“NEW LABOUR CODES, 2020 – WHAT CHANGES FOR WORKERS AND EMPLOYERS?”

By- Priyam Agarwal

India is a country with a labour force of around 500 million[1]. The term ‘labour’ means the amount of physical and mental work done for wages. The significance of the regality of labour and the need for ensuring the interest of human labour has been cherished in Chapter- III of the Indian Constitution (Articles 16, 19, 23 & 24) and also Chapter IV (Articles 39, 41, 42, 43, 43A & 54) keeping in line with Directive Principles of State Policy (DPSP) and Fundamental Rights.

Labour is a subject in the concurrent list under the Constitution of India and thus both the Central and State Governments have competence to enact legislations regarding labour. Due to this, a large number of labour laws have been ratified till date related to different facets of labour namely, occupational health, fixation of minimum wages, safety, resolution and adjudication of industrial disputes, employment, mode of payment of wage, gratuity, provision for payment of bonus, etc. 

The central government has stated that there are over 100 state and 40 central laws regulating various aspects of labour such as the resolution of industrial disputes, working conditions, social security and wages[2].

The Indian labour laws were too many which have led to confusion and overlapping. The labour laws existing in India were archaic, too many, often contradictory and badly administered. The existing labour laws were very old and thus they need a reconsideration. The labour laws enacted in India have been added in a piecemeal manner, this has in-turn resulted in these laws being extemporaneous, mutually at odds with assorted definitions, complicated and containing outdated clauses.

Justice N Anand Venkatesh had observed in 2019 in the case of The Management Of Sny Autotech Pvt. Ltd. vs The Inspector of Police” while hearing a case at the Madras high court: “Industrial laws available in this country have become archaic and unfortunately have not changed with the fast changing environment in the industry” [3] .

Various studies have discerned that labour enforcement in India has been feeble and has not been able to protect workers sufficiently, the success of collective bargaining has been low due to lack of recognition to bargaining agents, and also the coverage of labour laws has been sparse[4]. The Periodic Labour Force Survey Report (2018-19) stipulates that 70% of regular wage/salaried employees in the non-agricultural sector didn’t have a written contract, 52% did not have any social security benefit and 54% were not eligible for paid leave[5].

The major challenge in labour reforms was to facilitate employment growth while protecting worker’s rights. The government have to harmonise between the rights of workers and economic recovery. Favouring one over the other will influence the Country’s prospects in the distant future. In 2019, the Ministry of Labor and Employment introduced four bills with an aim to consolidate 29 central laws and thus replace the 29 existing labour laws. 

Out of these four bills, one was passed in 2019 (“The Code on Wages”) and the other three were referred to the Standing Committee on Labour. The three bills were reinstituted after incorporating 174 out of 233 recommendations given by Standing Committees[6] in 2020. The Union government has recently codified 29 central enactments into four labour codes namely the:

  1. The Code on Wages, 2019
  2. The Industrial Relations Code, 2020
  3. The Code on Social Security, 2020
  4. The Occupational Safety, Health and Working Conditions Code, 2020

These labour codes have been proposed on the recommendation of the Second National Commission on Labour (NCL). This commission found existing legislations to be complicated, with obsolete provisions and incoherent definitions [7].

Objective for New Labour Codes: 

  1. To simplify and modernize labour regulation as labour laws in India remain extremely complicated.
  2. Less complexity, simplifies access to numerous provisions of the law by the employees and employers.
  3. Ease of compliance by removing multiplicity of definitions and authorities without compromising wage security and social security of workers.
  4. Accountability and transparency, and uniformity in definitions and approach. 

The Code on Wages was passed by the Parliament and this code received the President’s assent on 8th August 2019. The implementation of this code was the first milestone in labour market reforms and it subsumed 4 existing central labour laws, namely the Payment of Wages Act, 1936, Minimum Wages Act, 1948, Payment of Bonus Act, 1965 and the Equal Remuneration Act, 1976. The Code on Wages legislates on wages and bonus and aspects relating thereto. The fixation of minimum wages has received a long overdue review under the Code on Wages, 2019. 

The three (3) remaining labour codes were passed by the Parliament on September 23, 2020 and thereafter received the President’s assent on September 28, 2020. 

An overview of the three (3) new labour codes passed in 2020 is provided below:

[A]. The Industrial Relations Code, 2020 (“IR Code”)

The IR Code subsumed and combined the features of three (3) erstwhile laws, namely – The Trade Unions Act, 1926, Industrial Employment (Standing Orders) Act, 1946 and Industrial Dispute Act, 1947.This code will energize the industry and would spur economic activity. It aims to free employees from the constraints of earlier labour laws.

