Thresholds and bad faith


back to issue

INDIA’S great hope of emerging as a manufacturing and economic power has to a significant extent been held back by its labour laws. If anything, the Industrial Disputes Act (IDA) does its best to undermine growth potential and encourage the wrong kinds of practices that are unlikely to take the country forward. Though it sounds good, kind and generous – even Gandhian – to eulogize the small-scale sector that depends heavily on informal labour, the truth is that by doing so we are not really doing our country a favour. Worse, the IDA does not encourage the establishment and flourishing of the organized sector either. Therefore, small or big, our economy is hamstrung by existing labour laws.

Instead of encouraging informal labour to move in the direction of formal labour, or helping small-scale units become large one day, the laws work in the reverse direction. Nobody disputes that informal labour dominates our industrial sector, but few know the extent to which it does. The National Sample Survey shows that about 79% of workers do not have a written job contract. As a consequence, most of them suffer from other attendant disabilities too, such as not being eligible for paid leave or social security benefits.1 What is an additional worry is that the numbers of informal workers in the formal sector is growing over time. When the late Arjun Sengupta conducted a survey, he found that in five years (1999-2004) this proportion had gone up from 37.8% to 46.6%.2 Today, some estimates suggest that this figure has risen even further to about 55%.3

This is a situation that needs to be corrected as it only gets worse by the day. No doubt, labour laws cannot do everything; they need a little help from outside. For one, the BIFR must be dismantled (the finance minister expressed that view in the 2015 budget speech) and fast speed courts set up to settle labour disputes. Needless to say, given the negligible coverage of social security in our country, labour laws must take that on board or else workers would be left completely unprotected in times of distress. It is in this context that the governing principles behind extant labour laws need to be examined.


The Industrial Disputes Act is founded on the principle of mistrust and bad faith. It belongs to an era that is long gone with none of the sensitivities that democracy has cultivated over the years. It is, therefore, at the level of foundational principles where we should begin our critique of labour laws in India. Much as we often evade this issue, the truth is that industrial relations in our country play on the hostility between labour and management. It is this that needs to be replaced by considerations of citizenship, for that is now the governing principle in all developed democracies.

In this scheme of things, it is not as if workers and entrepreneurs must submerge thinking about their interests in favour of a distant ideal. What is being advocated instead is the honest admission that what works best for both sides must begin with an acceptance of certain commonalities of collective existence. This would do a lot more good to all concerned than concealment, threat, inducement and opacity. Putting citizenship first does not mean that all differences and inequalities are either ignored or wished away. What is emphasized, however, is that as citizens there must exist a common set of resemblances and unities that ought to be accepted by everybody. Only when this happens is there something that endures between citizens, who may, at any point of time, be locked in a dispute.

T.H. Marshall’s understanding of citizenship is particularly illustrative in this context. First and foremost, he argues that there must be a status of equality between all of us. This he calls citizenship, in the operative sense of the term. Only on this foundation of equality of status, Marshall goes on to say, can structures of inequality be built.4 Therefore, while we are different from one another in a number of ways, at base there is something that unites us. If we were to adopt this optic we would go a long away in transforming labour laws in a progressive direction. With citizenship there is the nurturing of trust, but this can only occur when the rules of dispute resolution are agreed upon and endorsed by both parties. This why any attempt to reform India’s labour laws cannot stop short, but must go the distance. There are so many things wrong that any attempt at tinkering, or piecemeal patch ups, will not really work.


If there is one factor that infects almost every aspect of the Industrial Disputes Act, it is the frequent use of ‘thresholds’. These thresholds encourage misuse and malpractice and create distance, not just between workers and entrepreneurs but between workers too. If there are 100 workers, or more, then a certain set of laws become operative; if a worker is employed for less than 240 days, then another set comes into force. That is not all; there are also thresholds to decide the payment of bonus, for allowing closures, or what makes for a small, medium or micro enterprise.

