Labour laws Cover story

Hard labour
India’s antiquated labour laws throw up major roadblocks for investors.
Ajay Raghavan outlines instances where India’s labour regime is
out of sync with most other jurisdictions

I
ndia’s economic growth over the past two decades has Scenario 1: A multinational car manufacturer sets up a fac-
received considerable attention. Reforms carried out by tory in India that employs around 1,000 workers. Ten work-
the government and the development of an entrepre- ers become redundant when the company installs some
neurial mindset have led to great progress in certain sec- cutting edge technology and they are found to be lacking
tors of the economy. in any skills that would allow the company to redeploy them
However, one key facet of India has failed to keep pace elsewhere in the factory. The company decides to terminate
with the rest: the country’s labour laws. As a result of them immediately, assuming that as the employer it has the
the lack of reform in this vital and often overlooked area, inherent right to terminate workers for a valid cause.
employers in India find themselves with little wiggle room However, when the company issues termination notices
when dealing with staffing issues. to the 10 workers, it is faced with a labour dispute. This is
The following scenarios highlight challenges that employ- because section 25N of the Industrial Disputes Act, 1947
ers in India typically face: – one of India’s most significant labour laws – requires

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Cover story Labour laws

manufacturing establishments that employ more than 100 The multiplicity of labour laws adds to an employer’s
workers to seek prior permission from the government before woes and often deters foreign investors. Depending on
even one worker is terminated in such circumstances. the nature of the establishment, an employer might have
to keep track of compliances under at least 15 to 20 dif-
Scenario 2: A start-up information technology company ferent labour enactments from a list of approximately 50
based in Mumbai hires a CEO to steer its business. A central laws and 100 state laws.
year later, the company concludes that the CEO is under- Even employers functioning in India’s special economic
performing. It therefore wants to immediately replace the zones (SEZs) face such hurdles. For despite various facili-
CEO to ensure the company’s performance will not con- ties and exemptions from economic laws for units set up
tinue to suffer. in these zones, there has been little streamlining of com-
The company decides to utilize its right in such a situ- pliances with India’s labour laws. This is perhaps one of
ation, as detailed in the CEO’s employment contract, to the biggest failings of the government’s SEZ initiative.
terminate the CEO without notice or payment in lieu of
notice. Like other employers who are not familiar with Recent labour unrest
Indian labour laws, the company believed that the large sal-
ary and perquisites the CEO had been receiving, which ran Although many international investors view India’s
into several million rupees a year, sufficiently compensated labour laws as antiquated and draconian, the allure of a
for any hardship faced. cheap and efficient workforce has led many multinational
Here again, the company is surprised to learn about the companies to set up manufacturing units in the country.
protective termination provisions applicable to employees These companies represent well-known brands and
in Mumbai in commercial establishments, the category in obtaining a job with one of them guarantees both a hefty
which an IT company would fall. The Bombay Shops and pay package and a jump in social status. Yet in the recent
Establishments Act, 1948, requires that any employee past, some of these big players – including Toyota, Honda,
who has worked for one year or more should be given at Nokia, Bosch, General Motors and Maruti Suzuki – have
least 30 days’ notice in writing or wages in lieu in cases of been at loggerheads with their workforce in India. Workers
termination. Unlike some other states in India (for instance at a Maruti Suzuki plant in Manesar in Haryana went on
Karnataka and Andhra Pradesh), management-level strike three times over five months last year, which led to
employees are covered by the termination provisions of an estimated loss of over `20 billion (US$400 million) to
this act. the company.
These disputes, which have been played out under the
Little change full glare of media scrutiny, have brought to the forefront
two issues that are slowly strangling industrial relations –
While globalization and the liberalization of the Indian the use of contract labour and inadequate laws dealing
economy have created employment opportunities, they with labour unions.
have also increased the need for businesses to operate
efficiently to remain competitive. Temporary fix
The strong pro-employee focus of India’s labour laws,
several of which were drafted in the pre-liberalization era Section 25 O of the Industrial Disputes Act requires
– and of the courts – creates a rigidity that makes it a chal- manufacturing units that employ more than 100 work-
lenge for employers to manage their workforce and busi- ers to obtain the permission of either the state or central
nesses efficiently. government, depending on the case, before closing an
industrial unit.
This is on top of the requirement to
obtain government approval if even
a single worker is to be retrenched in
such an establishment. The granting of
such approvals is, more often than not,
based on political considerations that
have little relevance to the issue.
To bypass getting these approvals,
most companies engage large num-
bers of contract or temporary work-
ers. This allows companies greater
flexibility in managing their workforce,
especially in times of a slump. The use
of contract labour also helps to keep
costs down.
Reports indicate that Maruti Suzuki
– like its competitors – engaged over
50% of its workforce as contract labour.
These contract workers were required
to perform jobs similar to those per-
formed by the permanent employees,
Well protected: Manufacturers employing over 100 workers in India must but at lower wages. This created two
seek government approval before even one worker is retrenched. classes of workers within the workforce,

