Four Highlights Of The Labour Code Consolidation

From time immemorial, all commentary on the Indian economy had a permanent refrain — Indian labour laws made around or just after Independence are archaic.

These laws had limited the formalisation of the economy, forcing Indian firms to be sub-scale. The web of compliances and inspections was tough for even large companies to deal with.

However, all this changed last week. A big barrier to India’s industrialisation was removed.

Factor market reforms were undertaken in one sweep and the hottest political potato was tackled with determination.

The inapposite laws were also made relevant, recognising the realities of the modern-day labour structures, which is increasing short-term and flexible.

Of the 44 central labour laws, 29 have been subsumed into four codes. These Acts in total had more than 1,200 sections, which are down to 479 sections now.

The Code on Wages was passed by both houses of Parliament last year. Now, the Codes on Industrial Relations, Occupational Safety, Health and Working Conditions and Social Security have been passed too.

With the historic agriculture reforms enacted earlier this month, using the phrase ‘1991 moment’ seems trite.

But this is quite true in the context of labour codes — this is the biggest factor market legislative change since 1991, when capital controls were loosened.

Four major features of labour code consolidation stand out.

Firstly, the truly vexatious issues have been addressed. The threshold for firms being able to hire and fire has been raised to 300 without permission.

Beyond that, a permission would be deemed granted if the relevant labour authorities do not act.

Strikes will now need a two-week notice, so flash strikes will be taken out of equation.

Registrations, record-keeping and inspections will now be more unified and may involve less discretion.

Operationally, just these measures have a big second-order impact, taking care of many concerns of employers.

Firms will no longer shy away from growing and hiring workers on their own payroll.

Secondly, the labour codes parameterise rule-making.

The thresholds mentioned for social security benefits, health and safety benefits and ability of firms to layoff workers without permission can all be changed via rules.

This ensures that the time spent on legislative process is saved, reducing political leverage and rancour.

Thirdly, these codes account for the evolving nature of ‘work’. Beyond permanent jobs, there are gig workers and gig workers affiliated with platforms.

These codes account for welfare measures for such workers, fully factoring in the structural issues.

Aggregators will now set aside some part of their revenue for social security purposes for these workers.

However, the rule-making in this area has to be transparent and simple, else these low-margin businesses will have to either pass on the costs to the customers or reduce incentives for the gig workers, who find livelihood through them.

Businesses will have simpler registrations, inspections and returns process.

The perverse incentives to not grow no longer exist. Coupled with the reclassification of micro, small and medium enterprises announced as part of the Atmanirbhar Bharat package, Indian firms should now shed the reluctance to expand.

For workers, a fairly broad definition of work will be helpful.

New fixed-term contracts, social security provisions and the recognition for migrant labour with portability of benefits will help account for future requirements and even crises like the one forced by the Covid-19 pandemic.

As these codes get the Presidential assent, laws will be framed for each of the codes.

Two things need to be ensured in this law-making exercise.

The spirit of the codes not being very sector-specific should be preserved. If there are too many exceptions by types of workers or sectors, the effectiveness maybe lost.

Some sector-specificity has crawled in already in the codes, especially the Social Security code.

The laws should facilitate further future rationalisation rather than introduction of new rigidities.

For new areas like gig economy and platform-based work models, the laws should provide for simple definitions of what constitutes a worker.

For example, in the current definitions provided in these codes, a cab driver who owns a car, works with aggregators and also takes bookings outside the platforms, can be classified as self-employed, gig worker or platform worker, depending on the context.

The provisions of the codes applicable to each category differ in some aspects.

The specific laws should harmonise such situations rather than further complicate the applicability of laws.

A significant change may come in the form of limiting, if not eliminating license raj.

These codes permit web-based inspections with randomised inspections.

Self-certification and third-party certifications have been allowed in many areas. The process of these will be defined in the laws being framed.

Several states had already simplified some of these processes or even completely done away with them earlier this year, in order to attract new manufacturing investments.

Another interesting point is that the states can individually implement these codes with some variations.

They will have greater authority on the implementation front. This may lead to differences in the regulatory experience for large multistate firms, but at the same time, can also promote labour market competition between states.

All said and done, the labour codes should help improve ease of doing business across various sectors and industries.

State governments should now rise to the occasion and ensure they do their bit to eliminate regulatory cholesterol.

The Narendra Modi government has delivered on a big front, addressing longstanding concerns, while keeping in mind India’s future labour market needs.