Reforming the Labour Laws for better Industrial Performance: Is there a way out?

Theme of the Session

With introduction of economic reforms in 1991 India hoped for a dynamic

industrial sector, in particular manufacturing sector. But the sector never
took off as it did in other comparable countries (e.g. China). Lack of
flexibility in the labour market has been considered as one of the prime
reasons for the lackluster performance of Indian manufacturing sector. In
particular, certain provisions in the Industrial Disputes Act 1947 (IDA)
are said to be market-distorting. On its part, the government is facing an
acute dilemma over this issue and labour and managements are at
loggerheads with each other, forcing the government to be circumspect in
reforming the labour market. Faced with fierce resistance from trade
unions, the government is facing difficulty in introducing drastic labour
reforms, especially that of providing employers the flexibility to hire and
fire workers.
In this context, this session focuses on the implications of the existing
labour laws on manufacturing performance, the views for and against
deregulation of labour market, and the possible way out of the policy
logjam.
 The Issue

• Lack of flexibility in the labour market has been

considered as the prime reason for the lackluster
performance of Indian manufacturing sector.

• In particular, the following provisions in the Industrial

Disputes Act 1947 (IDA) are said to be market-
distorting.
(1) Government intervention:

• IDA confers on government the power to regulate labor-

management relations.
• Also, the labour judiciary has predominantly ruled in
favor of workers.
• In most other countries, government move to intervene
only after bilateral negotiations between workers and
management break down.
(2) Difficulty in changing working conditions:

• Under Section 9A of the IDA an employer must give three

weeks' written notice to a worker of any change in his or
her working conditions.

• These changes include (a) changes in shift work, (b)

changes in grade classification, (c) technological change,
and (d) changes in employment, occupation, process, or
department.

• Worker has right to object to these changes, which may

culminate in an industrial dispute.
(3) Difficulty in layoff, retrenchment and closure:
• Under Chapter V-B of IDA, it is mandatory for firms with
hundred or more workers to seek the permission of the
Labour Department for layoff and retrenchment of
workers, and closures of industrial units.
• The permission is seldom forthcoming.
• In addition, notice and compensation has to be issued
to workers.
• Even when the firm is bankrupt, it must pay its workers
out of profits from other operations
• Claims of unfair dismissal can be made until 3 years
later
 What about firms of other sizes?

• Firms with 50 to 100 workers does not require official

permission, imposes shorter notice periods, and
provides a cap on compensation in cases “where the
undertaking is closed down on account of unavoidable
circumstances beyond the control of the employer”.

• Firms employing less than 50 workers are not required

to give notice of closures to the government, or to pay
compensation for layoffs.
• If a firm chooses to employ less than ten workers (twenty if it does
not use power) [Note: such firms fall under unorganized sector].

Workers are not covered by most of national labor legislation

It does not have to offer formal employment contracts or the

usual benefits such as paid annual leave, sick leave, or medical
and pension benefits.

It can also fire workers without notice and does not owe any
severance pay.

Minimum wage regulations may apply, but these are not

vigorously enforced.
 Labour Reforms
Arguments of Industry Arguments of Trade unions
• Government/judiciary mostly favors workers • Labour cannot be treated like any other
• Difficult to respond quickly to technological commodity
changes or changes in demand conditions • Already, Indian industry has been
(Section 9A) adjusting its workforce.
• Encourages firms to stay small (due to • Increased use of contract labour &
Chapter V-B) outsourcing is a proof of flexibility.
• Encouraged to adopt capital intensive • Closures through informal routes (non-
technologies payment of electricity bills, etc)
• More jobs in informal sector (3 out of 4 • Noncompliance with the labour
working in non-agri. sector are in informal
regulations
jobs)
• General decline in TU strength
• Replacement of regular with contract labour.
• Increase in incidence of lockouts and a
• Encouraged to outsource activities
decline in the incidence of strikes.
• Lack of any relationship between • Unemployment could be the result of
productivity and wages
many other factors
• Detrimental effect on the entry of large-scale
• Labour mkt. reforms, even in most of
firms
the advanced capitalist countries, has
not been able to contain high
unemployment.
 Video Links

1) Truth vs Hype: Maruti - Trouble at the plant

(20.15 Minutes)
http://www.ndtv.com/video/player/truth-vs-hype/truth-vs-
hype-maruti-trouble-at-the-plant/214402

2) Why Honda Workers Are on an Indefinite

Hunger Strike at Jantar Mantar (8.05 Minutes)
https://www.youtube.com/watch?v=LXskgOBEhWg
 
 Questions for Discussion
(A) Who is at fault here? Is it industry or workers or
government or all together?

(B) Does India need a flexible labour law?

(C) What are the ways to ensure cordial industrial

relations in India?
What are the ways to ensure cordial industrial relations in India?