16 India Business Law Journal February 2012

Labour laws Cover story
which inevitably led to friction between the different for employers to recognize an employees’ union, except
stakeholders. in a few states such as Maharashtra and West Bengal.
Conflicts that result from such a situation can be The Trade Unions Act was passed in 1926 to give legal
avoided if companies offer similar wages to both contract recognition to trade unions. Almost a century into its
and permanent workers. This is also, strictly speaking, a existence, the law remains silent on the compulsory reg-
legal requirement under the Contract Labour (Regulation istration of trade unions, recognition of trade unions by
and Abolition) Act, 1970, and its rules. The conditions of employers and collective bargaining methods.
the licence granted to a contractor under this law require The Indian Trade Unions (Amendment) Act, enacted by
the contractor to ensure that a contract labourer receives parliament in 1947, provided for compulsory recognition
the same salary as a full-time employee of the principal and also included provisions regarding rights of trade
employer if both do the same or similar work. unions to negotiate with employers on matters pertaining
to terms of employment. Unfortunately, the government
Handling trade unions did not notify these amendments and they did not come
into force.
Another key issue which led to the recent disputes at Now India has many trade unions,and parliament needs
Maruti Suzuki was that the company did not recognize the to urgently enact legislation that mandates recognition of
new union at its Manesar plant and the registrar of trade unions by employers. This would help foster conditions
unions did not register it. While the right of association is for negotiations and develop a conducive atmosphere for
guaranteed by the constitution of India, it is not mandatory collective bargaining.

Compare and contrast

Conceptual differences between labour laws in India and the West
could catch businesses off guard
While labour law reform in India remains in limbo, it is leave. This mandatory paid time away from work tends
vital that companies conducting business in the country to vary depending on the nature of the establishment
familiarize themselves with the existing labour law regime. and also from one Indian state to another. However,
A few conceptual differences between India and countries Indian laws do not mandate paternity leave, bereave-
in the West are detailed below. ment leave or military leave.

No employment at will Social security benefits

“Hire and fire” as a principle is not recognized under India does not have a robust social security regime.
Indian law. Termination of employment in India is not Though Indian labour laws require employers to provide
only governed by individual contractual arrangements, certain mandatory benefits to employees, such as gratu-
but also a plethora of legislation like the Industrial ity and contributions to an employees’ provident fund, the
Disputes Act, 1947, state-specific shops and estab- amount contributed is relatively low. In addition, unemploy-
lishment (S&E) laws and the Industrial Employment ment insurance is not well developed in India. This inhibits
(Standing Orders) Act, 1946. the government from moving towards a regime where a
Each of these acts contains elaborate provisions with hire and fire approach is acceptable.
respect to termination of employment. As a result, termina- The Indian courts have consistently held that labour
tion can only be effected under certain specified circum- laws are meant to benefit and protect employees and
stances and not at the will of the employer. must be interpreted in this way. In a ruling in 1968 in
Management Shahdara (Delhi) v SS Railway Workers’
This is one of the major differences between Indian Union, the Supreme Court said: “The doctrine of hire and
employment laws and employment laws in countries fire, for instance, is now completely abrogated both by
such as the US, which follow the principle of employ- statutes and by industrial adjudication, and even where
ment “at will”. the services of an employee are terminated by an order
discharge simpliciter the legality and propriety of such
Leave and welfare an order can be challenged in industrial tribunals. These
restrictions on the absolute right to contract are imposed
India has many welfare-related laws, including the evidently because security of employment is more and
Factories Act, 1948, the Maternity Benefit Act, 1961, the more regarded as one of the necessities for industrial
Employees Compensation Act, 1923, the Employees’ peace and harmony and the contentment it brings about
State Insurance Act, 1948, and the S&E laws. These is a prerequisite of social justice.”
laws overlap, thus creating confusion about the applica- This ruling demonstrates how Indian courts have
bility of specific laws. interpreted labour laws in a pro-employee fashion and
Further, Indian labour laws provide for mandatory forced employers to refrain from adopting a hire and
leave such as sick leave, maternity leave and casual fire approach.

