Hire, fire, do business: How new labour codes aim to help companies

Labour reforms passed by Parliament aim to make hiring and firing workers easier as they reduce a number of regulatory approvals. Somesh Jha explains how these reforms could help businesses

President Ram Nath Kovind signed into law last week labour legislations that aim to attract investment and make it easier for companies to do business in India.

With parliamentary approval for the Industrial Relations Code, 2020, Code on Occupational Safety, Health and Working Conditions Code, 2020, and Social Security Code, 2020, the government amalgamated 29 labour laws into four codes. The Code on Wages, 2019, got parliamentary approval in August 2019.

Companies will have to deal with one registration, one licence — for setting up a factory, or hiring contract workers--and one return on compliance once the four codes are implemented. Presently, companies have to register under eight labour laws, apply for licence under at least three different laws and maintain 58 registers, along with filing separate returns. The definition of key work-related elements such as workers, industry and wages has been harmonised.

Santosh Kumar Gangwar, the Labour and Employment Minister, told Press Trust of India in an interview last week the government aims to enforce the four codes together in December 2020.

Under the Working Conditions Code, the government has introduced the concept of a five-year pan-India licence for setting up factories and hiring contract workers. A company will have to get a single licence from the Central government for operations in multiple states, reducing the need to approach multiple authorities for approvals. That will be a change from companies or contractors supplying human resources seeking separate licences for each work order.

For the first time, the government has set a condition that contractors have to fulfill pan-India licences through an electronic process. Contractors may continue to follow the older system of getting licences for separate work orders. However, a contractor then will have to inform the government every time it receives a work order, failing which the five-year licence will be cancelled. Further, if a contractor wants to increase the number of workers to be employed, it will have to renew its licence.

The new Industrial Relations Code makes it easier for companies to shut shop or lay off employees without significant addition in cost burden. Companies with up to 300 workers needn’t seek government sanction to lay off employees or shut down: the earlier rule was for 100 workers. State can increase the threshold through an executive order without taking the legislative route.

Companies employing to 300 workers will not have to frame standing order, a legally binding collective employment contract that contains key work-related terms, conditions and is meant to prevent arbitrary dismissals. Companies employing not more than 100 people were exempt before.

Companies frame standing orders after consulting with workers’ representatives and then get them certified by either the state or the Central government, depending upon the industry. Standing orders will now not require certification, in case firms decide to follow a model standing order to be notified by the central government.

The government has gone back on its proposal to increase retrenchment compensation by three times to 45 days of wages per year worked--from 15 days at present. Instead, companies will have to contribute for a re-skilling fund, making a one-time contribution of 15 days of wages of a retrenched worker.

The Occupational Safety Code will liberalise the contract labour system, which was restrictive and aimed at encouraging permanent roles. The new code introduces the concept of core and non-core activities in the functioning of a unit, easing hiring workers.

The Code on Industrial Relations Bill, 2020, has a provision allowing industries to hire workers on a fixed-term contract “on the basis of requirement and without restriction on any sector”, without the help of contractors. The government has not placed any cap on the tenure of such fixed-term contracts or the number of times it can be renewed. However, companies will be required to pass on all social security benefits to such workers as other permanent workers in the same unit.

The working conditions and safety norms, which are part of the Factories Act, will be stated through rules by the government, thereby allowing more flexibility.

The codes will bring smaller firms out of the ambit of labour laws. Companies hiring less than 50 contract workers will not be covered under contract labour laws. Similarly, factories with 40 workers (without the use of power) and 20 workers (with the use of power) will not be covered under the labour laws. At present, all factories with 20 workers without the aid of power and 10 workers with the aid of power have to comply with labour laws related to occupational safety, health and working conditions.