The Industrial Relations Code has rightly embraced the definition of industry propounded by the Supreme Court in 1978 in the case of “Bangalore Water Supply and Sewerage Board v. A. Rajappa” [8]. This Code has made the formation of unions difficult and also placed restrictions on the right of workers to go on strike. This code seeks to consolidate and amend laws relating to: Trade Unions, conditions of Employment (Hire and Fire Policy) on industrial establishments, settlement and investigation of industrial disputes:

  1. Increased the threshold for retrenchment: The government has hoisted the threshold on the number of employees needed in an organization for the layoff, retrenchment and closure of establishments without the approval of government to 300 from 100 employees, and allows the government to increase this limit further by notification.

The Standing Committee on Labour, in its report submitted in April, had also proposed hiking the threshold for lay off, retrenchment and closure to 300 workers, noting that some state governments like Rajasthan had already increased the threshold and which, according to the Labour Ministry, has resulted in “an increase in employment and decrease in retrenchment”[9].

The Labour Minister, Mr. Santosh Gangwar informed the house that: As many as 16 states of India had already increased the threshold for closure, lay off and retrenchment in forms with upto 300 workers without government permission.

According to the Central Government, this step would encourage the investors to set up big factories and employ more and more workers and the limit of 100 was not good for employment generation as it discourages the employers to recruit more workers. 

But this step will significantly improve the ease of firing of employees by the employer. It will attenuate the rights for workers in small establishments which have less than 300 workers as they would not get the protection of labour laws and trade unions.

  • Conditions for carrying out a legal strike: Now to conduct any strike, prior notice (60 days prior to strike) to the employer is mandatory if proceedings are going on in any tribunal and also to give 60 days’ notice if the proceedings are concluded. 

This step of broadening the permitted time frame before the workers can go on a legal strike will make a legal strike almost impossible. This would make workers vulnerable to exploitation and their freedom of speech might be restricted.

Till now, a worker employed in a public utility service cannot go on strike unless he gives notice for a strike within 6 weeks before going on strike or within 14 days of giving notice, but this new IR code makes this rule applicable for all the industrial establishments. This notice would be valid for a maximum 60 days.

3. Standing Orders: Previously, standing orders i.e., forming service rules for workmen was compulsory for employers if he hires equal to or more than 100 employees. This limit has now been increased to 300 workmen.

Standing order pertains to the classification of workers, manner of intimating to them period and hours of work, holidays, paydays, shifts, conditions for leave, termination of employment, rules of conduct for workmen, and the means available for redressal of grievances.

According to the Central Government, without the need of a standing order in industrial establishments due to the raised threshold, the process of hiring and firing workers will be more flexible and faster for employers which would result in increased employment. 

But, it will water down the labour rights for workers in small establishments having less than 300 workers and would enable companies to introduce arbitrary service conditions for workers, dismissal and alleged misconduct and retrenchment for economic reasons will be easily possible which will lead to complete demolition of employment security.

4. Recognition of trade unions: If there is one trade union in an establishment then it would be the sole negotiation union. But, if there are more than trade unions in any establishment, the union which has the support of the majority with 51 % employees will be the negotiating union. If the unions do not qualify this criterion, the employer must establish a negotiation council.

5. Fixed term employment: This gives employers the flexibility to hire workers based on requirement to a written contract. Fixed term employees should be treated on par with permanent workers. It includes matters related to hours of work, wages, allowances and other benefits such as gratuity.

6. Grievance Redressal Committee: In any establishment employing 20 or more than 20 workers, there should compulsorily be a Grievance Redressal Committee for quick redressal of the disputes arising in the establishment.

To reskill retrenched workers, employers will contribute worker’s last drawn 15 days’ pay. This step might help workers and the workers could work with good efficiency without any pressure. 

[B]. The Code on Social Security, 2020 (“SS Code”) 

This code replaced 9 labor laws relating to social security, retirement and employee benefits. This code expanded the definition of employees and it now includes inter-state migrant workers, gig workers, platform workers, film industry workers, etc. This code also increased the scope of ESIC (Employees State Insurance Corporation) and EPFO (Employees Provident Fund Organization) schemes. 

Till now, only the workers of the organized sector were given social security but now a significant change is brought by this labour code:

  1. Universal Social Security: This code provides universal social security to all workers for the very first time, including the unorganized and the gig workers (temporary workmen, e.g.: delivery boys) and platform workers. Due to this code, social security is provided to over 90% of India’s total workforce.

Gig workers are basically workers working in a job related to online platforms, independent contractors, on call workers, etc.

