In line objectives of social justice, social security, and improving the ease of doing business, the Second National Commission on Labour (2002) recommended that the central labour laws should be integrated into the following groups: (a) industrial relations; (b) wages; (c) social security; and (d) safety, welfare and working conditions. One of the key factors behind these recommendations was acknowledgment that existing labour legislations in India were archaic, inconsistent and complex.
In 2019, the Indian Government’s ‘Ease of Doing Business’ initiative and recommendations of the Second National Commission on Labour paved way for the introduction of four labour codes: the Code on Wages, 2019 (Wages Code), the Industrial Relations Code, 2020 (IR Code), the Occupational Safety Health and Working Conditions Code, 2020 (OSH Code), and the Code on Social Security, 2020 (SS Code). The Labour Codes have been passed by both the houses of Parliament and have received presidential assent. As per news reports, it is likely that the Labour Codes will come into force at the onset of the next fiscal year, commencing April 1, 2025, to align with the business cycle.
By codification of 29 central laws, Government of India has attempted to facilitate easier compliance, reduction of duplicate provisions, multiplicity of definitions and overlapping of authorities for businesses. The significant changes that will be brought about by the Labour Codes encompass a new and uniform definition of “wages” which is broader than the definitions under the current legislations; reduction of multiple compliances by increasing the applicability thresholds with respect to such compliances; recognition of fixed-term employment; prescribing a formal process for recognition of trade unions, extension of social security benefits to a broader spectrum of workers, including gig economy workers, platform workers and unorganised sector workers, and providing for an inspector cum facilitator. Overall, the Labour Codes aim to balance the needs of both employers and workers, fostering a conducive business environment while safeguarding the rights and welfare of employees. Some of the key changes introduced by the Labour Codes and their impacts are as follows:
Wages Code. The definition of ‘wages’ has undergone a substantial change and lists out the allowances to be included and excluded while calculating wages. The concept of floor wage has been introduced. The Wages Code provides for inspectors-cum-facilitators with powers of inquiry, investigation and advising employers and workers regarding effective means of complying with the law. The period of limitation for filing of claims by a worker has been enhanced to 3 years, as against the existing time period varying from 6 months to 2 years, to provide a worker more time to settle their claims. The Wages Code prohibits gender discrimination in wage or recruitment related matters for the same work or work of similar nature. As a result of these changes, businesses will need to reassess their salary structures and review their human resources policies, records and registers to match the adjustments introduced by the Wages Code.
IR Code. The IR Code increases the threshold for the applicability of standing orders and permission for retrenchment, closure, lay off from 100 to 300. A provision on recognition of a trade union or a federation of trade unions as Central or State trade unions has been introduced. The concept of a sole negotiating union has been introduced which means where there is more than one registered trade union of workers, the trade union having more than 51% of the workers as members would be recognized as the sole negotiating union. A reskilling fund for the purposes of training the retrenched workers has been established. The IR Code specifically provides for ‘fixed term employment’ which will give flexibility to employers, but it also prescribes protection to such employees by prescribing the obligation to provide all the statutory benefits available to a regular worker in proportion to the period of service rendered. The IR Code simplifies the dispute resolution process by eliminating various forums and have instead established Industrial Disputes Tribunals as the singular platform for resolving disputes. This consolidation is expected to minimize the occurrence of protracted proceedings, which are both costly and time-consuming. In light of the IR Code, companies would need to re-evaluate their workforce structure from a risk perspective along with conducting a cost-benefit analysis.
OSH Code. Under the OSH Code, employers will only need to obtain a single license instead of obtaining multiple labour licenses under various labour legislations as required under the current regime. The provision of one registration would facilitate saving time, resources and efforts of the employers. With employers now obtaining a single license instead of multiple labour licenses, a unified database will be established, enhancing transparency across the board. Other significant changes introduced by the OSH Code include web-based inspection, consent of employees for overtime work, consolidated registers, forms and returns, increase in welfare activities to be provided to employees. The impacts of the OSH Code include reduction in administrative burden and digitisation of processes.
SS Code. The SS Code provides for a single registration number as opposed to separate registrations. Due to the change in the definition of ‘wages’, the calculation of gratuity, provident fund and leave encashment will undergo a change. The SS Code provides for social security schemes to be formulated in matters relating to, inter alia, life and disability cover, health and maternity benefit, old age protection and education for unorganized workers, gig workers and platform workers. Limitation period of 5 years has been imposed on the initiation of any proceeding in respect of the amount of provident fund or employees’ state insurance contribution due from an employer. Since the overall social security costs for the employers would increase, the salary structures would need to be re-assessed.
The amendments proposed under the Labour Codes would need to be kept in mind by organizations in the assessment of their readiness to comply. It may be worthwhile for businesses to grasp the importance of the Labour Codes and evaluate their impact on particular sectors. This understanding will enable them to proactively address implementation and financial challenges by establishing policies and procedures in line with the Labour Codes.
Once the Labour Codes come into force, companies would need to revisit and perhaps overhaul compliance systems, compensation and benefits, HR policies and processes to align with the Labour Codes. At this point, businesses could consider investing in the new-age technologies such as AI to streamline and automate their HR processes.
The implementation of new labour code reforms signifies a departure aimed at further modernising and rationalising labour regulations. These reforms are poised to deeply impact both the workforce and industries throughout India.
Authored by: Pooja Ramchandani, Partner & Head of Employment, Labour & Benefits and Suryansh Gupta, Principal Associate at Shardul Amarchand Mangaldas & Co
