By Arya Tripathy and Rishi Sehgal on January 11, 2021
In our previous post, we aimed at providing an overview of some of the notable changes in Code on Social Security, 2020.
With the aim to revamp existing labour & employment laws, the government also notified the Industrial Relations Code, 2020 (“Code”) on September 28, 2020. It is likely that the Code will be implemented next year, and it will repeal 3 central labour enactments namely, Industrial Disputes, Trade Union and Industrial Employment Standing Orders acts. The Code has 14 chapters, 104 sections and 3 schedules. It aims at consolidating and amending the laws relating to trade unions, conditions of employment in industrial establishments, investigation and settlement of industrial disputes. While it retains several provisions from the existing legal framework regarding retrenchment, lay-off, closure, industrial disputes, trade union recognition, etc., new requirements have been introduced to simplify as well as add more structure to the existing regulations. This post aims at providing an overview of some of the key changes under the Code.
1. Industry: Industry is defined under the Industrial Disputes Act (ID Act) as any business, trade, undertaking, manufacture or calling of employers including any calling, service, employment, handicraft, industrial occupation, or vocation of workmen. The definition is wide enough to include every form of institutional and organized activity that results in production or supply of goods or services. Whether an organisation is industry under ID Act is fact specific and has been delved into in several court cases. In the landmark decision of Bangalore Water Supply & Sewerage Board vs. A. Rajappa & Ors.,[1] the Supreme Court held that if an institution involves co-operation between employers and employees to produce or supply good or services, it shall qualify as an industry, even where such activity is done for charitable purpose.
Subsequently, an amendment was proposed to industry definition in 1982, although this was never implemented. This amendment aimed at clarifying the nature of activity that industry must be engaged in and proposed exclusion of certain activities from the scope of industry – agricultural operations; hospitals or dispensaries; educational, scientific, research or training institutes; institutions owned or managed by organisations wholly or substantially engaged in any charitable, social or philanthropic service; khadi or village industries; domestic services; professional services where number of persons engaged is less than 10; any activity of the government relating to its sovereign functions and its departments dealing with defence research, atomic energy and space; and activities carried by a co-operative society, or club or similar body where number of persons engaged is less than 10.
The Code draws a cue from the 1982 proposal and defines industry as any systematic activity carried on by co-operation between employer and workmen, employed directly or indirectly for production, supply, distribution of goods or services with a view to satisfy human wants, including sales and business promotion activities, irrespective of capital invested or whether such activity is carried out with a motive to make any gain or profit. However, it limits the exclusions to 3 activities – charitable, philanthropic or social activities; domestic services; government sovereign activities, and its departments engaged in defence research, atomic energy and space. Relying on the exclusion for charitable activities, one could infer that educational institutions which are obligated to function as charitable organisations, religious trusts, charity hospitals, research & development organisations incorporated as societies, and similar other institutions which are currently treated as industries under ID Act will be outside the Code’s ambit. While the new definition seems to codify the principles that will be applied to determine if an establishment is industry under the Code, the determination will continue to remain fact specific.
2. Employee & worker: The ID Act, Trade Union and Industrial Employment Standing Orders acts did not provide for definition of employee, as they dealt with workmen. ID Act defined workman as any person including an apprentice employed in any industry to do manual, unskilled, skilled, technical, operational, clerical or supervisory work with monthly wages up to INR 15,000. It specifically excluded white-collar employees i.e., those who were engaged in managerial, administrative or supervisory role earning monthly wages above INR 15,000. Except for Trade Union Act which arguably included white-collar employees, the existing laws primarily aim at dealing with employment relations and working conditions of workmen. Further, certain special kind of employments such as working journalists and sale personnel were governed under different laws, and several court cases have ruled that they remain outside purview of ID Act. However, the Code seems to expand the scope.