As the Industrial Disputes Act (IDA) is beset by thresholds, ducking under, or vaulting over, them becomes the paramount concern for both workers and entrepreneurs. If, on occasion, some capitalists wish to stay under a threshold, it would be in the interest of labour to see that this does not happen. All such matters are aggravated by trade union laws which play upon thresholds and erect a divide between organized and unorganized workers.

Thresholds encourage us to emphasize disunities rather than unities. These markers consolidate differences to ensure that the two principle classes in the industrial sector have little in common. Everything a worker or entrepreneur possesses and every law that leans one way or the other, has been won in a hard fight against a significant and hostile ‘other’. This history is always on tap for easy recall, making the atmosphere between workers and their employers beset by tensions from the start. In such a climate it is perpetual war. Every now and then a peace flag can be waved, a treaty signed and called ‘labour reform’, but those are just temporary fixes and are unlikely to last long. That is why it is incorrect to believe that fiddling with thresholds can win us enduring acclaim.


The Industrial Disputes Act (IDA) is teeming with thresholds of the kind that are so tempting to manipulate. First, there is the size of the unit. If it should have 100 workers or more, a separate set of rules will govern the rights of labourers as well as procedures to close down or retrench. Any alteration of the conditions of employment has to be notified to the government and it takes forever and a day to get the authorities to act. Now look at the casuistry behind it. Should the government not respond within a specified time period, then it is deemed that permission has been granted. Inefficiency and unresponsiveness are thus being sanctioned, perhaps even recommended.

Naturally, when something like this happens, trade unions get active and all too often there is a full-fledged strike in the offing. It only encourages management to think of ways and means of resolving this unfortunate business by plotting against unions and workers’ representations. If a ‘recognized union’ is at the forefront of the unrest, the attempt is to either find ways to ‘de-recognize’ it, or buy over the leadership, or even encourage black legs. If all these moves fail, then approach the BIFR and shut down the unit. When thresholds are supreme then there are just a few alternatives available, none of them happy. One must either look for exceptions to the rule, hope for government inaction, or roll up one’s sleeves for a fight. Quite clearly, just as the management of a unit plots against the workers, the workers too lay traps for the management. Actually, not a sweet spot for either side to be in.


Entrepreneurs recognize this, which is why many of them make strenuous attempts to keep their units small and stop short of employing a hundred workers. To make sure nothing goes wrong, they doubly secure themselves by keeping most of the labourers on the rolls for less than 240 days. Should they exceed that period, there are other headaches, the principal among them being that workers would now be entitled to compensation if fired. Therefore, rather than take any chances, it is best to employ less than a hundred workers and make sure they are not on the rolls for more than six months. The pickings are rich if they stay well within the thresholds, no headaches, no questions asked. On the other hand, this arrangement denies job permanency, though it is an ideal that every worker desires.

What often gets overlooked when labour is kept dangling is the damage caused to enterprises as they are unable to build and consolidate a human capital and skill base. As workers are not engaged over a long-term, they find nothing to keep them loyal to the organization, nor make special efforts to hone their skills. Put all of these factors together and stir, and just one answer comes to mind. Such an arrangement hurts both sides. Workers do not build expertise and, over time, the enterprise loses valuable additions to its human capital, and nobody really wins the war. Moreover, as units are encouraged to remain small, any chance of actually becoming a major innovator in the field can never be seriously entertained.


This naturally brings us face to face with the issue of informal labour, for that is exactly what these thresholds spawn. Entrepreneurs see no problem with this for the alternative spells danger for them. Even when it is not always possible to keep firms small because the scale of the work is too large, they think of ways of limiting the unit size and period of employment. Let us say that the order books are bursting to capacity and there is an inflexible deadline stipulated for delivery. Under these circumstances, what is one to do?

