Job reservation in the private sector: un-ease of doing business?

By Varun Kalsi and Rishi Sehgal on May 7, 2021

Recently, the state of Haryana published the Haryana State Employment of Local Candidates Act, 2020 (“Act”) in the extraordinary gazette[1]. Presently, the Act has been published for general information and shall be enforced once it is notified by the state government. The Act emanates from a key election promise made by the ruling coalition to its electorate. Further, with this law, Haryana joins a group of states such as Andhra Pradesh and Madhya Pradesh, who have, or are considering taking steps towards reserving jobs for the local state population. Briefly, the Act provides for job reservation for a “local candidate” and every employer is required to employ 75% of “local candidates” for posts where the gross monthly salary does not exceed INR 50,000. This law applies to all (i) companies, societies, trusts, limited liability partnerships, partnership firms, (ii) any employer employing 10 (ten), or more persons and (iii) any other notified entities in Haryana for the purpose of manufacturing, or providing any service, except organizations owned and/or controlled by the Central and State governments. It seems the Haryana government strongly believes, that social and economic upliftment of the state population can be achieved by giving preference to local candidates in certain jobs. Additionally, the state government argues, that the law will discourage influx of migrants from neighbouring states, which creates issues such as proliferation of slums.

This post seeks to provide an overview of the legislation along with relative implications. Further, we have also examined the constitutional issues surrounding the Act and whether it can withstand judicial scrutiny.

1. Key Features

A “local candidate” is defined as one who is domiciled in the state of Haryana. Post commencement of the Act, a portal shall be designated wherein all eligible employers shall mandatorily register all employees earning a gross monthly salary or wages up to INR 50,000. Until registration is completed, no person shall be employed by any employer nor can a local candidate avail benefits of the reservation. Further, the Act provides flexibility to employers to restrict the employment of local candidates from any district in Haryana to 10% of the total number of local candidates. The employer can also claim exemption in case adequate number of local candidates of the desired skill, qualification or proficiency are not available to it. For this, the employer must apply to a “designated officer”[2] in a prescribed format. The designated officers shall conduct an inquiry and evaluate the employer’s attempt to recruit local candidates of the desired skills, qualifications, or proficiency. Thereafter, the designated officer may either accept, or reject the employer’s claim, or direct the it to train local candidates in order to achieve the desired skills, qualifications, or proficiency.

Furthermore, every employer is required to furnish and file a quarterly report on the designated portal in respect of the local candidates employed and appointed during that quarter. These reports will be scrutinized by another set of authorized officers[3]. The officers are empowered to call for any record, information or document in possession of an employer for purposes of verifying compliance with the Act. They have the right to enter the employer’s work premises to examine any record, register, or document, if they suspect that the employer has committed an offence under the Act or rules made thereunder.

In the event of non-compliance, the Act provides for graded monetary penalty for different offences. Private companies can be fined from INR 10,000 to INR 2,00,000 for the first offence up to INR 5,00,000 for the second or subsequent offences and up to INR 1000 per day for continued contravention post-conviction. Moreover, a penalty of INR 50,000 shall be levied on the employer who produces false records, or counterfeits, or knowingly makes or produces a false statement.

2. Constitutionality

The Act raises two potential constitutional issues: (i) whether a state can make reservation in private jobs based on domicile? (ii) whether such reservation in private institutions violates the employees’ and/or employers’ fundamental right to carry on an occupation or business?

Article 16(3)[4] of the Constitution of India (“Constitution”) stipulates that the Parliament may provide domicile-based reservation in public employment and jobs with local, or any other authority. In 1957, the Parliament had enacted the Public Employment (Requirement as to Residence) Act (“Public Employment Act”) under the aegis of Article 16(3). This legislation repealed all existing laws in states and union territories, that provided domicile-based reservation in public employment. However, the Public Employment Act makes exception for states such as Manipur, Tripura, Andhra Pradesh and Himachal Pradesh. But, this power with the central government is not unfettered. The Supreme Court of India (“SC”) has unambiguously and emphatically held that the Parliament cannot use Article 16(3) to provide for domicile-based reservation for individuals in a particular part of the state and leave out the rest.[5]