It defines employees and workers. Employee is any person other than an apprentice employed in an industrial establishment to do any skilled, semi-skilled, unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work. As the definition is wide, literal interpretation will include white-collar employees. Worker is defined in similar fashion as workmen under ID Act, although with certain key changes. Workers exclude apprentices, and supervisors earning more than INR 18,000 per month instead of INR 15,000. They will also include working journalists as defined in the Working Journalists and other Newspaper Employees (Conditions of Service) Act, and sales promotion employees under Sales Promotion Employees (Conditions of Service) Act. Further, it states that for purposes of Chapter III dealing with trade unions, workers will include all persons employed in the industry i.e., without any exception for white-collar employees. On cumulative reading, it appears that (i) apprentices can no longer raise industrial disputes, (ii) white-collar employees can form trade unions and seek recognition, and (iii) sales personnel and working journalists can raise industrial disputes and claim rights plus benefits under the Code.
3. Wages: Wages has a common definition under the 3 subsumed laws. Currently, it means all remuneration capable of being expressed in money, and includes allowances, value of house accommodation or supply of utility or medical amenity or concessional supply of food, and any travelling concession. It excludes bonus, contribution payable to any pension or provident fund, and gratuity. The Code includes a more concise definition of wages and the same definition is provided in all other 3 labour codes, thereby bringing uniformity across several labour laws. Wages will now mean any remuneration payable by the employer in cash or kind including basic pay, dearness and retaining allowance (if any), but exclude 11 components namely bonus, value of house-accommodation or utilities or medical amenities payable through special government order, contribution to provident or pension fund, HRA, conveyance/travel allowance, overtime, commission, gratuity, payment towards special expenses, any amount paid under award or settlement, and retrenchment compensation or any retirement or ex-gratia payment made upon termination under any law. Further, the Code states that the aforementioned exclusions (except gratuity and termination pay) and any payment in kind cannot exceed 50% and 15% of the total remuneration respectively. Where it does, the excess will be deemed as part of wages. Thus, a narrower scope is provided under the Code, which may result in employers limiting payment to basic + dearness + retaining allowance for retrenchment, lay-off, closure compensation, or where back wages are ordered under an industrial dispute.
4. Bipartite forums: Chapter II of the Code deals with works committee and grievance redressal committee. As per ID Act, appropriate government can order an industrial establishment with 100 or more workmen to constitute a works committee comprising of employer and workmen representatives. The works committee is mandated to promote amicable relations between employer and workmen, and endeavour to resolve differences. Further, it requires industries employing 50 or more workmen to create a grievance settlement authority that will settle disputes internally. The Code aims to strengthen these internal mechanisms. It retains the provisions concerning works committee, but reduces the headcount for constitution of grievance redressal committee from 50 to 20. ID Act limits grievance committee’s composition to 6 members, which now stands enhanced to 10, with adequate representation of women workers proportionate to their strength to the total workforce. Furthermore, the Code introduces a cut-off period of 1 year within which the grievance must be resolved, and if not, the employer or worker can raise a formal industrial dispute. Non-compliance with the above requirements may attract hefty fine up to INR 1 million.
With these changes, it is expected that employers and workers attempt to resolve difference internally before escalating it to labour forums. Consequently, it is likely that formal proceedings (conciliation followed by adjudication) cannot be initiated without following the internal grievance redressal mechanism. Considering that disgruntled workmen often engage in frivolous industrial disputes to pressurize employers for regularization, reinstatement, payment of back wages, and similar demands, mandatory grievance settlement is likely to curb such practices. Further, a ruling by the grievance committee may also be factored by labour tribunals in their ruling, and hence, organizations must seriously consider setting up a meaningful and efficient grievance redressal mechanism.
5. Trade unions: Chapter III of the Code deals with trade unions. It retains most of the provisions with respect to formation of trade unions, its bylaws, registration, alteration, constitution of fund, membership fee and other aspects. However, it introduces new provision for recognition of a negotiating union or negotiating council as the sole and authorised negotiating body for the unionised workers. Where the establishment has only one trade union, the employer shall recognise it as the negotiating union. But, if there are multiple unions, then the union supported by at least 51% of the workers will be recognized. Where none of the unions are backed by 51% of the workers, then employer shall constitute a negotiating council comprising of representatives from each union that has at least 20% workers, followed by proportional representation from all other unions. It further provides that where an agreement is reached between the negotiating council and the employer, same shall be binding on the workers. Introducing the concept of a sole negotiating union is a welcome step as many times multiplicity of unions compels employers to negotiate employment terms and benefits separately with each of them, making the process of collective bargaining tedious and prolonged. Nonetheless, the Code fails to clarify if the agreement reached with the negotiating union shall be binding on all unionised workers who belong to different unions, and perhaps, the rules will provide the needed clarity.
