The New Labor Codes – Revolutionary Change or Repeated Mistake?

April 2024

1.        Introduction 

A well-balanced mutually conducive relation between an employer and employee is necessary for the effective functioning of an organization. Recognizing this and an ever-growing emphasis on the ease of doing business, the Government decided to consolidate 29 existing labor laws into 4 labor codes (“Codes”) – Code on Wages, 2019[1] (“Wage Code”), Code on Social Security, 2020[2] (“SSC”), Code on Occupational Safety, Health and Working Conditions, 2020[3] (“OSHWC”), and Industrial Relations Code, 2020[4] (“IRC”). The primary intention was to simplify, rationalize and update decades-old statutes by removing multiplicity of definitions and compliances and redundant procedures. Therefore, the Codes aimed to consolidate and amend the extant legislations. To consolidate, the amendments fail to address loopholes in the prior legal regime, including the ambiguity regarding the application of various provisions to “employees” and “workers”. The resultant lack of clarity leaves disproportionate room for interpretation, and may lead to both categories of the workforce being deprived of intended benefits. Ironically, all the four Codes await implementation even in 2024.

This newsletter analyzes the shortcomings caused due to lack of clarity regarding application of provisions to blue and white-collar workers, and whether the Codes can succeed in revolutionizing the old labor law regime or will remain mere repetitions of past mistakes.

2.        Classification of the Working Class

In previous posts, we discussed key provisions of the SSC (here), OSHWC (here), and IRC (here). However, it is necessary to understand how the Codes classify the working class. India’s labour and employment laws recognize two broad categories – blue-collar, i.e., those employed by an establishment to perform manual, skilled or unskilled, technical, operational, clerical or supervisory work, and white-collar i.e., those employed in managerial or administrative positions. Under the earlier regime, these were classified as workmen or workers and employees, and each statute applied exclusively to a particular class defined distinctly thereunder. For instance, the Factories Act applied to workers defined as persons employed in any manufacturing process or in work incidental or connected to the manufacturing process. The Payment of Bonus Act (“PBA”) applied to employees defined as those employed in any industry for a monthly salary of less than INR 3,500 (about USD 42)[5] to do “skilled or unskilled manual, supervisory, managerial, administrative, technical or clerical work”, as provided in section 2(13). Conversely, the Employees’ Provident Funds (“EPF”) and Miscellaneous Provisions Act defines “employee” as one employed for wages in any kind of work, manual or otherwise, in connection with the work of an establishment. Varied definitions caused confusion as to when a person would be classified as an employee or worker/workman and was open to judicial interpretation.

The Codes resolved this by introducing uniform definitions: (a) employee, i.e., a person employed on wages to do any skilled, semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work; and (b) worker, i.e., a person employed to do manual, unskilled, skilled, technical, operational, clerical or supervisory work. Worker does not include those (i) in managerial or administrative roles, or (ii) doing supervisory work for wages beyond INR 18,000 per month. Furthermore, while the SSC does not define “workers”, it identifies and defines sub-categories including building workers, gig workers, home-based workers, and platform workers. In doing so, the Codes have reduced the need for intervention by courts in determining who is a worker and employee. Unlike the prior laws where each Act provided a separate definition for employee and workman thereby causing confusion and requiring judicial interpretation, the Codes have created a clear distinction applicable in all circumstances – white-collar will be managers, administrators, or supervisors paid more than INR 18,000 (about USD 215) per month are employees, while blue-collar including supervisors earning below INR 18,000 per month are considered workers and employees.

To illustrate, a person is employed as a supervisor in a factory with a monthly salary of INR 30,000 (about USD 359). Assume such person approaches the Industrial Tribunal alleging his employer has not paid equal EPF contribution, and fair wages during his entitled leave period as provided for under the Factories Act. Under the previous regime, he would be considered an employee according to the EPF Act since he is earning a wage for work in an establishment, but a worker according to the Factories Act since his work is connected to the manufacturing process. Factories Act does not, at any point, use the term “employees” and the EPF Act does not use “workers.” This creates confusion about the person’s status and applicable provisions, and would be left to the Tribunal to provide its interpretation. However, under the new regime, this issue of classification has been resolved. Such a person would squarely be considered an employee since the Codes have provided one uniform definition and have provided a monetary threshold for supervisors.

3.        Key Reforms under the Codes

The Codes have attempted to be inclusive of all working classes in the organized and unorganized sectors, and create compact legislations with more benefits, reduced procedural delays, and improved salaries and salary structures, working conditions, etc.

Some beneficial provisions are: (a) SSC makes all employees eligible for gratuity payment, including fixed-term employees[6] on par with full-time permanent employees doing the same kind of work since the 5 years continuous service requirement is removed in their case;[7] (b) Wage Code provides a standardized definition of “wages” with a comprehensive list of inclusions and exclusions in section 2(y) for application under all the subsumed legislations.[8] This simplifies calculation of wages and ensures employees receive uniform salary components irrespective of sector; (c) Section 9 of Wage Code provides for a minimum floor wage as the baseline for calculation of minimum wages. Since this is based on the minimum standard and cost of living, and varies geographically, the minimum wage rate will sufficiently ensure all employees are financially provided for, but it has the potential of causing trouble for employers since the floor wage is not necessarily going to be uniform pan India; (d) Section 17(iv) Wage Code mandates employers must pay wages before the 7th day of each month, irrespective of the establishment type, number of employees, and other such factors previously considered; (e) Under section 17(2) of the Wage Code, when an employee is removed from service, resigns, or becomes unemployed due to closure of establishment, all dues including wages, leave encashments, etc. have to be paid within 2 working days, as compared to the 45-60 days period under prior laws; (f) Section 16(1) of the SSC provides that, subject to Government notification, the employer’s contribution to the EPF may be increased to 12% from the earlier 10%; (g) IRC provides for more intricate recognition of trade unions. For instance, in establishments with more than one trade union, the union with at least 51% workers support will be considered the sole negotiating union for all. However, if no union has majority support, a negotiating council will be appointed to allow collective bargaining; (h) Section 27 of OSHWC provides workers in an establishment are entitled to overtime wages at twice the rate of wages. Under section 32, they are entitled to encash leaves where the total number of leaves exceed 30 days. They are also entitled to carry forward leaves not availed in a calendar year.

