Modifications in the Industrial Employment (Standing Orders) Act (IESOA), 1946, made in the new labour law will adversely affect workers, writes Dr K. R. SHYAM SUNDAR.
A day after receiving presidential assent, the controversial Industrial Relations Code (IRC) 2020 which amends and consolidates existing laws relating to terms of employment, settlement of industrial disputes, and the functioning of trade unions, it was published in the Gazette of India on September 29, 2020. Ever since it was enacted by Parliament, the commentaries on IRC have mostly concentrated on the changes in the provisions relating to the “hire and fire” policy and strikes. What has been missed out are the modifications made in the Standing Orders (SO) of the Industrial Employment (Standing Orders) Act (IESOA), 1946. The changes need to be focused upon, given its adverse implications.
Before the enactment of IESOA in 1946, employment contracts were negotiated in an unequal power setting and such contracts did not contain fair and reasonable clauses vis-à-vis employees. The Supreme Court spelt out why the IESO Act had become necessary in one of its judgements (Rohtak Hissar District..v. State of Uttar Pradesh & Others, 1965). The court noted that prior to the Act, in many industrial establishments, “the conditions of employment were not always uniform, and sometimes, were not even reduced to writing, and that led to considerable confusion which ultimately resulted in industrial disputes.”
In fact, the four major objectives of the law, as gleaned from several SC judgments, are to cure the unequal bargaining power in the labour market; standardise and universalise terms and conditions of service in a firm; ensure fair and reasonable conditions of employment and ensure industrial peace.
The fundamental objective of IESOA was to prevent the employer’s power of unilateralism. In fact, the four major objectives of the law, as gleaned from several SC judgments, are to cure the unequal bargaining power in the labour market; standardise and universalise terms and conditions of service in a firm; ensure fair and reasonable conditions of employment and ensure industrial peace.
What are Standing Orders (SO)?
It is important to understand the nature and role of a SO to appreciate the consequences arising out of its amendment. The IESOA required employers covered by it to define with “sufficient precision” conditions of employment formally in a Standing Order (SO) and communicate the same to workers. The SO is a special kind of collective contract arrived at through a tripartite procedure involving employers, trade unions and the officials of the state labour department, viz. the certifying officers (CO) and the appellate authorities (AA).
The SO covers regulations concerning the category of employees that an employer must recruit (permanent, temporary, casual, fixed-term employment, etc.) and specifies the definitions and conditions governing each category (e.g. tenure of probationers and conditions for their regularisation), shift working, types of leave and their application and sanction, stoppages of work and their consequences for workers, conditions to be followed by both employers and employees concerning termination of employment, specific acts of misconduct, contemplated disciplinary procedure and types of proposed punishment, means of redress for workers against unfair treatment and wrongful exactions by employers, among others. Thus, the SO regulates with clarity a variety of collective conditions of service. As a result, both employers and employees cannot deviate from them at their will.
Regulations for Orderly Industrial Relations
The certified SO is a statutory force which prevails over the corresponding terms of service in the individual contracts of employment. An employer cannot discriminate between the employees say in terms of probationary tenure or sanction of leave nor can suspend or dismiss an employee without due procedure.
Thus, the SO promotes at once workers’ discipline and non-discriminatory practices by employers. So, it is a powerful legal instrument protecting the interests of both employers and employees.
Similarly, a worker will have to adhere to the rules and regulations and be a disciplined worker. He or she cannot, for example, go on a longer unauthorised leave or abandon employment and later claim it. Thus, the SO promotes at once workers’ discipline and non-discriminatory practices by employers. So, it is a powerful legal instrument protecting the interests of both employers and employees. The State via the labour administration and the judiciary supervises and regulates it.
It is important to understand that the two laws, the IESOA and the Industrial Disputes Act, 1947 (IDA) have together built a strong armour against fire-at-will employment practices of employers and established elaborate procedures for termination of employment even in cases of alleged misconducts. These are in accordance with ILO’s Termination of Employment Recommendation, 1982 (No. 166).
For example, if an employee has allegedly committed one or several acts of notified misconduct, the employer, after due diligence, can initiate disciplinary proceedings as outlined in judge-made laws. If an employer suspends a delinquent employee pending inquiry, then he or she under the IESOA and the SOs must pay “subsistence allowance” to that worker. The employer determines the quantum of punishment only if the worker is found guilty in the inquiry process as per the regulations governing it.
The Labour Court or Tribunal under Section 11-A of the IDA can set aside unjust dismissal or discharge of a worker by an employer and even order reinstatement of that employee, but various judicial principles regulate their intervention. Simply summarised, these can interfere with employers’ actions only when punitive actions concerning say dismissal of an employee are perverse and violate principles of natural justice.
The entire regulatory framework in terms of SO and IESOA relating to acts of misconduct, inquiry, punishment, etc. enable the judiciary to assess employers’ actions. Thus, an employer cannot fire employees without adopting due procedure laid down in the SO and by the case-law established by the judiciary. Dismissal or discharge described here is different from lay-off or retrenchment, which is based on reasons other than disciplinary proceedings, namely, economic reasons.
SO in the Industrial Relations Code 2020
In the initial stages of industrial development, it was natural to apply laws to large establishments. Hence, IESOA was made applicable to industrial establishments employing 100 or more workers. Some states like Karnataka and Maharashtra later applied it to those employing 50 or more workers.
The government in the IRC, without any provocation, has made significant even alarming amendments to the Standing Order Regulations (SOR). Now, SOR applies only to industrial establishments employing 300 or more workers. The 300 threshold means SOR will not cover a total of around 90 per cent of working factories and over 40 per cent of workers employed therein.