February 2012 India Business Law Journal 17

Cover story Labour laws

of unions. Therefore, workers who are not

directly employed by a company may also
stand against it in the event of any dispute. In
addition, a strike ballot need not be held before
a strike is declared. A change in the law in both
these respects would be in the best interests of
both employees and employers.
Some years ago, the National Labour
Commission suggested the drafting of a national
labour code and also a consolidation of labour
laws. This was once again discussed last year
by the government, but no concrete steps in
this direction have been taken.

Taking a toll

The current labour regime – with multiple

forms to be filed and innumerable records and
registers to be maintained ­– makes operations
Unity and collaboration: Investments in human resource in India procedurally cumbersome. Compared
management have helped Hindustan Unilever avoid labour conflicts. to other rapidly developing economies, India is
clearly at the bottom of the curve when it comes
to investor-friendly labour laws and it is only a
Proactive management matter of time before the lack of reform in these laws begins
to impact India’s ability to continue to move forward.
Proactive management is crucial to avoiding expensive The Indian government’s inability to drive change in this
labour conflicts. It has been proven time and again that area needs to also be viewed against the backdrop of a
whenever management has engaged with unions in an open strong China, where significant amendments to labour laws
manner, the results have benefited the company and its over the past couple of years have contributed to higher
stakeholders. industrial and economic growth.
Hindustan Unilever (HUL), which has around 40 factories
all over India, has benefited from this approach. After facing Can we expect change?
the wrath of its workforce following the closure of a factory
in Maharashtra and a dispute over freedom of association The biggest impediment to the reform of labour laws is
and collective bargaining in Assam, the company posted a a lack of political will. The conflicting interests of various
human resources manager at every factory. stakeholders – trade unions, employers, political parties and
This has helped HUL develop channels of communication the government – adds to the problem.
and foster a collaborative approach with the unions, which Time and again various committees have been consti-
in turn helped the company deal with labour issues in a more tuted and submitted reports, but no action has been taken to
transparent manner. The initiative taken by HUL has proved implement their recommendations and suggestions.
beneficial to both the company and the workforce. A prime example of this is the Second National Labour
Commission, which made wide-ranging recommendations.
Ripe for reform These included measures to: (i) introduce umbrella legisla-
tion for workers in the unorganized sector and agricultural
Some of the biggest hurdles for manufacturing companies labour; (ii) train or retrain workers with a view to upgrade
are in chapter VB of the Industrial Disputes Act. This con- skills; (iii) encourage small-scale industries, agribusiness
tains special provisions relating to lay-offs, retrenchments and the rural sector to generate higher employment; (iv)
and closures in factories, mines and plantations with 100 or encourage participative management; (v) consolidate social
more workers. security legislation and the establishment of a social security
There have been intermittent debates about raising the system; (vi) abolish child labour. Unfortunately, these recom-
threshold to 1,000 workers and the Second National Labour mendations have prompted little legislative action.
Commission, which submitted its report in 2002, recom- There is not much hope that India’s labour laws will be
mended that this be done. However, opposition from trade reformed in the near future. Until this happens, it is impor-
unions and their lobbies in parliament has made it impos- tant for an employer in India to understand that some labour
sible for the government to amend the legislation. statutes impose severe penalties for non-compliance. In
Another provision of the Industrial Disputes Act that is extreme cases, non-compliance can even lead to imprison-
often criticized is section 9A. This requires that employees ment of the officials concerned. Moreover, understanding
be given at least 21 days’ notice before their hours of work, India’s labour statutes can go a long way in ensuring a har-
wages and other service conditions can be changed. If the monious and productive work environment. g
needs of the workplace require that employees be rede-
ployed to a different department (with different work condi-
tions), such notice may not be possible. Nothing has been
done to address this issue. Ajay Raghavan is a partner in the Bangalore office of Trilegal, where he
Another major flaw of the current trade union regime heads the firm’s employment law practice. Atul Gupta and Swarnima,
is that outsiders can be office bearers and members both of whom are lawyers at Trilegal, contributed to the article.

18 India Business Law Journal February 2012