The Industrial Relations Code (IRC) was introduced in Parliament during November, and the trade unions have protested against it as expected. Employers are not going to be happy either, for the IRC does not meet all their demands, especially with the changing of thresholds for firing employees and closure of firms at the national level.

The IRC has messed up the clauses relating to recognition, dispute resolution and labour flexibility.

It is not a good strategy for the Central government to leave the issue of labour flexibility to the State governments for three reasons: States may take time to formulate reforms, and the eventual reforms may lead to differential labour standards for various reasons; potential foreign investors will be left utterly confused with differential labour standards, while national reforms will send concrete and clear signals to them; for trade unions, difference in unions’ strength and an absence of social dialogue at the State levels will weaken their cause of labour protection. Hence, it is better to determine the labour standards at the national level.

While it is true that employers do require some amount of labour flexibility to respond to the somewhat volatile market forces, employment security and social protection cannot be altogether sacrificed at the altar of the market.

Aggressive and widespread flexibility is myopic. In the medium and long run this will eventually affect human capital formation due to underemployment and unemployment (at least in the short run); lead to lower labour-force participation due to negative perceptions; and result in lower skill formation at the firm level (due to poor investment in training, as employer tenures will be shorter and the issue of shifting skilling costs on to the temping agencies/contractors and the workers). The economy will suffer due to poor income levels, and as families will be constrained in investing in education. Labour flexibility will cause weakening of aggregate demand which will deepen the slowdown.

Instead of going down this path, here is an alternative that keeps in mind the interests of all stakeholders.

Employment flexibility

Fixed-term employment (FTE) should exist to afford flexibility to employers, and even on the supply side to the employees (for this reason, part-time employment should be legally regulated). There should be appropriate regulations concerning tenure (minimum and maximum), ceiling on the cumulative duration, the number of permissible renewals, and the objective reasons for which FTEs is needed.

The objective of FTE is to provide temporary flexibility, hence it cannot be abused by using it for ‘core’ and ‘perennial’ services.

Hence, either FTE should be prohibited for these kind of services; or, as in China, after two renewals, it should be converted into open-ended contracts.


Retrenchment of workers

Chapter X of the IRC refers to the closure of establishments and retrenchment/lay-off of workers.

The government can afford to tinker with Chapter X at any level, subject to five non-negotiable conditions: a credible and universal unemployment allowance/insurance system is in place (and the existing inadequate scheme under the ESI Act is done away with); employers and government shoulder the responsibility to create suitable skills and re-skill workers (with active labour market policies and reforms in skills development and retraining systems); a dynamic employment information system (EMS) is created; a robust system of recognition of trade unions and severe and quick resolutions of complaints of unfair labour practices (provided in the IRC) is provided; and trade unions are involved in the implementation of the unemployment allowance/insurance system and the EMS.

The provision that empowers the appropriate government to change the threshold for Chapter X through the notification route must go, as it is against the tenets of lawmaking in a democratic society.

Reforms must be based on effective and meaningful social dialogue at all levels. Till then, Chapter X should be left unamended.

Contract labour

The government must hold social dialogue to prescribe the ceilings on the contract labour and FTEs in an establishment, and strengthen the regulatory aspects of the contract labour system.

The IRC should recognise only financially strong contractors, replace employment threshold with financial capital threshold (as in China) and ban petty and fly-by-night operators, who cause utter damage to both firms and employees.

Granting of licences and renewals should be done subject to satisfactory compliance record. A transparent system of compliance records of principal employers and contractors should be maintained, with an embargo of at least three years if found non-compliant at least twice on major variables — a credit-rating system similar to the financial sector should be developed for this.

Principal employers cannot wash their hands of responsibility, as they are the eventual beneficiaries and will be held fully liable for any kind of violations of the contract labour regulations.

There must be a provision for a tripartite (principal employer, contractors and the contract workers’ or a general union) collective bargaining agreement, which will take care of the terms and conditions of employment.

Minimum wages for the contract workers should be separately fixed on a higher footing, if they are denied the collective bargaining rights by the employers.

The principal employers will be responsible for multiple labour rights, including occupational safety.

Contract workers working in the same firm, even under different contractors, for a negotiated period should be deemed to be employees of the principal employer for the latter has benefited for long.

Contract labourers should not depend on the fellow regular workers to raise an industrial dispute as we are recognising the principal employer as the relevant agency in the system.

The point here is that if employers want a contract labour system, then they must accept it with complete regulations. Since they involve three parties, all three should be involved in the entire process of regulation. Then, the ‘prohibition’ clause in the Contract Labour Act can go.

Employers should realise that flexibility comes at a cost (actually, as a benefit too, as the wages return to the firms as revenue) and trade unions should understand that employers genuinely need flexibility.

Competitive efficiency is as important as full and good quality employment, after which both the society and the economy can move forward.


The writer is Professor, XLRI, Xavier School of Management, Jamshedpur