Further, Article 16(2)[6] of the Constitution specifically prohibits any discrimination based on the place of birth, or residence in matters of public employment. This constitutional prohibition read with the positively worded Article 16(1)[7] necessarily implies and upholds equality of opportunity for all Indian citizens in matters relating to employment. Thus, it is our submission that Haryana’s job reservation statute is less likely to pass the test of constitutionality before the judiciary. Further, an analogy can be drawn from jurisprudence concerning domicile-based reservation in educational institutions to better comprehend the SC’s stance in such matters. In a case[8] involving denial of admission to medical colleges to eligible candidates on grounds of state residence, the SC held that the “sons of the soil” policies are violative of the Constitution. It observed that by denying admission to eligible candidates on the consideration that an individual from one state is an outsider in another, the state deprives a candidate of his constitutional rights and derecognises the essential unity and integrity of the country.

While it is certain, that the Act is prima facie in conflict with the jurisprudence on domicile-based reservation, the judiciary is expected to have the same attitude when it comes to the private sector as well. An example of this is the Andhra Pradesh Employment of Local Candidates in the Industries/Factories Act, 2019 introduced by Andhra Pradesh government in 2019. This law provides for 75% reservation to locals in industries or factories in Andhra Pradesh. It is presently under challenge before the Andhra Pradesh high court[9] with the division bench observing that the quota for locals in private jobs could be unconstitutional.[10] The division bench has also disagreed with the state government’s argument that there has been no objection from the industry. The matter is sub-judice and yet to reach its conclusion with the court seeking a reply from the state government on the constitutionality of the legislation.

The other possible challenge to the Act is on the basis of it interfering with the fundamental right of the employees and employers under Article 19(1)(g). All Indian citizens have a fundamental right to practice any profession, or to carry on any occupation, trade or business at any place within the country. By mandating private companies to provide jobs based on the domicile of a candidate, the Act denies other eligible candidates their constitutional right to practice their profession with complete freedom. A candidate who possesses the skill set and satisfies other requirements necessary for a particular job is excluded from consideration for the sole reason, that he belongs to another state. This itself defeats the concept of selection on merit, a practice that has been historically propagated by the SC[11] while holding that ignoring the same would be arbitrary and discriminatory.

Similarly, from an employer’s perspective, the Act violates their right to carry on trade or business. It is common knowledge that an organisation requires a skilled workforce to produce high quality products or services, that are globally competitive. To achieve this, an employer requires a workforce that is suited to its needs and has the requisite merit and talent. In fact, it could be the lack of availability of skilled manpower, which would make an employer recruit candidate from outside the state where it actually conducts its operations. The right to recruit candidates on the basis of appropriate qualifications is an essential feature of the right to practice any trade or business. There is no doubt that Haryana is the epicentre of various industries and services but, it also faces tremendous competition from other states, which have liberalized their investment policies and are offering various employment-incentive schemes to lure industry. In effect, the Act restricts the talent pool for employers and impacts their efficiency and operations, as they are left with no alternative but to compromise on the job specific requirements and/or experience.

3. Potential implications for Industry

It is certain that the Act will increase a company’s compliance costs for employers (including start-ups) as more time and resources would be expended in verifying the domicile of a selected candidate over and above the general process that was already being followed by companies.  Recruitment would become cumbersome and might lead to delay in projects, which are already impacted by the Covid-19 pandemic. Moreover, the exemption available to private companies is limited as the designated officers can always direct employers to train local candidates towards the achievement of desired skills and qualifications. Investment in the state may also suffer as investors will be reluctant to invest in a region where the skill pool is limited, or where they have to utilise their own resources to train the locals. Further, there is no option for entities to opt out of training the candidates as they would be punished with significant monetary penalties. These penalties will deter and impact smaller employers even more as the amounts could have a significant bearing on their finances.