4.        Ambiguity on Applicable Provisions

The result of multiple and not necessarily uniform definitions under the extant legislations caused confusion regarding scope and applicability. Additionally, the Industrial Disputes Act did not define “employee” but referred to a trade union of employees. Consequently, it was left to the courts to examine the unique facts of each case under the relevant Act, and analyze the definition thereunder to determine whether a person qualified as an employee or worker/workman, and whether the Act would apply. Since a single position could involve multiple duties, the courts were required to conduct an in-depth analysis of the various duties performed by a person to determine their employment status by identifying the primary duties, i.e., the dominant purpose of employment and ignoring any incidental work involved.[9] If a person was mainly doing managerial work, but incidentally also did some clerical work, the courts would decide that since he is employed in a managerial capacity, heis an employee. Conversely, if he occasionally assisted in administrative tasks, but was primarily hired in a supervisory role, he would be adjudged as a workman. The Supreme Court stated[10] such determination had to be done based on the facts and circumstances of a case, and materials on record. It was not possible to lay down a strait-jacket formula. In complex industrial or commercial organizations, many employees are often required to do more than one kind of work. It becomes necessary to determine the classification such individual will fall under, before deciding on the applicability of a provision. Therefore, the courts had to step-in to determine: whether a person is an employee or worker; and the rights, safeguards, and benefits for such person.

The Codes intended to resolve the issue of classification by creating two standardized definitions. However, this over-simplification led to a new misunderstanding. They recognized employees and workers as being distinct, and explicitly provided that managers, administrators, and supervisors who earn more than INR 18,000 per month (collectively “managerial employees”) are employees and not workers. Thereafter, the Codes made certain provisions applicable only to workers and not managerial employees. For instance, OSHWC provides that every worker is entitled to extra wages for overtime work and to carry forward un-availed leaves to the succeeding year. Similarly, section 25 provides that no worker can be made to work for more than 8 hours per day. Section 72 of IRC provides that workers shall be eligible to receive retrenchment compensation upon dismissal from service. In case of re-employment, retrenched workers are given first preference over others. IRC also provides for establishment of a works committee in certain establishments to promote good employer and worker relations, and a grievance redressal committee to resolve worker disputes. Since these provisions use the term “workers” and not “employees” there are two possible inferences:

(a)        The legislature intended to exclude managerial employees from the increased benefits and protections under the Act, presumably because of their usually higher remuneration compared to workers. Every provision of OSHWC and IRC refers to “workers” only, which would imply that managerial employees are not covered. However, “employees” has a wide scope in the Codes and includes all administrators and supervisors above a certain salary threshold. Therefore, junior employees who earn above INR 18,000 per month may be grouped with their seniors and possibly excluded from statutory benefits. Additionally, their employment terms will be governed exclusively by their respective private contracts. Perhaps, this could conflict with primary purpose of the Codes which is to equally protect and provide for all categories of working-class persons. Another consequence could be workers who are promoted as managerial employees may lose benefits. Ambiguity regarding  benefits and safeguards may cause potential disharmony amongst them leading to varied problems  for employers.

(b)       Alternatively, the differentiation between employee and worker is redundant, and the terms are to be used interchangeably. However, the result would be that the ambiguity in the prior legislations would remain unresolved. It could confuse employers when framing policies and determining salary structures and eligibilities.

5.        Conclusion

Simplifying legislations for the benefit of stakeholders is necessary. However, this cannot be done at the cost of definitiveness. Ambiguity in the applicability of provisions to certain categories of working class as a result of imprudent drafting leaves room for discriminative interpretation and is likely to contribute to poor implementation. This could  negatively impact smooth operations for businesses across industries, including global conglomerates with cross-border business or commercial interests in India. Given  the Codes have not yet been implemented, due thought needs to be given to the existing gaps and means of their rectification. Unless clarity is provided, the Codes will remain a compressed mirror of the earlier labour laws regime, and a repetition of the earlier mistakes.


Dylan Sharma

[1] Act No. 29 of 2019, Received President’s assent on August 08, 2019;

[2] Act No. 36 of 2020, Received President’s assent on September 28, 2020;

[3] Act No. 37 of 2020, Received President’s assent on September 28, 2020;

[4] Act No. 35 of 2020, Received President’s assent on September 28, 2020;

[5] 1 USD = INR 83 and rounded off

[6] Under section 2(34), SSC this refers to engagement of an employee on the basis of a written contract for a fixed period

[7] Section 53, SSC

[8] The Wage Code subsumed the Payment of Wages, Minimum Wages , , Payment of Bonus  and Equal Remuneration Acts

[9] See Arkal Govind Raj Rao vs. Ciba Geigy of India Ltd. (1985) 3 SCC 371

[10] See SK Maini vs. M/s Carona Sahu Co. Ltd. (1994) 3 SCC 510

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