Labour codes for industries don’t suit digital companies. Modi govt got a window to fix it

The Modi government’s labour codes, though historic, skirt over the realities of the digital economy and seek to transpose legacy regulation onto it.

Representational Image | People working at an office | Anindito Mukherjee | Bloomberg

Last year, India’s Parliament ushered in some of the most significant labour reforms since the country’s economy was liberalised in 1991. It cleared three Labour Codes on industrial relations, occupational safety, health and working conditions, and social security. Another reform, the Code on Wages, was cleared in 2019. Despite wide-ranging reforms in most other sectors of the economy, India’s labour laws were frozen in time until last year. The new codes subsume 29 central laws – a significant reform that streamlines the minefield of labour laws that employers had to navigate in India. The shift to digital is the next frontier for the Indian economy and these Labour Codes have arrived at an opportune moment.

However, the new laws, especially the Industrial Relations Code (IR Code), skirt over the realities of the digital economy and seek to transpose legacy regulation onto it. The codes, scheduled to be implemented on 1 April, have been postponed by the Narendra Modi government because states haven’t finalised their rules yet. Unwittingly, it has opened a window for the government to revisit the applicability of some provisions of the IR Code to the digital economy.

Hits and misses

The biggest concern for India’s digital economy is the Industrial Relations Code, which increases the threshold for retrenchment, lay-off or closure of a company without government permission, from 100 to 300 workers. This would improve transparency and ease doing business, according to labour minister Santosh Gangwar. The real question however is this: Why should organisations require government permission to retrench employees?

The effect of the Code’s Section 78 will be that a loss-making company will not be able to take decisions on trimming its workforce without a green light from the State. Only 30 out of 190 countries have a requirement for prior government approval before retrenching employees. Moreover, representatives from the International Labour Association have also noted that government permission to reduce collective redundancies is not effective or essential.

Another point of concern for digital companies is the terminology of some provisions of the IR Code. For instance, it is unclear whether the definition of an ‘industrial establishment’ would cover ‘digital companies’. Intuitively, it should not because digital companies are distinct from traditional industrial setups. However, the definition of ‘industrial establishments or undertaking’ under the IR Code is broad enough to include them. This means that a digital company would have to comply with strict regulations on grievance management, hire-and-fire rules and lengthy certification processes meant for traditional industries. These requirements are antithetical to the government’s objective of improving agility and flexibility, essential traits for a digital economy to thrive.

Lastly, labour reforms have not struck at the root of many issues that existed during the previous UPA era. The Modi government has adapted legacy regulation to the digital sphere when it could have followed a nuanced approach. For example, the Draft Model Standing Orders for the Service Sector permits companies to allow employees to Work From Home (WFH), but the compliance burden on the IT sector — if they were to offer WFH to employees — is prohibitive. The IT sector may face more difficulty once state rules interact with this Model Standing Order. In effect, it is easier for companies to informally provide WFH now than it would be once this Model Standing Order comes into force.

That said, the labour reforms recognise ‘gig workers’ and ‘platform workers’ – a previously invisibilised class of workers who form the backbone of the ‘gig economy’. These include delivery personnel for companies such as Amazon and Zomato, service providers on Urban Company and drivers on Uber and Ola. It was also heartening to see that the codes were a result of exhaustive debates and discussions in the Parliamentary Standing Committee on Labour, which included members from across the political spectrum.

The way forward

The Labour Codes will come into force once states make rules on the subject. Labour is an item on the concurrent list so both the Centre and states have the power to make rules on the subject. This is also the reason behind the delay in implementing the codes. The Centre should seize this opportunity to work with state governments and carve out a specific framework for the digital economy. This could also take the form of ‘exemptions’ from some of the prescriptions under the Labour Codes.

For example, Karnataka exempts startups, establishments in gaming, animation, telecom, BPO/KPOs, and computer graphics from the Industrial Employees (Standing Order) Act, 1946. This is not the same as suspending the operation of all labour laws, like what the Uttar Pradesh and Madhya Pradesh governments did to attract global manufacturing companies. Under the Karnataka exemption, eligible entities are still mandated to make disclosures on the disciplinary action taken, be transparent about the service conditions for workers and set up committees to investigate sexual harassment complaints and address employee grievances. Similarly, instead of creating a threshold that necessitates prior government approval, the IR Code could have required a company to make disclosures about employee retrenchments to the government.

The question that the states and the central government need to answer before carving exemptions is this: Should laws and rules meant for traditional industries be applied to the digital economy? An issue brief by the Organisation for Economic Cooperation and Development (OECD) on ‘Regulatory effectiveness in the era of digitalisation’ notes that countries must develop ‘fit-for-purpose’ regulatory frameworks and reimagine traditional cost-based ones. Labour laws in India are an example of the latter, where companies either comply, or receive a penalty or jail time for non-compliance. The alternative is a comply-or-explain approach where organisations have the option to provide reasons for why they could not adhere to the rules. The postponement of these codes is a golden opportunity for the government to consider these questions and evolve an approach towards labour reform that benefits the digital economy.

The authors work at Koan Advisory Group, a technology policy consulting firm. Views are personal.

This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector. Read all the articles here.