Simple, wait till the time for handing over the finished goods to the consumer is just round the corner. At that point the whole enterprise is put in emergency drive. From the crowd milling at the factory gates workers are hired, sometimes through the medium of a middle man. After that they are put to work for long hours, sometimes with regular overtime, for a short, perfervid spell, till the work is done. This strategy suits them for a number of reasons. They manage to deliver on schedule; so the job is done and the money banked. Second, a short burst of energy (overtime included) allows them to fire workers well before the 240 days period is up. After all this hectic activity is over, the company owners will hibernate till the same time next year when the same cycle will be repeated

This is the most frequently used way of beating the system of thresholds. It denies workers the ability to strike if hired and, further, makes sure that no compensation is paid to such a person. In other words, should managers duck under these two thresholds they are heavily compensated, in fact, hugely rewarded. There is yet another tack that can be put to work if for some reason a large number of workers, exceeding one hundred, have to be employed. Over and above the measures just mentioned, it is possible to break up a unit into a number of smaller ones and register them as independent concerns. Now you could, in effect, employ 299 workers, but after splitting the lot in three units you would still stay well below the hundred threshold.


To make hiring and firing easy, and in consonance with the IDA and its thresholds, we also have the contract labour laws coming to the rescue. In most cases, casual workers are hired through labour contractors and, therefore, they do not figure in the books of the unit itself. Very often, when a large enterprise is divided into smaller ones, fake contractors are set up to legally separate units from one another. These contractors are often old, and trusted employees of the promoters of the company and have been patronized for far too long to betray their masters. Ironically, contract workers are governed by the Contract Labour (Regulation and Abolition) Act, though there is no sign, so far, that their numbers have even come down.

Go to any large-scale organized sector unit and one is sure to find hordes of contract workers. They may be doing the same job as the regular ones on the muster but are paid less and have practically no security and get no compensation when fired. One of the reasons for the Maruti flare-up a few years ago is precisely because of this faultline in the company’s hiring system. This led to mad rage in the ranks5 resulting not just in property damage, but sadly, in the loss of lives as well. Nobody calculated for that!

These thresholds are meant to stave off trade unions and workers unrest, but as we have seen in recent times, such ploys do not always work. In fact, once tensions rise and there are too many workers without security, then violence, if unleashed, tends to spread unchecked. There are few, if any, inhibiting factors that can quell this rise of discontent and plain animosity. Even a representative trade union is a better bet than providing workers with no avenue for expression at all. More of that in a while.


In the Indian case, the IDA also allows for exceptions to industries that are deemed to be seasonal. This sector is characterized on the basis of two criteria. Either the products manufactured are not in demand round the year or we are dealing with perishable produce. The two biggest industries that fall under this rubric are garment manufacturing and food processing enterprises, respectively. The justification in one case is that clothes are rarely good for all seasons and, in case of the other, certain perishable vegetables and fruits grow only in some months.

While all of this sounds legitimate for food processing units, the label ‘seasonal’ does not always fit well for garment manufacturers. After all, the weather is different in different parts of the globe at different times of the year. When it is summer in India, it is cold in Australia, and when it is freezing in North America people are swimming and snorkelling south of the Equator. As the world is divided into different climatic zones, any real garment producing unit should aim to manufacture round the year and not be limited by seasons. The reason why some of these garment producing factories claim seasonality in their functioning is because of two reasons, and none of them are very convincing.


To arrive at a more rational and citizen friendly set of labour laws we need to dismantle the existing Industrial Disputes Act and start all over again. The first hurdle is obviously one of ‘thresholds’ for it is the one factor that creates maximum damage. There is no point really in increasing or decreasing these thresholds for they do not cure the disease, only postpone the malaise. Thus, when the Rajasthan government raised the threshold from 100 to 300 workers there was really no need to applaud; all they basically did was to kick the can down the road.

In place of thresholds, let us begin by recognizing every worker as permanent and entitled to figure on the muster roll from the start. Consequently, everyone is entitled to Provident Fund, ESI benefits and gratuity. In addition, it is necessary to ensure that workers have the right to compensation should they be fired. This is akin to ‘severance pay’ and should be determined in terms of number of days worked. Such a provision would give some security to those who are being laid off for no fault of their own. This is where the notions of citizenship and transparency work their way in. There is now no advantage in concealing the size of the enterprise or the terms of employment of the workers. This is because they will all get severance pay and other benefits at the same rate if they are fired. Therefore, it makes no difference now whether there are 10 persons on the muster rolls or 110. Consequently, the books and records of enterprises become more transparent and honest. It also gives workers reason to cheer; they are all permanent to begin with until something goes wrong.

