Blog: Decoding the Code

Employee Relations

Decoding the Code

The present Labour Law Reforms are a bold step. Three of the labour codes passed by the parliament have received presidential assent on 28th September 2020. As the rules are awaited, I have attempted to provide an interim interpretation on the Industrial Relations Code 2020 (‘Code’), which is one of the 4 important new labour codes replacing 29 central legislations.
Decoding the Code

The reports of the First National Commission on Labour (NCL) 1969 and the Second NCL 2002 are of significance to understand the context of labour law reforms in India.  Judicial pronouncements that were long winded, complicated, but profound also contributed to the evolution of the labour reforms.

The present Labour Law Reforms are a bold step. Three of the labour codes passed by the parliament have received presidential assent on 28th September 2020.  As the rules are awaited, I have attempted to provide an interim interpretation  on the Industrial Relations Code 2020 (‘Code’), which is one of the 4 important new labour codes replacing 29 central legislations.

Though few accuse the bureaucrats of doing a copy/paste of the existing legislations, I consider it to be a diligent attempt to consolidate and simplify important labour legislations.

The change in the definition of “industry” expected in 1982, is found in Section 2(p) of the Code. The Sec.2(p)(ii) elaborates the exception to the broader interpretation of the term ‘Industry’, given by Justice Krishna Iyer in Bangalore Water Supply & Sewerage Board, etc. vs A Rajappa and others. It sets to rest any controversy regarding whether temple institutions such as Tirupati Devasthanam are industry. The institutions engaged in charitable, social or philanthropic services are excluded.

  • Section 2(b) defines the “appropriate government”. As per the explanation to section 2 (b)(i) if the Central Government reduces the equity held, in a public sector undertaking,  to less than 50% (by privatisation) in that undertaking, the appropriate government shall continue to be the Central Government. This reflects the significant difference in the ‘powers’ for implementation of certain legal provisions by the two enforcement authorities, viz. Central and State. 
  • Section 2 (zr) defines worker and this is ad idem with the definition of “workman” under the ID Act 1947.
  • Section 2(l) defines ‘employees’ which includes persons with supervisory, managerial and administrative responsibilities, they are entitled for certain statutory benefits like PF, Bonus, ESI, etc. under existing laws.
  • Section 2 (o) is on “Fixed Term Employment” (FTE) and covers the engagement of a worker based on an employment contract for a fixed period.  The term incorporates modern 21st century thinking which contemplates new employment formats such as Gig and Neo Gig workers.  A significant change is in the eligibility for the payment of gratuity if a FTE renders service for one year.  The provision of FTE has its roots in Section 2(oo)(bb) of the ID Act 1947, an exception to the term ‘retrenchment’, in the case of non-renewal of employment contract.   However, clause 10 of the 2nd Schedule considers ‘the practice of depriving a person of the status of and privileges of permanent worker’ as unfair labour practice. This appears somewhat contradictory in spirit and will need interpretation. 
  • Section 2 (zq) of the new Act defines Wages. This definition is common for all the Codes. As per the definition, the inclusions are basic pay, dearness allowance and retaining allowance (if any) and exclude other allowances/benefits. However, if the figure adding the aforesaid three elements falls short of 50% of total remuneration, other elements in the ‘exclusion’ clause are   reckoned as wages, upto the 50% threshold. 

Trade Unions may consider the above a retrograde step particularly in view of the Supreme Court’s judgement in the matter ‘Surya Roshini Ltd. Versus Employees Provident Fund (EPF) and others, wherein it was decided that PF contribution is payable on all elements that are “ordinarily, necessarily and universally” paid. 

  • Chapter IIB introduced in the ID Act in 1982, provided for the constitution of Grievance Settlement Authorities to redress individual grievances of workmen. However, the machinery remained somewhat dormant because of – (a) lack of TU’s support to redress individual grievance of workman in this formal bipartite forum; (b) Sec.9C(5) enabling the aggrieved workman to raise an industrial dispute notwithstanding the existence of the Grievance Redressal Machinery. This concept having struggled to find its due place for many years, is now in the Code. Rules framed will enable this bi-partite forum to play an effective role in resolving individual grievances.
  • Chapter III deals with Trade Unions.  TU can be registered with at least 10% of the workers or 100 workers, whichever is less, subject to a minimum of 7 persons.
  • Section 6(3), provides an exception to the membership rule of 10% or 100 workers in case of TU seeking registration under the Code. It allows ceasing or disassociating of members upto 50% after the date of application for registration.

