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Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Decoding the draft labour code

The code does not deliver on its central objective of improving labour flexibility and entrepreneurial freedom

Come make in India. Sell anywhere, make in India," Prime Minister Narendra Modi appealed in his Independence Day speech in 2014 while unveiling his ‘Make in India’ programme. But ‘Make in India’ shall remain easier said than done without significant improvement in the factors market. Labour reforms must therefore be an essential part of this campaign to revive manufacturing in India. Rationalisation of arcane labour rules that help neither the employer nor the workers is long overdue. Therefore, the recent unveiling of the draft labour code on industrial relations bill by the ministry of labour and employment is a potential game-changer. Yet, as has been the case with many of the recent governmental initiatives, the draft code’s content does not truly live up to its promise of simplifying labour laws and enhancing ease of doing business. A muddled approach to certain key issues—especially applicability of Chapter V-B of the Industrial Disputes Act—has produced a draft that may cause as much damage as the benefits that it is likely to bring.

For sure, the draft code proposes a few tectonic shifts in our industrial relations laws. The amalgamation of the three central statutes into a single instrument is itself noteworthy. Recommended by the second National Commission on Labour (NCL), such consolidation shall make compliance simpler for both employers as well as employees. Similarly, allowing direct application to tribunals, even without a reference by government, shall minimize the need for political patronage and thereby curb political interference with unions.

The most radical proposal in this draft pertains to dilution of existing restrictions on lay-off, retrenchment and closure. Chapter V-B of the Industrial Disputes Act (IDA) currently requires prior permission for lay-off, retrenchment and closure in all industrial establishments having 100 or more workers. Chapter X of the draft code increases this threshold number to 300 and thereby seeks to exempt a larger number of establishments from obtaining prior sanction for lay-offs. This is aimed at greater labour flexibility for industries to meet the fluctuation in demand arising from ebbs and flows of business cycles. At the same time, the code attempts a fine balance between the interests of workers and greater entrepreneurial flexibility by increasing the quantum of compensation for retrenchment and closure to 45 days’ average pay for every year of continuous service from the current provision of 15 days’ average pay for a year of service.

Nonetheless, these changes are in danger of being overshadowed by a few other muddled provisions. First of all, while proponents of labour flexibility have welcomed the increase in the numerical threshold for prior sanctions for lay-offs from 100 to 300, what has been missed is that many new industries, hitherto not covered by Chapter V-B of IDA, may now require prior sanction for lay-offs. Chapter V-B applies only to factories, mines and plantations (having 100 or more workers) and not to all industries. Thus, a service-sector establishment having 350 workers, even though an industry for the purpose of IDA, does not require prior sanction for lay-offs since it is not covered by Chapter V-B. However, it shall now require prior sanction under the code for the dragnet of prior sanctions shall now be extended to all industrial establishments, even those that are not factories, plantations or mines. As a result, even as the code enhances labour flexibility in manufacturing and mining, it may constrict the space for such flexibility in the services sector, which has hitherto been untouched by Chapter V-B. Similarly, standing orders, which provide for detailed regulation of terms of employment, shall be made applicable to all industries having 100 or more workers, thereby extending its scope to service sectors too. As of now, standing orders apply only to factories, railways and a few other establishments having 100 or more workers. Extending the granular regulation of standing orders to services sector would severely limit entrepreneurial freedom in such establishments. These two features of the draft code can cumulatively smother the growth of large services sector establishments and undermine the benefit of raising the numerical threshold for prior sanction for lay-off.

There may be a case that doing away with the distinction between different types of industries would lend greater uniformity in industrial relations law. It has also been argued the benefits of labour flexibility are overstated. Lack of a dramatic rise in manufacturing special economic zones and states that relaxed the requirements of Chapter V-B of IDA suggests the causal role of structural impediments other than rigid labour laws. There may be a case, therefore, for labour reforms to go beyond flexibility of hire and fire. However, in so far as labour flexibility and entrepreneurial freedom have been professed as its central objective, the draft code does not deliver on its promise. In trying to catalyse manufacturing, it may, in fact, jeopardise the services sector.

Saurabh Bhattacharjee is an assistant professor at the National University of Juridical Sciences, Kolkata.

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