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OVERVIEW OF INDIAN LABOUR LAWS

This article discusses an overview of Indian labour laws that businesses should be aware of.


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Pankaj Singla

3 years ago | 9 min read

Labour laws in India form a part of the concurrent list of the Constitution of India, 1950 (the “Constitution”) and therefore both the central government (“CG”) as well as the state governments (“SGs”) have the power to enact laws to regulate labour matters in India.

Under the Constitution, the need for protecting and safeguarding the interest of labour as human beings has been enshrined in Chapter-III[1] and Chapter IV[2]. The Ministry of Labour and Employment, a branch of the Government of India, is the apex body for formulation and administration of the rules and regulations and laws relating to labour and employment in India.[3]

The Indian labour laws have been designed to address various issues such as resolution of industrial disputes, working conditions, labour compensation, insurance, child labour, equal remuneration etc. and are in compliance with International Labour Organisation standards.

It must be highlighted that the Second National Commission on Labour (2002) acknowledged the existing labour and employment legislations in the country to be inconsistent in definitions, complex, and suffering from archaic provisions.

In order to simplify and create consistency, it had recommended for consolidation of CG enacted labour laws into broader groups such as: (i) industrial relations, (ii) wages, (iii) social security, (iv) safety, and (v) welfare and working conditions.

Based on the recommendations, the CG has enacted the following four labour codes: (i) the Code on Wages, 2019; (ii) Code on Social Security, 2020; (iii) the Occupational Safety, Health and Working Conditions Code, 2020; and (iv) the Industrial Relations Code, 2020.

While these four labour codes have been enacted in the form of comprehensive labour and employment legislations, these codes have not yet been notified and until the notification (i.e. coming into effect), the existing labour laws continue to govern the employer-employee relationship.

In view of the sheer volume of labour laws that are in force in India, their applicability to a particular organization is determined and affected by a variety of factors such as sector, place, and number of employees and can be discussed by grouping broadly under the following heads:

1. Wages and Bonus: The labour laws regulating the wages of employees in India include ‘The Payment of Wages Act, 1936, which aims to facilitate the payment of wages to employees in a timely manner, ‘The Minimum Wages Act, 1948’, a law that seeks to fix the minimum rate of wages in certain employments[4], Payment of Bonus Act, 1965[5], wherein the employer is required to pay bonus to persons on the basis of profits or on the basis of production or productivity.

The Code of Wages, 2019 seeks to amend and unify the laws related to wages and bonus and subsumes the Payment of Wages Act, 1936, Minimum Wages Act, 1948, Payment of Bonus Act, 1965 and Equal Remuneration Act, 1976.

2. Health and Safety: Employees Compensation Act, 1923 provides for compensation to an employee for any injury suffered during the course of his/her employment or to his/her dependents in the case of his/her death. It provides for the rate at which compensation shall be paid to an employee. It is pertinent to mention that this is one of many social security laws in India[6].

Another example is the Employees’ State Insurance Act, 1948 (ESI), which is applicable in case of sickness, maternity and employment injury, and other related matters. Under ESI, the employees are entitled to receive medical relief, cash benefits, maternity benefits, pension to dependents of deceased employees and compensation for fatal or other injuries and diseases.

The Factories Act, 1948 (FA) is another milestone in the CG formulated labour laws[7]. The FA lays emphasis on the cleanliness and comfort of the labour inside the factories. Moreover, health and safety measures, to be adhered inside the factories, have been laid down to ensure a healthy and safe work environment for the labour.

Also, the state specific shops & establishment acts play an important role in regulating the working conditions of employees covered under such laws. The Occupational, Safety, Health and Working conditions Code, 2020[8], upon notification, will replace the CG enacted legislations that govern the health and safety of employees.

3. Social Security: various laws relating to social security and insurance adopted by the CG and the SGs regulate social security collectively at the moment. One of the important social security measures comes in the form of Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPF), which ensures the financial security of the employees in an establishment by providing for a system of compulsory savings by way of establishing a contributory provident fund.

Similarly, Payment of Gratuity Act, 1972, (PGA) ensures that gratuity is payable to the employee if he or she resigns, retires or dies[9] after rendering continuous services for five (5) years or more and is linked to the number of years in service.[10]The Code of Social Security, 2020 shall, upon notification, replace all the relevant CG laws related to social security.

4. Leave and Benefit: Laws made by the CG are the principal regulators of leaves in India. The Maternity Benefit Act, 1961 (MBA) regulates the employment of women and maternity benefits[11]. Leaves for the factory workers covered under FA are also regulated thereunder. The FA also lays down standards for working hours, minimum overtime wages, annual leaves and employment of employees under certain age to ensure social and economic justice to the labour.

Apart from the CG laws, laws formulated by SGs such as state specific Shops and Establishment Acts, also provide specifications for working hours, leaves, holidays and overtime. Upon notification, the Occupational, Safety, Health and Working conditions Code, 2020 shall replace the laws that govern leaves and benefits of employees.

5. Industrial Relation and Dispute Resolution: It is important to discuss that the Indian labour laws are not always supportive of ‘at-will’ employment, a concept pioneered in the US. The retrenchment of employees in some cases is governed through government authorities that need to be consulted and taken prior permission from before an employee may be retrenched or laid-off[12].

The Industrial Dispute Act, 1947 (IDA) specifically governs the retrenchment of employees at a workplace having employees above a certain limit[13]and provides for procedure to be followed at the time of lay-off and retrenchment[14].

