India’s Labour Laws – The Balancing Act

In 2018, Arvind Subramanian came out with his book ‘Of Counsel’ on the Modi-Jaitley economy. In his book, he chose to describe the Indian economy as a form of ‘stigmatized capitalism’. This was so because India’s growth story began with an emphasis on industrial manufacturing, quickly shifting its focus toward agriculture, and settling for a service-led economy while jumping the gun on manufacturing. There is little doubt that the manufacturing sector is an important bridge in the development story, as most countries emerging out of the colonial subjugation, and the post-war destruction, have had an export-led manufacture growth model. Countries such as South Korea, China, Taiwan, and recently Bangladesh and Vietnam, have shown that export-led manufacturing is essential for bringing the abundance and growth required to pull the citizens out of abject poverty.

The reasons for the absence of the manufacturing sector in India can best be captured from the review written by the father of India’s planned economy – P.C Mahalanobis. While reviewing the Swedish economist Gunnar’s ‘An inquiry into the poverty of the nations’, he observed, “However, it seems to me that in certain respects, welfare measures tend to be implemented in India ahead of economic growth. For example, our labor laws are probably the most highly protective of labor interests – in the narrowest sense – in the whole world. There is practically no link between output and remuneration and hiring and firing is highly restricted.” The observations were made in 1969. The Indira Gandhi government went on to implement more and more restrictive labor laws and ensured that in every conflict, the judiciary gave judgments in favor of the workers.

For example, consider the Factories Act, 1948, under Section 2(m), ‘factory’ has been defined to mean any premises where 10 or more workers are working on any day of the preceding 12 months when the manufacturing process is being carried on with the aid of power, and 20 or more workers where the manufacturing process is being carried out without power. The threshold of what constitutes a factory is, therefore, set to be extremely low. It arguably covers almost all small establishments and workshops. But the prescriptions under the Act do not commensurate to the size of these establishments.

Chapter III of the Act prescribes that, where the premises are not painted with washable water-paint or have a smooth impervious surface, they are to be whitewashed once every 14 months. The Act also prescribes norms for overcrowding under Section 16, where the Chief Inspector can prescribe the maximum number of laborers that can work in a room. There are similar norms for sanitation ventilation, lighting, even for Spittoons!

It is also pertinent to mention here that through a government notification dated December 09, 1976, employment of contract labor for sweeping, cleaning, dusting, and washing of buildings owned by the establishment is prohibited. Hence as per law, these mandatory tasks under the various provisions of the Factories Act cannot be performed by contractual laborers, enlarging the financial burden for the owner of the establishment.

Further, under Chapter V, the Act prescribes the requirement of washing facilities for workers, arrangements for sitting, and if the factory has more than 500 workers, there is a requirement of maintaining an ambulance with the prescribed equipment. In addition, if the factory has more than 250 workers, a canteen has to be maintained. An amendment in 1976 in the Act also requires that the expenditure in running the canteen cannot be considered for fixing the cost of foodstuff and has to be borne by the employer. Similarly, if the factory has more than 150 workers, there has to be a provision for suitable shelter, restrooms, lunchroom, and provision for adequate drinking water and a creche has to be provisioned for every 30 women workers. Under Section 51, the workers cannot be made to work more than 48 hours a week i.e 8 hours a day. Further, under Section 66, women cannot be employed for night shifts. Under Chapter VII of the Act dealing with Annual Leave with Wages, it is stated that the provisions of the Act will apply on all awards, agreements, and contracts of service, where the terms are less favorable. A worker shall be eligible for paid holidays in the subsequent year after working for 240 days or more in a factory in a given calendar year. For every 20 days of work, the worker is benefited to get a paid holiday, in addition to the holidays in the given year.

It is easily discernible that the provisions are prohibitive in nature, especially for small establishments. In addition to this, they disincentivize the hiring of female workers by denying them the right to work in nightshifts and requiring the setting-up of creches if the factory reaches the threshold of 30 workers. For implementation, the Act prescribes checks by inspectors, encouraging inspector raj and rent-seeking behavior. There is nothing in the Act that would incentivize the employer in ensuring these provisions are met like governmental aid for ensuring a certain level of compliance and assistance in setting up creches when the threshold is reached.

