India: States Make Controversial Employment Law Changes

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By Madhur Singh

On Sept. 7, the state government of Maharashtra changed the law governing employment in retail and commercial establishments to exempt those employing fewer than 10 persons from compliance, a change estimated to affect 350,000 establishments and several million employees.

In good news for small, new, and new-entrant foreign establishments, the Maharashtra Shops and Establishments (Regulation of Employment and Conditions of Service) Act of 2017 brought the law into conformity with present-day reality by, for instance, enabling women to work hours other than 7:00 a.m. to 9:30 p.m., allowing online business registration and filing of returns, and empowering the government to fix separate opening and closing hours for various establishments, such as malls and shopping complexes.

To boost a vibrant industrial sector that contributes 14.6 percent of the country's GDP, Maharashtra earlier this year amended the Contract Labour (Regulation and Abolition) Act to exempt businesses employing fewer than 50 people from statutory provisions preventing the employment of contract workers for work considered perennial in nature. The law previously applied to businesses employing 20 or more employees.

States Take the Lead

As India aims to improve the business environment and ramp up its manufacturing sector—considered necessary to generate jobs and spread the gains of economic growth more widely—state governments such as Maharashtra's are taking the lead in changing laws considered outmoded and overly restrictive.

The federal government, currently led by the Bharatiya Janata Party, which has cultivated a business-friendly reputation and came to power promising wide-ranging labor reform, has instead moved slowly to avoid provoking a union-backed political backlash.

While state-level reform of the favored kind—raising applicability limits to exempt businesses from statutory compliance—enables states to compete in attracting more investment, employment lawyers warn that paring down worker protections is causing widespread dissatisfaction and reducing worker productivity, increasing turnover, and leading to dangerous disputes and expensive litigation.

The attorneys call for a more participative process of reform that will remove unnecessary and counter-productive restrictions aimed at protecting workers, while assuring minimum wages and good working conditions.

Multiple Jurisdictions

In India, labor is a subject on which both federal and state governments can make laws, although some subjects are reserved for the central government (such as regulation of safety in mines and oil fields).

Both state and federal laws exist on important matters such as social security, trade unions, industrial and labor disputes, conditions of work, and provident (retirement) funds. Often, state governments modify and adapt federal statutes to local conditions. There are also subjects on which only state-level laws exist, such as shops and establishments.

In business and policy circles, consensus has long existed on the need to eliminate archaic and overlapping laws.

“When we advise clients, before the question of compliance arises, we need to figure out which of all laws would apply to that business,” Rahul Chadha, managing partner at Chadha & Co., told Bloomberg BNA Sept. 26. Some statutes, such as the Factories Act, are so outdated and detailed they make it nearly impossible to design a modern production facility, Chadha said.

The statutes most criticized include the Industrial Disputes Act, which requires prior government approval to lay off workers and close down business and a notice period (usually 21 days) before changing an employee's conditions of work, and the Contract Labor (Regulation and Abolition) Act, which forbids the hiring of contract workers for work of a perennial nature.

Chadha said requirements regarding layoffs and change in working conditions are so restrictive they make it almost impossible for businesses to respond to changing market conditions, while removing workers' incentive to perform. The result has been low formal employment, greater contractualization as businesses dodge laws to retain the flexibility to hire and fire, and corruption as inspectors demand pay-offs to look the other way.

With the current BJP government's focus on facilitating ease of doing business, “reforms of archaic labor laws are being promoted as an important element of the entire ‘Ease of Doing Business' and ‘Make in India' policy initiatives of the government,” Seema Jhingan, partner at Lex Counsel, told Bloomberg BNA Sept. 25.

The Make in India initiative, launched in September 2014, aims to raise the contribution of the manufacturing sector to India's GDP to 25 percent by 2020 (in 2016-17 it was 16.57 percent, dwarfed by the nearly 54 percent share held by services, which provide higher-paying but far fewer jobs).

Federal Inertia

The BJP government in its early days picked some low-hanging fruit for reform. In October 2014, for example, it created a single-window online compliance process and took steps to end the discretionary inspection of business facilities that enabled corrupt inspectors to harass businesses. Going forward, inspection routines would be auto-generated on a portal, and inspectors would have to upload their reports within 72 hours.

