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This article is written by Rahul Sharma,  who is pursuing an Executive Certificate in Labour, Employment and Industrial Laws for HR Managers from LawSikho.

Introduction

The new labour laws aimed at making the prospect of doing business in India, easier. They consolidate more than 44 labour laws under four categories of Codes namely, Wage Code, Social Code, Occupational Safety, Health and Working Conditions, and the Industrial Relations Code. While this is all well-intentioned and a welcome exercise of reforms to reduce complexity and increase compliance, there are bound to be certain challenges that arise because of these changes. Also, certain sections of the employee unions have raised questions on the government claiming that these Codes are more favourable to the employers. Therefore, there is a need to do a systematic assessment to study the specific key changes in the new labour codes as compared to the existing laws and their impact on both employers and employees.     

Code on Wages, 2019 

Change

Impact on ‘employer’

Impact on ‘employee’

The new definition of wages

  1. The new definition of ‘wages’:
    1. It includes basic pay, dearness allowance and retaining allowance, and
    2. Excludes certain pay components such as house rent allowance, bonus excluded from the terms of employment, any retrenchment compensation or other retirement benefit, or ex-gratia payment made by an employer.
  2. Critical new elements in the definition:
    1. The pay components that are excluded from the definition of wages will be ‘deemed’ to form a part of wages where these pay components exceed 50% of all the remuneration paid to an employee, and
    2. For remuneration paid in kind, up to 15% of such remuneration in kind will be ‘deemed’ to form part of the wages.
  1. Increased total salary costs:

 

‘Wages’ defined by the Wage Code will form the basis for calculating the statutory benefits to the employee such as provident fund contributions by the employer, gratuity and leave encashment. 

  1. Need to update the salary structure:

Employers must rejig the division of total salary into different components to make sure it is in sync with the new ‘Wage’ definition and the salary costs are under control. 

  1. Less take-home salary: 

Though there may be some savings visible in the long-term statutory benefits, the restructure of salary components would certainly increase the employee deductions including the taxes. 

  1. This will be more appealing for tenured employees.

The new deadline to clear full and final settlements

Deadline to pay full and final settlements:

The full and final settlement of wages to employees who are removed, dismissed, retrenched, or resign from service must be paid within two working days of them ceasing their employment with their employers i.e. last working day.

Employers must review the FnF settlement process at their end to comply with this provision. 

This change is very beneficial to the employee as it will ensure liquidity during the transition from one job to another. 

Enhanced penalties for non-compliances with the ability to compound offences

Penalties for non-compliance are being enhanced by the Wages Code and the material penalties are:

Under-payment or non-payment of amounts due is punishable with a fine of up to INR 50,000 for the first contravention which increases (with liability for imprisonment) to up to INR 1,00,000 for second and subsequent contraventions; and 

Other contraventions attract fines of up to INR 20,000 for the first contravention which increases (with liability for imprisonment) to up to INR 40,000 for subsequent contraventions.

The Wages Code permits compounding of offences through payment of fines, and offences that are compounded but recurrence within a period of 5 years cannot be compounded again.

Employers should assess compliances considering the enhanced penalties and punishments.

The facility to compound offences partly favours employers by allowing non-compliances to be settled through payment of fines:

  • This will be time-saving and reduce the burden of the prosecution to an extent.

This will be favourable for the employees as the employers will seek to fully comply to avoid increased penalties. 

In the earlier statutes, the penalties were abysmally lower to create any motivation for the employer to comply.

 

Code on Social Security and Welfare, 2020

Change

Impact on ‘employer’

Impact on ‘employee’

Computation of statutory benefits:

Statutory benefits such as provident fund (“PF”), gratuity and employee state insurance (contributions for which are deducted as a percentage of an employee’s wages) must now be computed using ‘Wages’ as newly defined in the Wages Code.

The new definition of ‘wages’ may:

  • Enhance the employer’s burden for statutory contributions such as PF, and
  • Gratuity resulting in additional (matching) deductions from employees’ salaries thereby reducing take-home pay.
  • This may impact salary structures with lower ‘basic salary’ and higher allowances; and
  • Not materially affect salary structures which already compute statutory benefits on salary components applied universally for employees.

This will negatively impact take-home salary for the employees but will be beneficial for the longer term as the contributions to the statutory deductions will increase. 

Gratuity for work less than five years: 

Gratuity will now also be payable (on a pro-rata basis) to employees on fixed-term employment i.e. five years of continuous service is not mandatory for such employees and they must be paid gratuity for the tenure of their services (which could be less than five years).

Employers should consider the number of employees engaged in fixed-term employment (especially those on deputation and second ment) to assess the impact of this change. Here, the salary costs for the employers will significantly increase. 

Employees should consider this as a welcome move as it is more conducive to current job trends where the average tenure in a job is much less than 5 years.

New concepts and social security for

Gig and platform workers

The Social Security Code introduces new concepts to bring workers and employers (outside

the typical employment relationship) into its purview, such as –

  • Aggregator – Being a digital intermediary or a marketplace for a buyer or service user to connect with the seller or the service provider; and
  • Platform work – Being organisations or individuals using an online platform to access other organisations or individuals to solve specific problems or to provide specific services.
  • Gig workers – Being a person who performs work and earns from such activities outside of the traditional employer-employee relationship.

The government will create a social security fund for platform and gig-workers. Businesses deemed as ‘Aggregators’ will need to contribute between 1-2% of their annual turnover (capped to 5% of the sums payable to their workers) into this social security fund.