The problem is further exacerbated by the Industrial Disputes Act, 1947. The Act covers all disputes between the workmen, and with the employer. The Act provides for an expansive definition of ‘industry’ and ‘workmen’ under Section 2 (j) of the Act, and Section 2(s) of the Act. Further, provides for successive machinery for adjudication of disputes such as conciliation officers, board of conciliation, labor courts, and tribunals. The Chapter II-A of the Act provides that an employer is under an obligation to inform any change in the condition of service applicable to any workman by of advance notice of 21 days, which inter alia includes rationalization, standardization, or improvement of the plant or technique that is likely to lead to retrenchment. As we can see, most of the provisions create unnecessary hurdles for a decision to arrive. The employer also cannot introduce new and advance technology without being in a possible conflict situation with the workers. An amendment brought about in 1971 also gives the Labour courts and Tribunals to order reinstatement of the worker on terms and conditions as it thinks to be fit. Then there is the Chapter V-B, which lays down the conditions for lay-offs, retrenchment, and closure for establishments having more than 100 workers, requiring prior permission from the government. These permissions are almost never granted burdening the Courts with litigation.

Now consider how the Courts have interpreted the various provision of these Acts, in Lal Mohammad vs Indian Railway Construction[1] the word ‘premises’ under the section 2 (m) of the Factories Act was read to also include open land and the laying down of a railway line was treated as ‘manufacturing process’ was covered by the Section 2 (k) of factories Act. Similarly, in Uttaranchal Forest Development vs Jagbir Singh[2] areas of the forest was enough to constitute premises within Section 2(m) Factories Act, 1948, and the cutting of trees by an axe, and changing the shape of the timber were taken to be manufacturing process under Section 2(k) of the Act. The effect is that regardless of the contractual rules of engagement, these are superseded by Factories Act, and by virtue of Section 25-L of the Industrial disputes Act, provisions of the Chapter-VB of the Industrial Disputes Act become applicable. Consequently, under Section 25-N, the establishments had to give 3 months’ notice and the pay before retrenchment. Needless to argue, the benefits under the Act are above and beyond the ordinary practice in the markets. Beyond the expansion of the definition of ‘factory’ and ‘manufacturing processes’, numerous judgments have expanded the liability of the employers beyond the statutory prescription. For example, in Parimal Chandra Raha vs Life Insurance Corporation[3] the Supreme Court traced that the employees of the statutorily mandated canteens under the Factories Act can be treated as the employees of the establishment regardless of their contractual status. Thereby, ensuring that the establishment bears the liability of providing the canteen employees the same benefits are their own employees.

Similarly, the Supreme Court in Bangalore Water Supply and Sewerage v. A. Rajappa[4] greatly expanded the definition of ‘industry’ under section 2(k) of the Industrial Disputes Act. It virtually covers everything from cooperative societies to government departments to trade unions themselves! Making its provisions applicable to a great number of establishments that could benefit without these provisions being applicable to them. If this wasn’t enough, the criteria for application of chapter-VB of the Act has also been greatly expanded. In S.G Chemicals and Dyes Trading Employees Union vs S.G Chemical and Dyes Trading Limited [5] the Supreme held that the while applying the provisions of Chapter-VB of the industrial disputes Act, the functional integrity of the various unit of the Industrial establishment has to be taken into the account. Therefore, even if one of the units of the industrial establishment has less than 100 workers, if it is functionally integrated with other units, their combined strength will be taken into consideration, and consequently, the Chapter-VB of the Act will be applicable.

These examples of expanded interpretation and labor-friendly decisions are by no means exhaustive. The Industrial Disputes Act and Factories Act constitute just the surface of the plethora of labor laws in India. Since labor is a concurrent subject, there are as many as 52 central labor laws and more than 100 different laws implemented in various states. Economists such as Jagdish Bhagwati and Arvind Panagariya in their book ‘India’s tryst with Destiny’ have shown how such laws ensure that the size of the manufacturing firms remains small in India, denying the economies of scale and competitive advantage.

There is little doubt that the labor laws as they stand require amendment. Fortunately, the central government has decided to bring all the labor laws under four codes with Wage Code already in implementation. The government can slowly reform these codes to bring them in line with the economic and socio-political realities of the Indian market. Meanwhile, a total repudiation of these laws might be an extreme position. The state should create an environment for compliance by providing incentives to ensure it is voluntary. Consequently, there can be a proportionate reduction in of requirement of constant vigilance. One can be hopeful that better sense prevails in balancing the rights of the workers and the necessities of the market. 

Image Courtesy – Wikimedia Commons

[1] (1999) 1 SCC 596

[2] (2007) 2 SCC 112

[3] 1995 Supp (2) SCC 611

[4] 1978 (76) FLR 266 (SC)

[5] (1986) 1 LLJ 490 SC

Anuj Aggarwal

Leave a Reply