Apart from the retrenchments, the IDA is an important legislative tool to secure industrial peace and harmony; it provides machinery and procedure for the investigation and settlement of industrial disputes through negotiations and arbitration[15] and also provides for prevention of illegal strikes and lock-outs[16].

The IDA provides for the power of the government to refer any industrial disputes to the labour boards, courts or industrial tribunals through the department of labour under the respective SGs.[17]The Industrial Relations Code, 2020 shall, upon notification, replace the IDA.

From the Perspective of a Foreign Investor:

The Indian labour laws are often viewed as draconian and arbitrary by the foreign investors. However, for the large part, such view may be termed as overly pessimistic if not a misconception due to lack of information and inability to fully understand the labour laws in India and their applicability.

There is no denying the fact that the labour laws in India tend to be inflexible and vague at times but a better understanding of the law and its implementation may resolve a few issues.

From the point of view of a foreign investor in India, it is important to understand the applicable labour laws and the effects of non-compliance. The subsidiaries of foreign companies in India are treated at par with other Indian companies so far as the applicability of labour laws is concerned and no special labour laws govern such subsidiaries. Following are example of some of the known best practices adopted by Indian companies to avoid labour disputes:

1. Identify the long term requirement of employees at an early stage.

2. Identify the class of employees who are covered under the particular labour laws applicable on the employer.

3. Appointment letters of employees must be prepared very carefully in order to clearly define the employment terms and conditions including clauses for wages, benefits, non-compete, confidentiality, term, termination etc.

4. Depending on the requirement, use of fixed term contracts for employees is also one of the measures to minimise any future disputes.

Applicability of labour laws enacted by SGs shall also be considered while drawing up the employment contracts.

Author:

Pankaj Singla, Partner


Disclaimer- This Article is for information purposes only, and the views stated herein are personal to the author, and shall not be rendered as any legal advice or opinion to any person, and accordingly, no legal opinion shall be rendered by implication.

The Article does not intend to induce any person to omit, commit or act in any particular manner, and that you should seek legal advise before you act on any information or view expressed herein. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this Article.


[1]Fundamental Rights, Articles 16, 19, 23 & 24 of the Constitution.

[2]Directive Principles of State Policy, Articles 38, 39, 41, 42, 43, 43A of the Constitution.

[3]Note: The website of this Ministry can be found at: https://labour.gov.in/ similarly, ministries of labour at state level are responsible for administration and formulation of rules and regulations relating to the labour laws for the respective states.

[4]Note: Minimum rates of wages are revised on a regular basis by keeping account of the inflation and cost of living. Minimum wages under the act may be classified by nature of work, location and numerous other factors at the discretion of the government. Most importantly the wages are fixed in a way to curb exploitation of the labour, vulnerable to exploitation.

[5] Payment of Bonus Act, 1965 is applicable to the enterprises employing 20 or more persons, provided if the Government notifies, then the factory can have members less than 20 but not less than 10.

[6] Note: It is the duty of the employer to inform the employee about his/her rights., and if he fails to do so, then shall be punishable with fine of Rs 50,000 extending up tp Rs 1,00,000

[7]Note: The FA covers all manufacturing processes and establishments falling within the definition of ‘factory’. Applicable to all factories using power and employing 10 or more workers, and if not using power, employing 20 or more workers on any day of the preceding 12 months. Certain specific facilities have been made mandatory for large factories; ambulance room, if 500 or more workers are employed, canteen for a factory having 250 or more workers, rest rooms / shelters with drinking water where 150 or more workmen are employed, crèches if 30 or more women workers are employed at a factory, full time welfare officer for factories having 500 or more workers, and requirement of safety officer if 1,000 or more workmen are employed, are some of the key highlights of the act.

[8] Note: This code applies where there are 20 or more workers engaged in manufacturing process being performed using power (electricity), and 40 workers or more where the manufacturing process is being performed without the use of power. The Code mandates to appoint a Welfare Officer if there are 250 workers or more.

[9] Provided, rendering continuous five years of service is not necessary in case of death of an employee.

[10]Note: PGA is applicable to all establishments employing 10 or more workers. Section 4(3) Payment of Gratuity Act, 1972 mandates that gratuity be payable at the rate of 15 days salary of the employee for each completed year of service subject to a maximum of 20,00,000.

[11]Note: Under MBA, every female employee who has worked for a minimum of 80 days in an organisation is entitled to paid maternity leave of 26 weeks. Also, every establishment having fifty or more employees shall have the crèche facility.

[12] Note: Termination of workers in India is governed by The Industrial Dispute Act, 1947, specific Shops & Establishment laws at state level and employers’ standing orders [governed through ‘The Industrial Employment (Standing Orders) Act, 1946’]

[13]Section 25A of the IDA

[14]Chapter VA and VB of the IDA

[15]Chapter III (Sections 10 and 10A) of the IDA

[16]Chapter V (Section 22 to Section 25) of the IDA

[17]The process for resolution of labour disputes starts with filing of a petition before Labour Conciliation Officer and in case no compromise is possible, the said officer sends a failure report to the Government. After consideration of the said report, the Government may send a reference to the Labour Court/ Industrial Tribunal. In certain matters, the labour dispute can be directly filed in the court concerned.

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Pankaj Singla

Corporate Lawyer | M&As | Startups/PE/Venture Funds | Employment Laws


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