Labor Laws

Foreign companies looking to establish in India should understand multiple federal labor laws as well as locally enacted laws that are specific to the state and industry of location and the size of the firm. The government has undertaken major reforms in this regard to consolidate numerous existing laws into four major labor codes.

While the Code on Wages was enacted in 2019, the rules for three labor codes on industrial relations; social security; and occupational safety health & working conditions were enacted in September 2020. As of writing this guide. The Ministry of Labor initially set a deadline of April 1, 2021 for implementation of all four new labor codes. The Ministry stated in January 2021 that it was in the final leg of amalgamating the federal labor laws into the four broad codes on wages, industrial relations, social security, and OSH.

However, delays have been sought by industry stakeholders lobbying the government, so that they get more preparation time to comply with the new labor legislation. This means that the implementation of the new rules under the four codes could get delayed beyond the latest October 1 deadline.

Note: The list is not an exhaustive account of India’s labor laws; it excludes worker and sector-specific regulation.

Existing Regime – Federal Labor Laws

There are two broad categories of labor law in India. Individual labor laws deal with the employee’s rights at work, like the Rights of Persons with Disabilities Act, 2016, while collective labor laws govern the tripartite relationship between employers, employees, and labor unions, such as the Industrial Employment (Standing Orders) Act, 1946. Federal legislation Act as umbrella laws for state-level implementation. For example, the minimum wage requirement in the state-enacted Shops and Establishments Acts must be in line with the Code on Wages Act, enacted at the federal level.

Existing Regime – State Labor Laws

State governments also enact certain laws, which enumerate compliances for companies established in those states. Key state law is the Shops and Establishments Act, which applies to all commercial establishments – any premise where business, trade, or profession is carried out for profit – and shops, where any business or trade occurs, or services rendered to consumers.

All terms and conditions of the employee-employer relationship in shops or commercial establishments are governed by this Act. It reiterates federal laws about establishment registration, wages, as well as working scope and conditions, thus consolidating most applicable federal labor compliances.

Certain federal laws, such as the Industrial Employment (Standing Orders) Act, 1946, affect all industrial establishments where 50 or more workers are employed and in establishments where the Shops and Establishments Act is applicable. The Act governs various aspects of employment, addressing the rights and liabilities of employees and employers and other conditions of service. Notably, state governments may amend this Act to better suit industry in its state.

Companies operating in multiple states should be careful of the distinction between respective state labor laws and state-specific amended federal laws, even if the differences are minor.

Code on Wages Act, 2019

The Code on Wages, 2019, also known as the Wage Code, was enacted in August 2019, and commenced December 18, 2020. The Wage Code consolidates the provisions of four labor laws concerning wage and bonus payments and makes universal the provisions for minimum wages and timely payment of wages for all workers in India. The Code repeals and replaces the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965, and the Equal Remuneration Act, 1976. The Code prohibits discrimination of employees on grounds of gender, especially when the employees are doing the same or similar kind of work.

New Labor Codes on Industrial Relations, Social Security, and Safety, Welfare, and Working Conditions

India enacted three new labor codes in September 2020, in a historic move to consolidate the country’s labor legislation and compliance norms. The codes are – Industrial Relations Code, 2020; Code on Social Security, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020 (OSH). The respective bills bring gig workers and inter-state migrant workers into the ambit of social security for the first time.

Businesses will find that the new codes make it easier for them to be flexible in their hiring and firing decisions as well as in shutting down operations in the country. For example, firms with up to 300 workers can now fire staff without seeking government permission. Conditions restricting worker’s right to strike have also been introduced.

Labor Law Compliance in India: What Businesses Must Note

Until the implementing rules for the Codes are finalized and implemented by major industrial states, existing labor laws will continue to be relevant.

Why the codes have not been implemented yet

Among the contentious provisions is the definition of wages. The new code proposes to cap allowances at 50 percent of the wage, so if allowances exceed this amount, the employer will have to pay social security, including gratuity, on the excess amount. This will increase the employer’s social security obligation and thus raise financial costs due to greater salary cost. On the other hand, employee’ representatives accept the new definition – even if the take-home salary comes down. Under the existing regime, employers in India have flexibility in calculating the compensation package as they can reduce the components liable for social security and increase the allowances. Employers’ bodies want the 50 percent threshold for basic pay plus dearness allowance to be brought down to 20-30 percent of the total package.

Meanwhile, trade unions have urged the government to implement the labor codes on wages and social security at the soonest but industry bodies have asked to slow down to increase preparation time.

The government, however, remains steadfast in its position that all the four labor codes – on wages, industrial relations, social security, and occupational safety and health – will be implemented together and simultaneously.