The government has steered clear of thornier issues, however, such as retrenchment (layoffs) and contracts.

“It does appear that the central government has found it difficult to implement various labor reforms at a national level, which have been in the pipeline for a long time,” Jhingan said, adding that “this could be due to lack of political consensus coupled with immense opposition faced from trade unions. . . . The larger trade unions often have ties with powerful political parties and are able to exercise a considerable influence due to the number of workers (and thereby votes) they represent.”

To carry out a labor reform at the national level applicable across India, the government must secure greater political consensus than states, whose governments need only address the concerns of people within its jurisdiction.

In addition, Jhingan said, “reforms make states attractive for foreign direct investment, employment generation, and wealth creation, arguably setting off any consequent political complications arising later on.”

Slow Process

The federal government has focused on creating four codes to address wages, industrial relations, social security and welfare, and safety and working conditions.

These codes aim to streamline compliance and remove overlapping coverage but may not be finalized any time soon.

“I would not be surprised if the government waits until after the 2019 election and then passes them quickly,” Chadha said.

Meanwhile, several BJP-ruled states such as Maharashtra, Rajasthan, Haryana, and Assam have made changes to key statutes.

Rajasthan made state-level amendments to raise the threshold under which employers are exempt from certain laws—the Industrial Disputes Act from 100 to 300 workers, the Contract Labour Act from 20 to 50, and the Factories Act (which ensures workplace safety) from 10 to 20 for factories that use electricity and from 20 to 40 for factories that do not.

The state governments of Haryana and Madhya Pradesh have taken some similar actions.

“This move will practically move more than 90 percent of the establishments in these states outside the ambit of Chapter V-B [of the Industrial Disputes Act, which deals with laying off workers],” Ravi Singhania, managing partner at Singhania & Partners told Bloomberg BNA Sept. 20.

Haryana also changed the law to make it difficult for workers to unionize by raising the number of employees that a trade union must have to be officially recognized from 15 percent to 30 percent of all employees.

This process is not fast, however.

“As the majority of these decisions/moves impact the masses, it has a social, economic, and also political consequences,” Singhania said. “Therefore, the process of implementing these changes is considerably slow.”

Overhaul or ‘Tweaks'?

Chadha sees a better picture emerging as the labor law codes take shape, states amend laws, and compliance is made easier at the federal and state level through, for example, electronic filing of returns and self-declarations for exemptions from wage withholding.

Some states, such as Gujarat, have gone further by creating separate laws for special economic zones to tackle “political hot potato issues,” Chadha said, adding that “going forward, I see more investment, more employment, higher wages, and a happier workforce.”

Others caution that leaving large numbers of workers—up to 90 percent in states such as Rajasthan—without statutory protections is counter-productive.

“High attrition rates are likely to be a more pronounced problem in organizations where workers are not protected under labor laws,” Jhingan said. “Personal disgruntlement of workers can in certain cases also result in collective strikes being called, which can stall production leading to great revenue losses for companies.”

“There have been instances where strikes called against suspension of employees resulted in reduction in the company's product output that led to temporary closures of the plant itself in order to cut down losses,” she added.

Statutory changes of the kind that states are undertaking encourage contractualization of jobs and do not enable large-scale formal job creation in the private sector, Stephen Mathias, Bangalore-based partner at Kochhar & Co., told Bloomberg BNA Sept. 18.

“India creates too few quality jobs to meet the aspiration of its growing workforce, leaving many people under-employed, poorly paid, or outside the labor force,” the OECD's Economic Survey of India 2017 said, adding that despite strong economic growth, job creation in the organized sector has plummeted since 2010.

“What we need is an overhaul, not tweaking of existing laws,” Mathias said, adding that such large-scale reform would ensure fewer, clearer, and iron-clad laws on minimum wages, social security, safety, and leave with in-built provisions for better enforcement.

Mathias added that labor codes have been drafted largely through bureaucratic fiat with no stakeholder consultation, and this must change.

At the very least, reforms must ensure that the balance of rights is not tilted in favor of any one group, Singhania said.

To contact the reporter on this story: Madhur Singh in Chandigarh at correspondents@bna.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For More Information

For more information on Indian HR law and regulation, see the India primer.

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