Indian Employment Law: A Case for Reform

By Justin Bharucha & Abhira Gonge

Posted: 9th May 2012 09:46

Indian employment law has been identified as a significant constraint on the growth of the Indian manufacturing sector.  The need for reform is emphasised in the present global and domestic economic climate.
 
The history of Indian employment law dates back to pre-independence India when employee welfare was deliberately emphasised at the cost of manufacturing efficiency. That inherent bias continues to date and has been underscored by an increasingly complex set of Central (Federal) as well as State legislations which operate in conjunction, and occasionally in conflict, with each other.
 
The Indian economy is comprised of the organised sector as well as the unorganised sector with the unorganised sector having by far a greater number of employees.  This is paradoxical given that Indian employment law focuses on the organised sector where there are lesser employees who are better protected, in some cases at the cost of business efficiency.  Illustratively, the organised sector is governed by almost 50 Central and State statutes relating to employment law whereas the legislature is only now beginning to formulate policy to address the unorganised sector.
 
Dealing first with the organised sector, the principal issues arise given the numerous legislations which operate.  Illustratively, Indian employment law operates to protect employees who qualify as ‘workmen’ (defined under various enactments including in the main, the Industrial Disputes Act, 1947).  Employees satisfying the statutory definition of a ‘workman’ are afforded protection and benefits under various statutes.  However, different statutes define this concept differently as a consequence of which an employee entitled to a benefit under one statute may not always be entitled to benefits under another.
 
A significant issue employer’s face is with respect to ‘retrenchment’ and ‘lay off’.  The Industrial Disputes Act, 1947 includes a mechanism which allows for this but the process is onerous and injunctions against the employer are relatively easy to obtain.  The result can be increased costs on an employer who, given business realities, has little option but to restructure and re-organise his business, in any event.
 
Added to this is the fact that employment law is a fairly sensitive issue in India and, until recently, there has been a palpable lack of political will to initiate reform.  Most statutes are more than 50 years old and continue to apply even today with minimal amendments.  Illustratively, the Factories Act, 1948, a statute which applies across India, was last amended in 1987.
 
Additionally, the multiple licences and registrations which an employer must obtain are not in sync with today’s globalised economy and the need for expeditious and efficient regulations.
 
Over the last 3-4 years there has been some progress on reform.  Several committees have been considering extant employment laws in consultation with stakeholders (including industry associations and trade unions).  Although much of this is still being discussed in terms of recommendations and prospective policies, there seems to be broad consensus that:
 
1. Employees are entitled to and must continue to be protected.  However, this protection should not impede business or the efficient allocation of capital.  Nor should employees be protected to the extent that the law effectively precludes disciplinary action where it is warranted.  For example, lay off and retrenchment of employees has always been a significant problem in India.  There is general agreement that employees must receive due notice and compensation and that lay off and retrenchment must not be discriminatory or punitive but, the present regime which makes lay off and retrenchment very difficult to implement and occasionally also hampers genuine business restructuring must be rationalised in context of today’s imperatives; and
 
2. This process must be effected in stages, the first being harmonising the various statutes which operate.  As a next step policy makers indicate that they would like to move to a single window system for obtaining licences and registrations and, ultimately, work towards a single National Labour Code.
 
While all this remains to be implemented the fact that the issues are being actively considered and consensus being sought is a significant step forward.
 
For completeness, employees in the organised sector who are not statutorily defined ‘workmen’ are governed by their respective employment contract and the general law of contract applies.  In practice therefore employers may find it easier to retrench a number of managerial staff than dismissing a blue collared employee.
 
The unorganised sector is a significant contributor to the Indian economy and there are efforts being made to consider how workers in the unorganised sector should be protected.  This has relevance even to the organised sector given the inherent linkages.  Illustratively, in the case of support services, supply chains, and distribution networks.
 
In sum, at present and for the foreseeable future the Indian employment law remains an intimidating challenge for any employer.  The importance of the HR function cannot be over emphasised as far as concerns managing employee relationships and preventing a formal dispute.  Any M&A transaction as well as any business restructuring must necessarily carefully consider employees and how they must be approached so as to prevent the transactions being stalled.
 
Meanwhile, the reform process continues and over the next few years we hope to see a legislative framework more in tune with today’s economy.
 

Bharucha & Partners brings to you a blend of rich experience, creativity and the energy of youth.  Each of the partners has a proven track record of handling complex commercial transactions or disputes.  Each associate has been groomed or selected as sharing these qualities and vision of the partners. 

With five partners and thirty associates, we work across practice areas, and count leading international and Indian corporate houses, banks, financial institutions and funds among our clients.

Justin Bharucha can be contacted on +91 22 6132 3900 or via email at justin.bharucha@bharucha.in. While Abhira Gonge can be contacted on the same number, or alternatively by emailing abhira.gonge@bharucha.in.


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