Employers should assess if they will be considered ‘Aggregators’ and whether they provide ‘Platform work’ such as cab aggregators, food-delivery companies or service aggregators.

Again, employees who were earlier working without any kind of safety net on social security will find these changes helpful to their long-term needs.

Code on Industrial Relations, 2020

Change

Impact on ‘employer’

Impact on ‘employee’

  • Certified Standing Order, a must for establishments with 300 or more workers.
  • Currently, establishments with 100 or more workers (50 or more in some states – there are variances state-wise) are currently required to prepare and register ‘Standing Orders’ (which is like a compendium of material employee-oriented policies of an establishment covering matters such as leave, working hours, the grievance redressal mechanism, retirement age etc.).
  • The IR Code changes this by requiring only those establishments with 300 or more workers to prepare and register ‘Standing Orders’.

Employers in the manufacturing sector employing less than 300 workers will find this very beneficial. Others were already inside the applicability net so not much changed for them. 

Employers in the services sector, including the IT sector, will find this a daunting compliance because in some of the states they were exempt from this provision. 

Most employees in the services sector are not familiar with Standing orders and their implication in managing working conditions. 

It will be interesting to see how this statute will impact employees. 

Employee thresholds for Lay-off,

retrenchment and closure provisions increased:

Industrial establishments employing 300 or more workers will now need appropriate government permission for lay-off, retrenchment of their workers or closure of their establishments – the current threshold is 100 workers.

Perhaps this is the most significant change that will help an employer to manage their business as the hiring and firing decisions become much easier than before. 

Employees will generally abhor this change as it will significantly decrease job security.

Prior notice required in case of strike or lock-out:

Employees will have to give at least 60 days prior notice for a strike in an establishment.

The employer will have to give 60 days prior notice for lock-out of the establishment.

Also, the new definition of ‘strike’ specifies that mass casual leave by 50% or more of the workers will be considered a strike.

Expanding the definition of strike and imposing a 60-day notice requirement on employees will be beneficial to employers.

Also, the requirement of a 60-day notice in case of a lock-out ensures that there are no arbitrary lock-outs.

Introducing the concept of ‘negotiating union.’ Every industrial establishment with a registered trade union will need to have a negotiating union or a negotiating council for negotiating with the employer. A trade union can be recognised as the negotiating Trade Union in the following manner:

  • Where only one Trade Union is registered, the employer will recognise this Trade Union as the sole negotiating union.
  • If more than one Trade Union is registered, the Trade Union with 51% or more workers on the muster roll of that industrial establishment supports that the Trade Union will be the negotiating union.
  • If no such union with majority support exists, then the employer will constitute a negotiating council which will consist of Trade Unions with the support of over 20% of the total workers on the muster roll.

  • Employers will need to assess the impact considering arrangements with existing trade unions.
  • Negotiating with only a single trade union will likely ease the dynamics where employers are currently dealing with multiple trade unions.

Union of employees that are in minority will find this unfavourable.

Other changes 

There is a significant increase in penalties, enhanced dispute resolution process (only ID Tribunals will be sole forum), pay-in to reskilling fund in cases of retrenchment, mandatory grievance redressal committee are some of the other changes that are there in IR Code.

These changes are well-intentioned to solve the problems in IR space but will be done at the cost of increased contribution from the employer

These changes are neutral in nature and mostly favouring employees. In my view, this is a trade-off to earlier provisions that were in favour of employers.

 

Code on Occupational Safety, Health and Working Conditions, 2020

Change

Impact on ‘employer’

Impact on ‘employee’

Establishments will be prohibited from engaging contract labour in ‘core activities’ i.e. any activity for which the establishment is set up and includes any activity which is essential or necessary to such activity, and the key exemptions are limited to – Activities ordinarily done through contract labour; the activities which do not require full-time workers for the major portion of the working hours in a day; and any sudden increase of volume of work in the core activity which needs to be accomplished in a specified time.

As defined ‘core activity’ is very broad: A simple reading will essentiality eliminate the use of contract labour in the fundamental activities of an establishment e.g. a software maker cannot engage software engineers as contract labour, or a manufacturer of consumer goods cannot hire blue-collar contract labour in the manufacturing process, which are the traditional areas where contract labour is engaged.

Contract workers have always been a marginalised group of employees who end up doing most of the heavy lifting in an organisation but end up working as second-rate employees in the organisation. With this change, there is a hope to address this issue and the key lies in the implementation of this change. 

Contract labour provisions will apply at a higher threshold

The requirements concerning contract labour e.g. registration, obtaining licences, maintaining registers etc., will only apply to establishments where 50 or more contract labour are or were engaged in the past 12 months.

This change keeps in line with the requirements already in place in some states such as Maharashtra and will aid establishments (operationally and compliance-wise) which engage contract labour below the new threshold.

 

Conclusion

It is very clear that one of the biggest impacts these Codes will have on everyone, especially employers is the increased simplicity of usage and compliance. Because of the increased threshold of workers and lifting of restrictions on hire and fire, these Codes will encourage entrepreneurs and MSMEs to operate their business much more freely. There are some confusions in the industry around a few topics – especially the definition of wages and a new classification of workers for social security. But these should be resolved after the respective rules come along with some clarity on implementation after a couple of years of compliance cycles. Employers will have to keep a close watch on increased costs on salary and benefits. There are also increased fines and penalties for non-compliance, so management must be very cautious about compliance with these Codes. Employees and trade unions on the other hand will find the provisions of the Industrial Relations Code to be the biggest change that is not in their favour. Other than most of the changes (especially social security and statutory payments) though they are beneficial to employees, they will show results only in the longer run. 


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