Research shows that the probability of unions being formed increases with the size of establishments (measured by the number of workers). Simply put, trade unions are less likely to be present in the medium-sized firms and least so in micro and small firms. Employees in MSMEs, as opposed to those in large establishments, require legal protection in the absence of “voice” mechanisms. Employers too of MSMEs require a disciplined workforce. The IESOA recognises the needs of both the workforce as well as employers. But the IRC does not.
The SOR amendment came like a bolt from the blue. The earlier drafts of IRC (since 2015) did not contain the clause to increase the threshold. Even the 2019 draft which was subjected to the scrutiny of the Parliamentary Standing Committee (PSC) and stakeholders did not contain it. It was after the PSC report that the government introduced the new clause.
On the flip side, it was a smooth passage for the legislation in a deserted Parliament boycotted on that day by the Opposition! The passage of the three Labour Codes and the Farm laws betrays the abdication of Parliamentary responsibility of all legislators, none spared.
It can be argued that had the proposal to introduce this clause has been put to the PSC as well as to stakeholders, then the latter would have had the opportunity to make their views known to the PSC which could have flagged the concerns and added its own views. That the draft did not include a major shift, betrays absence of transparency. There could also be an issue of propriety in terms of Parliamentary procedures which raises a lot of questions.
On the flip side, it was a smooth passage for the legislation in a deserted Parliament boycotted on that day by the Opposition! The passage of the three Labour Codes and the Farm laws betrays the abdication of Parliamentary responsibility of all legislators, none spared. Then why blame the NDA for propriety! At any rate, governance of labour market has been weakened and labour is set to lose on all fronts.
However, the flexibility in the IRC will introduce differential SOs across firms and hence will promote differential conditions of employment akin to the individual contracts in a free market economy.
The IRC now allows employers to draft Standing Orders concerning not only matters provided in the first schedule but also any other matter peculiar to their establishments. The “matters” listed in the schedule provide a common framework for firms in a region to make regulations–which was the objective of the law as per Madras High Court judgement in Salem Erode Electricity… v. Salem Erode Electricity…, October 15, 1965.
However, the flexibility in the IRC will introduce differential SOs across firms and hence will promote differential conditions of employment akin to the individual contracts in a free market economy. Further to reduce the transaction costs, IRC under Section 30(3) allows employers to adopt the “Model SO” framed by the Central government with respect to “matters relevant to his establishment” and this shall be deemed to have been certified as by the normal process outlined in this section. Then, all that the employer needs to do is to “inform” the certifying officer concerned of what has been adopted or left out from the Model SO.
Two problems exist here. One, the model standing orders to be considered should be those framed by state governments, which will take into account regional and industry-wide disparities. Two, from the plain reading of the clause it appears that employers can pick and choose clauses in the Central Model SO. This could introduce ambiguities and create differential employment conditions.
Consequences of Liberalisation of IESOA
What does the new law entail? Firms employing less than 300 employees now can discriminate between workers in terms of conditions of employment (say probation period, late coming or notice period for employment termination), avoid providing means of redress against unfair acts, frame charges against “inconvenient workers” (say union leaders or those promoting unions) as there is no SO detailing misconduct, and dismiss them without a domestic inquiry, avoid paying subsistence allowance to the suspended employees, among others.
But litigation in an ideal industrial relations system must be a last resort and not potentially first order resort, which will be so in the absence of regulations or responsible self-governance on the part of employers.
Employees can, no doubt, raise an industrial dispute under the IRC and seek State intervention via conciliation and adjudication, which will take years to deliver justice.
Unfortunately, laws in India promote a “litigation culture” which ends up juridifying industrial relations. According to J. Clark and Lord Wedderburn, juridifying means that the line personnel managers, shop stewards and full-time officers often adopt is a dominant strategy to deal with individual and collective employment issues by reference to legal (or what are believed to be legal) norms, procedures, rather than to voluntarily agreed norm and procedures or to custom and practice. In simple terms it means converting potential bi-partite and non-legal processes and procedures into legal and formal ones. The most undesirable outcome of juridification is promoting a litigation culture in the industrial relations system.
The outcome: the already vulnerably placed workers in small and medium-sized establishments will not enjoy employment security as they earlier did, though in a limited manner. These workers will be left to the mercy and benevolence of employers, which will promote nepotism.
The liberalisation of the IESOA threshold to 300 will mean that the notorious “employment at will” doctrine and practice will rule in most establishments. The outcome: the already vulnerably placed workers in small and medium-sized establishments will not enjoy employment security as they earlier did, though in a limited manner. These workers will be left to the mercy and benevolence of employers, which will promote nepotism. In a progressive and civilised society, sound labour regulations, i.e. those that protect the interests of both employers and employees and promote orderly industrial relations should cover more establishments and employees. In which case, IRC should apply SO regulations to at least those establishments employing 50 or more employees if not less.
The Periodic Labour Force Survey (PLFS) results for 2017-18 show that more than 70 percent of regular wage or salaried workers did not have a written employment contract, a condition mentioned by the judiciary in explaining the reason for IESOA. It is true that the Occupational Safety and Health and Working Conditions Code (OSHWCC) requires employers to serve written employment contracts to workers. But without a corresponding penalty for non-implementation of it, this clause lacks teeth. This important provision should have been logically inserted in IRC and not in OSHWCC. A legal clause without penalty is ineffective.
The objective of any labour law is to prevent not only unilateralism but also opportunistic behaviour on either party to a contract, worker or employer. Secondly, a reasonably regulated system will produce optimal outcomes and will benefit both labour and capital. The lawmakers have entirely lost sight of these two incontrovertible and time-tested propositions. The IRC is likely to bring back chaotic labour market conditions reminiscent of the pre-colonial and free-market economy era.
(Dr. K.R. Shyam Sundar is a Professor at XLRI, Xavier School of Management, Jamshedpur. Views are personal.)