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Decoding the Labour Code

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Ritu Bhandari
Ritu Bhandari
The author is Head of Research, Smahi Foundation of Policy and Research. She is based out of Mumbai. She tweets at @Ritu_twt Views are personal.

India faces an elephant size problem related to its workforce – creating enough jobs for the one million addition to workforce monthly– such that the demographic dividend runs the risk of becoming a demographic curse. India has a growing labour force because of its young population as also people are leaving farms and turning to urban areas for jobs. India needs a massive expansion in small enterprises in the private sector over the next decade to absorb its growing labour force.

At the same time, India’s archaic labour laws have been highlighted as one of the key impediments in attracting investment in labour intensive manufacturing- key to India’s employment and job challenges. The recent labour reforms are part of India’s serious attempt to try to boost manufacturing along with lower taxes, production linked incentives, import disincentives etc. The streamlining of labour laws will have a positive impact on manufacturing. From the current 12 per cent of India’s workforce in manufacturing, even if India did not reach the 28-35 per cent level that major economies have had at their peaks, and only reached 18 per cent, that would mean 30-50 million more jobs.

The changes in labour laws are meaningful, but is it sufficient?– we will have to wait for details, follow-up by states and implementation.

What is the problem?

Current labour laws have neither benefited industries (as they have constrained firm growth) nor workers (due to lack of formalization and weak enforcement). This is reflected in the fact that ~70 per cent of incremental factory workers in the 1998-2018 were on contract. Out of a total workforce of 450-500 million, formal labour accounts for 80 million (comprising of permanent labour 40 million and temporary labour including contract labour 40 million) and informal labour 400 million. At the enterprise level, the challenge with the existing labour laws was broadly on 3 fronts:

Maze of regulations and ambiguity- making compliance almost impossible

Firms needed 67,000 compliances (47 per cent labour-related), of which 18,000 prescribed jail for violation. There were 40 central and ~100 state laws regulating various aspects of labour, such as wages, resolution of industrial disputes, working conditions and social security.

Industrial Relations (Labour Unions, Strikes)

There could be multiple trade unions within an establishment. Firms had up to 64 trade unions—everyone said “no” and no-one said “yes”. For example, Maruti had 28 trade unions. There were no criteria to determine which unions could formally negotiate with the management. Settlements made with unions were only binding on the participating unions, thereby impacting consensus building. Threat of strike was a potent weapon against the firm.

Flexibility to retrench or close down operations

Firms which employed >100 employees were required to seek state government permission before they could retrench or close down operations – this permission generally does not come. There are only 22 countries globally where government permission is required for retrenchment/layoff.

For instance, India has struggled with apparel exports, due to stringent labour laws. Textiles, a labor-intensive sector, while having a large domestic raw material and industrial base, have struggled to grow exports (flat since FY14 at $16-17 billion), where Bangladesh and Vietnam have grown bigger than India. Customers require the ability to respond rapidly to an order – most of the business is seasonal, with contracts that need to be serviced in a few months. The supplier must meet the production targets with high quality and timely execution. To do this, the manufacturers need easier labour laws, as the current laws limited flexibility in responding to business fluctuations.

What has the Government done?

The Government has consolidated 29 central labour laws into 4 codes. We discuss the key changes from the implementation of 4 codes.

  • Code on Wages, 2019
  • Code on Social Security, 2020
  • Code on Industrial Relations, 2020
  • Code on Occupational Safety, Health and Working Condition, 2020

Simplify the maze of regulations

Several regulations were redundant, created ambiguity and led to harassment. India’s complex labour laws acted as a hindrance when firms explored investing in India.

Number of sections have been reduced from 1,232 to 480 (60 per cent reduction). Number of minimum wages demanding compliance set to reduce to 12 from 540 under central laws, to 180-200 under the state laws from 9,000 at present.

Significant consolidation in Compliance & Reporting requirements. Now only two registers are required to be maintained. A single return to be filed that covers all the components under the different enactments. Several offences have been de-criminalized. Introduction of web-based inspections to ease the inspection process.

Reflects the modern times

These laws were archaic as most of them were enacted five to ten decades back. Codes have been made contemporary e.g. penalties raised; fixed-term employment introduced. Social Security Code for gig and platform workers – recognition that we have a different category of workers.

Improved Industrial Relations

The new code significantly reduces the power of blackmail (threat of strike) and provides a faster redressal path. Trade union with more than 10 per cent of employees are recognized (unlike no such threshold currently).

A trade union with membership of more than 51 per cent of the on-roll employees is recognized as the negotiating council. In the absence of majority, a negotiation council may be formed. Provisions for formation of a negotiation council may be restrictive for trade unions.

14 days prior notice before going on strike was earlier only for public utility services, but now extended to all establishments. Concerted casual leave by 50 per cent workers is also now included in the term ‘strike’. Strikes and lock-outs may become difficult for all establishments.

The Code provides for the constitution of Industrial Tribunals for the settlement of industrial disputes. Appeal can be made to High Court (and not Civil court) – thereby reducing the timeline. The Code bars the civil courts from hearing any matters under the Code. Persons aggrieved by the orders of the Inspector-cum-facilitator and the administrative appellate authority would now only have a recourse in the form of a writ petition before the relevant High Court

Flexibility on Hiring & Firing

The labour cost becomes variable instead of fixed. Fixed Term Employment has been recognized. Increase in threshold of employees (from 100 to 300) for enterprises to seek state government permission to retrench. 90 per cent of industrial establishments have less than 200 employees, which account for 37 per cent of overall industrial employment.

Flexibility in use of Contract employees in any activity of intermittent nature even if that constitutes a core activity of an establishment or where there has been a sudden increase in the volume work which needs to be completed in a specified time.


This would also help MSMEs in scaling up as well as more formalisation, driving more flows to ESIC (Employees’ State Insurance Corporation) and provident funds. Reduced compliance requirements (including decriminalization) along with extension of employee benefits (in some form) to contract employee is expected to help drive formalization of enterprise and workforce. The impact though is likely to take a few years to show.

Ensure that future changes to the Labour Code are easier

The new Codes delegate various aspects of the laws to the government through rule-making (some of which were earlier needed to be passed by the Parliament). For e.g. Change in threshold for retrenchment and closure (currently set as <300 employees) can be done by an executive decision – it is the legislature that delays decisions.

Deemed approval in many cases post 30 days. The Central Government can direct that any power exercisable by it under the Code can also be exercised by the State Government or by such officer or authority subordinate to the State Government.

The Code also enables the state government to exempt any new factory from its provision in the interest of creating more economic activity and employment. The exemptions could cover a wide range of provisions including those related to hours of work, safety standards, retrenchment process, collective bargaining rights and contract labour

Higher employee cost

The new codes extend benefits to a wider section of workers including contract workers. The new Codes require Social security fund for Unorganized workers, gig and platform workers. The Periodic Labour Force Survey Report (2018-19) indicates that 70% of regular wage/ salaried employees in the non-agricultural sector did not have a written contract, 54% were not eligible for paid leave and 52% did not have any social security benefit.

The Code has provided for special provisions for interstate migrant workers. Employers are now required to notify specified authorities of both states in the case of fatal accidents. Further, employers are also required to provide suitable conditions of work, medical facilities, housing, displacement and journey allowance to interstate migrant workers.

National floor for wage. 8-hour instead of 9-hour working day and 2x overtime thereafter

Role of States

Labour is a concurrent subject and a large number of laws come under the ambit of the State Government. The new codes give powers to state governments to make rules as they will have jurisdiction over most of the establishments. For instance, while the central government will frame around 57 rules for the Industrial Relations Code, 2020, states will have to come up with around 40 rules.

Recently, certain state governments have made significant labor reforms, brought in easier approval regimes for businesses and provided ready land. In the immediate aftermath of the lockdown, state governments of Uttar Pradesh and Madhya Pradesh announced significant liberalization of labour laws as well as processes for setting up and running of business. We discuss some of the recent labour law changes made by States.


No government permission required to retrench for establishments employing up to 300 workers from 100. Percentage of workers needed for registration to form a trade union raised to 30 per cent from 15 per cent. Increase in number of workers threshold for applicability of Factories Act, Contract Labour Act. Daily working hour limit raised to 12 from 8.

Madhya Pradesh

Time to get license (Companies Act) reduced from 30 days to 1 day. Validity of license (Contract Labour Act) has been extended from annual renewal to renewal once in 10 year. Increase in number of workers threshold for applicability of Contract Labour Act. Exemption from departmental inspections; inspections can be carried by third parties. Relaxed provisions related to Industrial Disputes for a period of 3 years. 11 large sectors given significant exemptions for next 1,000 days.

Need for government permission to ‘lay-off’ employees done away for new companies. Existing companies to see suspension of collective bargaining rights. Contract worker staffing rules eased substantially. Shift hour raised to 12 from 8; 72 hours per month overtime allowed. No inspection of firms with <50 people; third party inspection allowed. Shops and establishment can work from 6am till midnight.

Uttar Pradesh

All labor laws (except those governing safety, timely payment of wages and statutory liability in case of worker injury at workplace) have been exempted for three years. Inspection by labour inspectors, minimum wage rule, dispute resolution in suspension. Easier hiring and firing of workers enabled.


New units to be exempt from most labor laws for 1,200 days. Land allocation to new units in 7 days. All government approvals for new units in 15 days.


Introducing fixed term employment. Daily working hour limit raised to 12 from 8. Doubling threshold of applicability of certain labour laws on occupational safety etc.


The target set by the Narendra Modi government of taking Indian economy to $5 trillion by 2024 appears extremely daunting, especially given the Covid-19 pandemic. It will need India to grow at an average of 14 per cent in real terms from fiscal year 2021 to 2024. While India has become the world’s back office due to its stellar performance in the services sector, it is manufacturing where India woefully lags at a global level.

India is taking constructive measures to position itself as an attractive investment destination. The labour reforms are a step in the right direction and will provide a fillip to domestic competitiveness. As time progresses and the full impact of these reforms set in, we expect an encouraging future for corporate India as India seeks to step up its growth trajectory.

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Ritu Bhandari
Ritu Bhandari
The author is Head of Research, Smahi Foundation of Policy and Research. She is based out of Mumbai. She tweets at @Ritu_twt Views are personal.
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