(A) Serve Notice:

 Employer should serve notice to the employee to be
terminated in order to minimise the element of surprise
and shock. It would help the worker to prepare for
accepting the separation and to look for alternative
job options.
(B) Appeal against dismissals:
• Create avenues for redressal – Give right to appeal against
what employee thinks to be unfair dismissals.
• Forums like employment or labour courts, administrative
bodies, private arbitration agencies, or special bodies should
be created to facilitate the appeal.
• Remedies in cases of proven unfair dismissals include
reinstatement of the dismissed worker
• If reinstatement is impractical, then financial compensation
is provided.
(C) Severance Pay:
 It is an allowance paid by the employer for
terminating an employee irrespective of the reason
for termination
 Provided where social security is not existent or
inadequate.
 Paid by the employer or by a fund set up specifically
for this purpose with employer’s contributions
 Severance pay may be a fixed amount; but in most
cases it is calculated taking into account level of
wages and length of service.
(D) Role of Government:
 Many countries require firms to notify the
government authorities of workforce
reductions.

 No explicit requirements for government

authorisation of workforce reductions
(E) Fixed term contracts/employment:
 Refers to employment on the basis of specific projects,
seasonal work, replacement of temporarily absent permanent
workers (on sickness or maternity leave) and exceptional
workload.
 In other words, an establishment could sign on employees for
a specified duration under the assumption that their
employment will be ended once the project that they are
hired for is finished
 These workers do not require notice of dismissal and
severance pay; it is a flexible arrangement.
 Use contract labour for conduct of non-core activities and for
sporadic and seasonal demands
(F) Income/Social Security & alternative jobs:

 Consisting of unemployment benefits for a specified

period, provisions for re-training and active
assistance for job search

 Relocation and re-adjustment of workers within and

among groups of enterprises should be allowed in
active consultation with trade unions

 Re-training in marketable skills as required by

employers
(G) Skilling:
• Employers should agree to invest in both the
development of workers’ skill and upgradation of
technology.
(H) Treat contract workers well:
• By creating organised sector-like conditions for them.

(I) Simplify and rationalize the labour laws:

• India labour laws are too voluminous and ambiguous to
be effective from point of view of either labour or firms.
• This only promotes costly litigation and corruption in the
• Revoke the statutory obligation to issue notice of
change.

• Apply the requirement for prior approval from

government for closure to firms employing 300 or
more (say 1000) workers

• Employers should consult trade unions and cough up

more money as compensation to the affected workers

• Principal employer will be responsible for benefits

payable to contract workers.
 Other ways ……..

• ‘Respect for the individual’ – i.e. respecting the

gender, educational background, and nationalities
of all employees. Give equal opportunity to all
people, regardless of any of those characteristics
(Honda Policy).

• Have direct communication with

associates/employees (Honda Policy).

• Take care of little things: all wearing same uniform

in office, use same canteen, celebrate festivals
together (Honda Policy).
• Encouraging states to change their labour laws
according to their needs and conditions.

• Making use of this opportunity, states like Haryana,

Rajasthan, Madhya Pradesh and Gujarat have
introduced labour reforms in their respective states.

• Haryana, Rajasthan & MP reformed their labour law

to allow enterprises with up to 300 employees to
lay off workers without the government’s
permission.
• Gujarat has eased “hire and fire” provisions in special investment
regions like the Delhi Mumbai Industrial Corridor (DMIC), export-
oriented industrial establishments and some other economic
zones.

• In these areas, companies are allowed to lay off workers without

the government’s permission, but wages equivalent to 60 days of
work every year have to be paid to the retrenched workers.
(Gujarat)

• Industrial employee(s) can arrive at a compromise with the

employer without moving court, in case of an industrial dispute.
(Gujarat)

• A workman gets only a year to make an application against his

dismissal, discharge, etc, for raising an “industrial dispute” to the
labour court or tribunal, which was hitherto three years. (Gujarat)
• Overtime hours for workers in a quarter will be increased
from 75 hours to 125 hours. The factories will have to
maintain a record of overtime of workers and pay double
the wages if the work hours are extended. (MP)

• Women will be allowed to work in night shifts at factories

— they could work from 8 pm to 6 am in morning. (MP)

• Workers in Madhya Pradesh will get the benefit of earned

leave after six months of service, in the same calendar year.
Earlier employees are entitled to annual leave after they
have worked for at least eight months, but they are able to
avail of these in the next calendar year. (MP)
• Membership of 30% (earlier 15%)of the total
workforce needs to be recorded for a union to
obtain recognition (Rajasthan).
“At the end of the day, everybody wants higher
wages, job security, and the pride of working in
a specific company. However, without company
development, none of this can be realised.
Therefore, all of us are working towards the
same target.”

Mr. Hironori Kanayama, former President and

CEO of Honda Cars India Ltd