2. National Social Security Board: A National Social Security Board will be formed which shall recommend to the Central Government for formulating suitable welfare schemes for different sections of workers which can benefit them by providing comprehensive social security relating to Provident fund, employment injury benefit, housing, educational schemes for children, etc.

3. Contribution of annual turnover: The employers employing gig workers would have to necessarily put up 1-2 % of their annual turnover for social security of workers. This will also lead to upliftment of social security of gig workers.

4. National Database: Under the “SS Code”, there is an aim to make a national database for unorganized sector workers and the registration of all the workers would be done on an online portal on the basis of Self Certification through a simple procedure.

5. ESIC and EPFO benefits: The facility of ESIC which is provided in 566 districts hitherto will now be provided in 740 districts. Till now, EPFO’s coverage was applicable only on establishments included in the Schedule, now it would be applicable on all establishments having 20 workers.

6. Gratuity: Provision for Gratuity has been made for Fixed Term Employee and there would not be any condition for minimum service period for this.

[C]. The Occupational Safety, Health and Working Conditions Code, 2020 (“OSH Code”) 

This code consolidates 13 existing acts such as Factories Act, 1948, Dock Workers Act, 1986, Contract Labour Act, 1970, Inter State Migrant Workers Act, 1979, etc. This code aims to consolidate and amend the laws regulating the occupational safety, health and working conditions of persons employed in an establishment and related matters. This code empowers the companies to employ the labour on a contractual basis and also to increase the term of contract for any number of times and for any amount of time required.

  1. Inclusion of interstate migrant workers in the definition of worker: A worker who is earning upto 18000/- per month and has come on his own from one state and obtained employment in another state will be treated as an interstate migrant worker and would be provided the benefits of a migrant worker i.e., PDS, building cess, insurance and provident fund.
  • Promotes formalisation: The mandatory requirement of issuing of appointment letters by the employer of an establishment will promote formalisation in employment. This step of formalising employment will provide appointment letters which can be used as a proof of experience in other employments.
  • Journey allowance: A aggregate amount of fare is to be paid by the employer for to and fro journey to the employee’s native place from the place of employment. It will reduce burden on employees.
  • Single License: This code will allow a single license for staffing forms to hire workers on contract across different locations instead of multiple licensed ones required till now.
  • Expansion of Definition of factory: The Factory Act, 1948 defines any manufacturing unit as a factory if it employs 10 workers and uses electricity or 20 workers without using electricity power. Now the threshold is being raised to 20 and 40 workers respectively.
  • Women employed in all establishments for all types of work: Women can work in any establishment and it’s the employer’s responsibility to provide adequate safeguard and conditions relating to safety, holiday, working hours with their consent. It would help in increasing women participation in the labour force and address gender bias in wages. 

But the Code does not formulate the preventive measures that employers have to bring into being before allowing women to work at all hours. Also there are no harsh penalties for violations laid down in the code.

According to the World Bank, with less restrictive laws, India could approximately add on an annual basis “2.8 million more good quality formal sector jobs” [10]. Economic Survey (2019-2020) points out that: Units in states that have made the transition towards more flexible labour markers were 25.4% more productive than their counterparts[11].

This simplification of numerous labour laws is a great step forward and these new labour codes are a very big and much required reform for India labour laws. These new labour codes will make noteworthy changes to regulation of labour and the relationship between employer and employee. These labour codes are “historic” because they come after nearly a century. These codes would provide basic security to unorganised workers and will also lead to business growth.


[1] https://data.worldbank.org/indicator/SL.TLF.TOTL.IN?locations=IN

[2]  List of Central Labour Laws under The Ministry of Labour and Employment, The Ministry of Labour and Employment.

[3] W.P.No.23427 of 2018 and W.M.P.No.27342 of 2018

[4] “Reorienting policies for MSME growth”, Economic Survey 2018-19

[5] Periodic Labour Force Survey Report (2018-19), The Ministry of Statistics and Programme Implementation, June 2020

[6]  http://www.legalserviceindia.com/legal/article-3932-new-labour-codes-2020.html

[7] Report of the National Commission on Labour, Ministry of Labour and Employment, 2002 (http://www.prsindia.org/uploads/media/1237548159/NLCII-report.pdf)

[8] The 1978 verdict said that any establishment would fall under the definition of an industry if an employer-employee relationship existed and there is systematic and organized activity ([1978] 2 SCC 213)

[9] https://indianexpress.com/article/india/firms-with-up-to-300-workers-can-hire-and-fire-without-govt-nod-bill-in-lok-sabha-6602928/

[10] https://www.hindustantimes.com/india-news/understanding-the-new-labour-codes/story-llI015EZK8EYtDHmP9SXVP.html

[11] https://www.indiabudget.gov.in/economicsurvey/