Will India's new Labour Codes boost SME businesses?

Will India's new Labour Codes boost SME businesses?

Legal & Compliance

Wadhwani Foundation

Wadhwani Foundation

180 week ago — 5 min read

India has embarked on a major initiative of Labour Law Reform. Question is, will this be India’s Glasnost or Not?


The Indian Parliament cleared the path for three labour codes – namely, Industrial Relations Code, 2020; Code on Occupational Safety, Health and Working Conditions Code, 2020; and Social Security Code, 2020; with the Wage Code has been enacted in 2019 itself. With the enactment of these Codes, the Government has demonstrated its resolve to tackle politically sensitive subjects with time-bound action and direction.


The Indian Labour Law regime is infamous for the multiplicity of laws at the Central and State levels and a lack of transparency that affects both the employers and the employees. Labour Laws have been perceived to be an impediment in improving India’s position in the global ‘Ease of doing business’ rankings.


Around 44 Central Laws have been consolidated in the four Codes.


While some changes are welcome for Small and Medium Enterprises (SMEs), others may enhance the burden of compliance. The key highlights of the Codes are as follows:


  • Coverage: Most Labour Laws apply to establishments over a certain threshold, usually the number of employees exceeding 10. All the Codes retain such employee strength-based thresholds – with some progressive relaxations. Something to cheer for the SMEs.


  • Retrenchment: Establishments hiring 100 or more workers have previously required Government permission for closure, layoffs, or retrenchments. The Industrial Relations Code raises this limit to 300 and allows the Government to further increase this limit by notification.


  • Standing Orders: The requirement to get standing orders certified for establishments with over 300 workers, versus the earlier requirement of over 100 workers, is one significant step in empowering and enfranchising the SMEs towards self-regulation and lesser compliance burden.


  • Labour enforcement:  Multiplicity of Labour Laws has resulted in distinct compliances, increasing the compliance burden on firms.  On the other hand, the labour enforcement machinery has been ineffective because of poor enforcement, inadequate penalties, and rent-seeking behaviour of inspectors. The Codes address some of these aspects.


  • Universal Minimum Wage: The Wage Code for the first time will introduce a National Minimum Wage. India currently operates a complex way of determining minimum wage which varies across states.


  • Fixed-term employment: Industrial Relations Code introduces a new form of short-term labour – fixed-term employment. There is recognition of Fixed-term employees and provisions with respect to service conditions, salary, leave, and social security as well as terminal benefits like gratuity. SMEs would find newer alternatives/opportunities to structure the workforce. At the same time, fixed-term employees will also be entitled to their share of rights!


  • Trade Unions:  There are several registered trade unions but no criteria to ‘recognise’ unions that can formally negotiate with employers. The Industrial Relations Code creates provisions for the recognition of unions.


  • Gig workers: Code on Social Security creates enabling provisions to notify schemes for ‘gig’ and ‘platform’ workers; however, there is a lack of clarity in these definitions. 


  • Delegated Legislation: The Codes leave several key aspects, such as the applicability of Social Security schemes, and health and safety standards, to rule-making. The question is whether these questions should be determined by the legislature or be delegated to the Government.


Khaitan Legal Associates View: This is an ambitious first step. However, the proof of the success will be in the timely implementation. It is going to be a herculean endeavour as it will require the enabling rule-based framework and cooperation of State Governments to make this happen! The Government is working overtime to ensure that the Codes are implemented before April 2021. Until then SMEs should prepare themselves for the new regime.


We partnered with GlobalLinker and organised a webinar to help you understand more, from legal experts, about how these labour law reforms impact SMEs like you. The panellists discussed the key highlights of the codes like coverage, retrenchment, enforcement, etc. Watch the webinar recording below.



Also read: India’s new Labour Laws: Your queries answered by legal experts


Image source: shutterstock.com


Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker