardless of sector.

Implications for Overseas Companies

The main benefits with the implementation of the new labor codes are:

1. Simplification of procedures and reduction in requirements, resulting in reduced compliance costs.
2. Single registrations will replace the need for registrations under multiple labor laws.
3. Ability to hire workers for a fixed duration, which will encourage companies to hire individuals directly rather than through contract agencies.

Some of the main disadvantages of these labor codes will be:

1. Consequences of noncompliance will be more severe, since penalties have been enhanced.
2. Companies may need to apply for some first-time compliances and registrations.
3. Material aspects of the implementation of the labor codes have been left to notifications to be issued by the government from time to time.
4. Aggregators such as ride-hailing services, logistics companies and food-and-grocery delivery companies will be obliged to offer social security benefits to their workers.
5. The leave and working time provisions under the OSH code will overlap with the provisions of state-level shops and establishment acts, and no specific mechanism has yet been prescribed to resolve conflicts.

Conclusion

The new labor codes retain the spirit and broad coverage of existing labor laws, so companies’ existing employment policies may not need significant revision. However, the implementation of material aspects of the new labor codes is also subject to directions issued by the government from time to time; this casts a level of uncertainty into the requirements and practices companies will be required to follow – including companies that were not directly under the purview of all existing labor laws (e.g., aggregators).

Companies will therefore need to carefully study the implementation of the new labor codes – especially during the initial phases – and be prepared to implement the provisions of the labor codes and amend their practices and policies swiftly.

In June 2020, the Indian government announced its plans to accelerate the development of a National Employment Policy (NEP), focused on the generation of employment opportunities and attracting foreign investments and businesses in India. The NEP will seek to formalize and create a skilled and employable workforce while also providing social security protections. These latest reforms to labor laws in India are the first step to ensure effective implementation of the NEP’s objectives, promote ease of doing business in India and encourage foreign companies to establish their businesses in India.