The Section 14 of the code brings a significant change. For the first time, the Central Government has introduced under law the concept of recognition of TU.  A TU will be recognised as sole negotiating union, if it has membership of 51% or more workers in industry/industrial establishment.  The concept is similar to a representative union under the BIR Act, 1946, MP IR Act, 1960 and that of a recognised union under the MRTU & PULP Act 1971.  In an industry/industrial establishment where  the TU’s membership is  less than 51%, a sole negotiating union will be replaced by a negotiating council empowered for negotiations.  The negotiating council in such cases, shall comprise representatives of different TUs on the basis one representative for every 20% membership cohort.

Section 23 spells out the proportion of office bearers of TU who are to be connected with the industry (‘insider’). As per section 23 of the Code, in the case of unorganised sector, not less than one half of the total number of office bearers of the TU shall be ‘insiders’. Whereas in case of the organised sector, “all office bearers of a registered TU, except not more than one-third of the total number of office bearers or 5 whichever is less, shall be ‘insiders’.  

Section 23 of the Code incorporates another new idea allowing retired and retrenched employees to be considered as ‘Insider’.

The provisions of Section 27 (1) and (2) read together on first appearance seem ominous.  However, the two clauses can be seen as enablers of tripartite consultation among the representatives of Government, Employees and Employers.  There could be a situation where a trade union or federation of trade unions  recognised by the Central Government as a central trade union may be recognised by  State Government as a State Trade union.  In my view, besides the Central Trade Unions, the State Government may recognise certain state-level Trade Unions as State Trade Unions representing the employees of the State, for the tripartite consultation at the State level.

Chapter IV is on Standing Orders and the significant change is  the applicability to industrial establishments with 300 or more workers vis-à-vis the present threshold of 100 or 50.   In the landmark judgements of SC in – 

  1. Glaxo Laboratories vs The Presiding Officer, Labour Court, Meerut and Others – wherein it was held that “the employer is under an obligation to specify  with  precision  those  acts  of  omission and commission which  would constitute  misconduct… so as to be visited with penalty”; and
  2. The Workmen of Firestone Tyre and Rubber Company of India vs. Firestone Tyre and Rubber Company - (Bombay Tyres case), required the employer to pay full wages as lay-off compensation since the standing orders had no such provision. Such a  power, therefore, must be included  in the terms of contract of service or the Standing orders governing the Establishment. It is, therefore, essential for establishments with less than 300 workers, to frame  a detailed ‘Code of Conduct’ and/or ‘Terms of Employment Contract’ containing provisions pertaining to lay-off, retrenchment, closure, misconducts, violations, etc. and communicate to workers. The chapter clearly mentions that where certified standing orders already exist notwithstanding the fact that an establishment has less than 300 workers, these will continue to be in effect, unless inconsistent with the code.  

Section 38 (3) limits the subsistence allowance paid in case a worker is suspended, to 75% of wages after the first 90 days.  This section is likely to be challenged by unions, seeking 100% of the wages as subsistence allowance, if the suspension continues beyond 6 months.

Section 77, is another big change in the Code. . The threshold has changed from 100 workmen to 300 workers for seeking permission of the Government for Lay-Off, Closure and Retrenchment of workers. Harbingers of change in the threshold have already been seen in MP, Gujarat and Rajasthan. The critics of this change are afraid of misuse by hiring and firing workers in establishments with less than 300 workers while the protagonists see this as a welcome step towards ease of doing business 

The Code repeals Trade Union Act 1926, Industrial Employment (Standing Orders) Act 1946 and Industrial Disputes Act 1947.  There is ambiguity about application of state laws such as, BIR Act 1946, MRTU & PULP Act, 1971 and the MP IR Act, 1960 which deals with similar matters as provided under the Code.  

Though ‘labour’ falls under the Concurrent List, enabling both Central and State Government to enact law on ‘labour’,  the Constitution expressly secures the predominance of the Union Government on State  – (a) the law passed by State needs the assent of the President; (b) Article 256 enables Central Government to seek compliance by the State to the laws passed by the Parliament. 

The term ‘….as may be notified by the Central Government from time to time’ has been provided in the Code, bestowing the Central Government  with enormous powers, far more than earlier,  to amend the provisions and/or applicability of the provisions of the Code.

As the interpretation of the new Act unfolds, controversies and contradictions will have to be settled.

We hope that the reform gives fillip to industrial growth, productivity and promotes a robust and healthy economic environment of business while meeting the soaring aspirations of many young Indians.


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Topics: Employee Relations, #GuestArticle

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