Industrial Relations Code, 2019 – Will it Increase ‘ease of Doing Business’ in India?

India’s effort to implement major legislative reforms has been recognized by the World Bank as India joins the list of top ten improvers in the ‘Ease of Doing Business’ rankings published by the World Bank for the third consecutive year. Major contributors to India’s jump to 63rd place are reforms in insolvency law, starting a business in India and the implementation of the ‘Make in India’ campaign. Having gathered some momentum, the Indian Government envisions to bring India within the top 50 countries in ‘Ease of Doing Business’ by 2021. A key focus area for achieving this goal is a much-needed overhaul of Indian labour laws.

One of the labour law reform measures proposed by the Indian Government involves codification of three critical industrial relation legislations under one code: The Industrial Relations Code, 2019 (Code). The Code consolidates Indian labour laws on trade unions, conditions of employment and industrial disputes. However, the Code has been met with strong opposition from the workforce. The Indian Government now faces a challenge of striking a balance between the demands of the workforce and providing the freedom to companies to conduct their business efficiently.

Indian labour laws with respect to trade unions were enacted in 1926 to protect workmen from exploitation as it was the need of the hour, given the pre-independence market economy. Trade unions grew out of the compulsion of situations where an individual worker was unable to voice demands and had no bargaining power vis-a-vis his employer. Collective bargaining through trade unions emerged as an effective instrument for workers to improve their working conditions. Currently, the Trade Unions Act, 1926 does not provide for recognition of a trade union.  Recognition of trade unions is governed by instructions and guidelines stated in the ‘Code of Discipline’, voluntarily accepted by employers and workers. The ‘Code of Discipline’ provides for two types of recognition: (i) a representative union for industry (which requires the support of at least 25% of workers in that industry); or (ii) recognition as a majority union in an establishment (which requires the support of at least 15% of the workers of that establishment). Recognition bestows rights to recognized unions such as entering into collective agreements with employers as regards terms of employment, conditions of service of workers, conduct of discussions for prevention/ settlement of disputes, etc. The Code proposes to provide for a ‘negotiating union’/ ‘council’ for negotiating with the employer of the industrial establishment on prescribed matters. However, a trade union having the support of 75% or more workers of the establishment shall be recognized as the ‘negotiating union’. Where a trade union cannot attain the support of 75% or more workers, the Central Government/State Government will constitute the ‘negotiating council’. This proposed amendment to the current labour laws has been met with strong opposition from the workforce, due to the strict 75% support requirement for recognition. The existing trade unions are of the view that the criteria of 75% support for recognition and government intervention on account of the role of the government in the constitution of the ‘negotiation council’ will dilute the powers of the workers to form their independent body. In 2018-19, the conciliation efforts of the Central Industrial Relations Machinery, an office of the Ministry of Labour and Employment averted 461 strikes out of 465 threatened strikes. Therefore, from the perspective of the employer, a change in the mechanism of the constitution of ‘negotiating union’/ ‘council’ will improve the ease of doing business in India.

Another key highlight of the Code is that it seeks to redress the issue of redundancy of the existing multiple adjudicatory forums which deal with labor law disputes. Currently, disputes are adjudicated by the board of conciliation, courts of inquiry, labour courts, tribunals, and national tribunals. Resolution of disputes under the Code will be streamlined to two forums: Conciliation Officer, Industrial Tribunal and National Industrial Tribunal. The Conciliation Officer will mediate and promote settlement of disputes relating to retrenchment, closure, interpretation of standing orders, the grant of relief to workmen, the illegality of strikes, lock-outs, etc. Whereas, the National Industrial Tribunal will adjudicate disputes affecting States due to the nature of the industry and matters of national importance. In addition, the Code provides that the employer and workmen may refer disputes to an arbitrator pursuant to an arbitration agreement. This reorganization of dispute resolution mechanisms can be expected to regularize the resolution of disputes by eliminating the multiplicity of claims before multiple forums and may also lead to the reduction of timelines for dispute resolution.

One of the fears of workers in India is job permanency due to an increasing gap in skill and ability to integrate themselves with industrial advances driven by technology. The World Economic Forum expects 75 million jobs to be displaced due to automation, technological integration, and large scale unemployment. On 22 January 2020, India joined the World Economic Forum’s Reskilling Revolution Platform which is an initiative to provide one billion people with better education, skills, and jobs by 2030. In order to keep up with technological advancements, the Code requires setting up of workers’ re-skilling fund by employers for the training of retrenched workers. Employers shall be required to contribute to the extent of 15 days wages of retrenched workers, or such other days as may be notified by the Central Government. The underlying rationale of requiring employers to contribute to the re-skilling fund is to skill retrenched workers so that they are employable and productive in the near future.

Further, the Code codifies the right of the employer to engage fixed-term workers directly. A fixed-term worker will be a worker who is engaged in through a written contract for a fixed period. An employer would be required to provide all statutory benefits to fixed-term workers such as social security and wages at par with regular workers engaged in a similar field of work. This will benefit employers and workers alike as workers will be directly engaged by the employers as opposed to third party contractors.

The Code aims at balancing of rights between workers and employers which is essential for increased productivity. A 2019 study (Amirapu and Gechter, referred to in World Bank Ease of Doing Business Report 2020) reveals that the restrictive labor laws in India add a 35% increase in a firm’s unit labor costs. The key parameters of determining the efficacy of a country’s labor legislation are flexibility in employment regulations. Labour laws in India are spread over various central and state laws, for instance, various states have implemented their own standing orders which govern the code of conduct of workers. Codification of these labor laws will also assist in bringing uniformity across various states in India assuming that the States will accept such changes without significant amendments. The Code aims to correct course for labor legislation taking into account the emerging sectors in the Indian economy and the recent incentive for having a corporate structure for doing business in India. Therefore, what may be viewed as pro-employer reforms proposed to be introduced by the Code only seek to provide flexibility in the restrictive labor laws in India and in due course will facilitate ease of doing business in India.

Author: Souvik Ganguly

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