Additionally, the Act instead of limiting reservation to the nature of work, applies across all kinds of jobs irrespective of the degree of skill, complexity and experience requisite for a particular opportunity. This could also have a negative effect on the business standards of entities and would in turn lead to distortion in the skill-based demand and supply dynamics of the labor market. For instance, employers may resort to notifying less vacancies to avoid hiring incompetent candidates. They may opt for remote based employment of candidates for back-office jobs or data entry jobs from other states. Thus, instead of reducing the state unemployment rate, this law may, on the contrary, contribute to an increase in the nationwide unemployment rate.

Further, the fear of being penalized may compel employers to move base from Haryana rather than be embroiled in legalities. Gurugram, in particular, is one of the biggest hubs for multinational entities in India, including the Information Technology/Information Technology Enabled Services, automobiles and electronics industries. The success of these sectors is dependent upon the extent to which the government interferes with their business operations.[12] With private entities compelled to hire local candidates and justify their position when they claim exemption, the business environment may not remain highly conducive.

There are also fears of other states following in the footsteps of Haryana and Andhra Pradesh.[13] This would create restrictions on the free movement of labor and manpower, which in turn would constrain the ability of industries to grow rapidly and enhance capacities. Going forward, this could also impact the overall consumer spending power, that is already affected by the economic slowdown and the pandemic. Therefore, a market competitive approach is essential to ensure, that industries follow best practices, retain their efficiencies and the economy remains cohesive.

Conclusion:

It is not surprising that, the Act has not been received with much enthusiasm by various industry bodies who have, in fact, expressed concerns[14] regarding the practical challenges involved, reduction in the talent pool and skilled labour. They are of the view that, if entities are forced into a regressive straightjacket of hiring only local candidates, irrespective of their skills, talent, or suitability for the job, this would in all likelihood influence the direction of private investment and create hindrances in the ease of doing business. Lack of skilled domestic workforce will only hurt the productivity of private industry making them less competitive compared to industries in other states, or countries.

[1] See http://storage.hrylabour.gov.in/uploads/labour_laws/Y2021/March/W2/D09/1615277534.pdf (accessed on April 10, 2021)

[2] Section 2(c) of the Act defines designated officer as an officer not below the rank of a Deputy Commissioner

[3] Section 2(b) of the Act defines authorised officer as an officer not below the rank of Sub-divisional officers

[4] Article 16(3): “Nothing in this article shall prevent Parliament from making any law prescribing, in regard to a class or classes of employment or appointment to an office 3 (under the Government of, or any local or other authority within, a State or Union territory, any requirement as to residence within that State or Union territory) prior to such employment or appointment.”

[5] AVS Narasimha Rao v. State of Andhra Pradesh (1969) 1 SCC 839

[6] Article 16(2): “No citizen shall, on grounds only of religion, race, caste, sex, descent, place of birth, residence or any of them, be ineligible for, or discriminated against in respect of, any employment or office under the State”

[7]Article 16(1): “There shall be equality of opportunity for all citizens in matters relating to employment or appointment to any office under the State.”

[8] Dr Pradeep Jain v. Union of India (1984) 3 SCC 654

[9] CH Varalakshmi v. State of Andhra Pradesh WP 8428/2020.

[10]See: https://www.newindianexpress.com/states/andhra-pradesh/2020/may/07/75-per-cent-quota-for-locals-may-be-unconstitutional-andhra-pradesh-high-court-2140245.html (accessed on April 18, 2021)

[11] VN Sunanda Reddy v. State of Andhra Pradesh 1995 Supp (2) SCC 235

[12]See: https://www.businesstoday.in/current/economy-politics/economic-survey-2020-says-govt-intervention-does-more-harm-than-it-helps/story/395066.html (accessed on April 6, 2021)

[13]See:https://theprint.in/india/after-haryana-jharkhand-to-reserve-75-jobs-in-private-sector-for-state-residents/621534/ (accessed on April 6, 2021)

[14]See:https://www.livemint.com/news/india/haryanas-75-private-sector-jobs-quota-move-will-spell-disaster-industry-body-ficci-11614854746530.html (accessed on March 30, 2021)

The views expressed here do not constitute legal counsel, are aimed at knowledge sharing and awareness advocacy, and are views of the contributing author.

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