6. Standing orders: Chapter IV of the Code deals with standing orders and unlike existing law where standing orders is mandated for industrial establishments with 100 or more workmen, the Code increases the threshold to 300 or more workers employed in preceding 12 months. Covered entities must prepare standing orders on matters such as classification of workers, work hours, holidays, paydays, wage rates, termination, disciplinary proceedings, and grievance redressal mechanism. It further codifies the existing practice of automatic application of model standing orders and states that within 6 months from the date on which the headcount triggers, covered organisations must apply for certification of any modification that they wish to incorporate in model standing orders, failing which the model shall become binding. The Code also provides that model standing orders will be developed by central government (CG) which power currently vests with the state government. Vesting power with CG to devise model orders is likely to be a relief for employers who have operations in several states, as they were required to comply with model standing orders as promulgated by different states. Now, employers can apply the same set of standing orders for their establishments in different states.
7. Strikes and lock-outs: ID Act defines strike as cessation of work by workmen acting under a common understanding. The Code further expands the definition to include a situation where 50% or more workers go on mass casual leave on any day. Apart from this, the Code changes the requirement of a legal strike and lock-out. Under the existing law, workers and employers engaged in public utility services such as essential supplies, transportation, postal services, and other notified sectors are obligated to provide minimum 14 days’ prior notice before going on strike and lock-out, respectively. The Code aims at deterring arbitrary strikes and lock-outs. Towards this, it requires workers of all industries to provide 60 days’ advance notice before proceeding on strikes. Similarly, employers are required to provide 60 days’ notice before imposing a lock-out.
8. Retrenchment, lay-off and closure: As per ID Act, any establishment with 100 or more workmen must obtain prior permission from the appropriate government prior to retrenching or laying-off workmen, or closing the establishment. Additionally, it entitles workmen in such establishments to 3 months’ notice or pay as compensation for retrenchment, lay-off or closure. The Code liberalises the entire process by increasing the headcount to 300 workers. This means that establishments with headcount below 300 workers can proceed to retrench or lay-off workers, or close the establishment by simply notifying the appropriate government. In all such cases, the workers would no longer be entitled to 3 months’ notice or pay. Rather, they would be entitled to 1 month notice or pay as is currently applicable to establishments with less than 100 workmen. Consequently, the overall process and costs associated is likely to be eased out for various organisations during retrenchment, lay-off and closure.
9. Worker reskilling fund: The Code empowers the appropriate government to introduce a worker re-skilling fund for retrenched workers. The fund shall consist of contribution from employers @15 days’ wages last drawn by the retrenched worker and such other sources as may be prescribed by government. The proceeds shall be utilised as direct credit of 15 days’ wages to the retrenched worker’s account as per prescribed process. This will be over and above the retrenchment compensation paid to worker as part of retrenchment process.
10. Timeline for disciplinary proceedings: The Industrial Employment Standing Orders Act did not prescribe for any finite timeline within which disciplinary proceedings must be completed. However, the Code introduces a limit of 90 days within which internal investigation into misconduct must be completed.
11. Penalties: The Code also has enhanced penalties for various offences. For example, under the ID Act, the penalty for contravention of retrenchment provisions under Chapter VB was imprisonment for a term up to one month and/or with fine up to INR 1,000. Under the Code, this has been made punishable with minimum fine of INR 100,000 that can be extended to INR 1 million. Alongside, it enables compounding of offences which are penalised with fine, or with fine or imprisonment up to 1 year. For offences that are punishable with fine only, the offence may be compounded for 50% of the maximum fine, and for others with 75% of the maximum fine.
Conclusion: As evident from the foregoing points, there is lack of clarity on several new changes as the Code does not provide specifics. It is expected that the needed clarity will be captured in final CG rules and those that will be notified by states. It is possible that different chapters of the Code are supplemented with specialised rules to bring more structure, and government adopts a staggered approach for implementation. It will also be key to wait and watch if the rules or commencement notification provide for transition guidelines, which are currently missing in the Code.
[1] A.I.R 1978 S.C. 548