Even so, when something does go wrong, and it invariably does, the promoters of a company should have recourse to regroup and start afresh. This is the time for entrepreneurs to be protected. Should they want to downsize, right size or close down their units they should be allowed to do so without an interminable wait for government sanction. As long as they compensate workers in terms of ‘severance pay’, they must have the freedom to work out their survival strategies. Thus, while capitalists must have the right to do what they think correct and proper for their investment’s future, there is a cost they must pay for this benefit. This complements what the worker must be prepared to accept for a place on the muster rolls.


In line with this, instead of abolishing contract labour we would do better to regularize it in the following manner. Every worker who is on contract with one firm should be on the muster of the parent firm from where the person is being hired out. It is from this original firm that the workers get their entitlement. This includes everything, from PF to severance pay. In other words, there is no need to ‘abolish’ contract labour. What needs to be ensured is that those who are ‘contracted’ by one firm for a particular job are on the rolls of some other firm which specializes in just that skill. A contract worker is, therefore, a full time employee elsewhere. It is this parent organization that is now responsible for taking care of the persons PF, gratuity and severance pay, as the case may be.

To make matters totally transparent; should the company become bankrupt the owners cannot go to the BIFR for financial transfusion. Experience tells us that such ‘sick industries’ almost never get well again, but in the interim workers are fired while the management stays on. What is worse, a new set of loans are freed under more agreeable conditions, and that money is ploughed in elsewhere by the same group that brought down the earlier firm. This is why the finance minister in his budget speech of 2015 wanted to abolish the BIFR and replace it with bankruptcy laws, as everywhere else in the world. The advantage in making this move is that it does not protect the incompetent management who must now account, and pay, for their failures. They cannot calmly let their businesses fold up in the full knowledge that BIFR would stand by them and overlook what is actually bad business practice.


It is now time to consider the wisdom of designating a ‘recognized union’ within an enterprise. This restricts options available to the workers and also prompts intense politicking between workers and management. To make matters more difficult, there are a number of provisions that must be met for a union to be ‘recognized’. Once a representative union comes into being it takes on a life of its own and becomes more or less autonomous from the people it is supposed to represent. Professionals enter the picture and the effects of the ‘outside hand’ become all too evident. From this time on, the flexibility required to address internal and urgent concerns of the workers is put away in favour of ideological and larger political concerns.

Rather than quarrel over which of the many unions within a factory, or enterprise, be the ‘recognized’ one, it is better to think instead of a single Workers Council. All workers are members of this body and office bearers to it are chosen on the basis of universal, secret ballot. This does not bar unions from being active within the enterprise, but none of them can officially represent the workers. This responsibility rests solely with the Workers Council and its elected office bearers. Therefore, different unions, should they choose to do so, can set up their own panel of office bearers for election to the Workers’ Council. At the same time, they must be prepared to compete against nominees from other groups too. They are free to canvass their positions, even ideologies, but must be prepared to be challenged by other bodies. There could also be a large number of workers who owe no formal allegiance to any organization and their votes would matter a lot as well.


Thus, while unions are not debarred from functioning under this scheme, it is the workers, ultimately, that choose their representatives for a fixed period, preferably a year. Office bearers of this council will be elected internally and only those who work in the enterprise are eligible to vote, just as no outsider can contest for any position either. Such a provision immediately undermines the intense rivalry between trade unions, as well as makes it difficult for the management to play off one union against the other. In all such cases it is ultimately the workers who suffer. In units that are below 20 workers, and that is the only threshold entertained here, all workers will be in the Workers Council, much on the lines of a village panchayat.

The surest way of strengthening the Workers’ Councils is by placing a time limit within which industrial disputes must be resolved. It is the fear of continuous litigation that makes many entrepreneurs seek remedies other than the formal, legal one. There is, however, a strong possibility that the suggestion to set up a Workers Council will be opposed by many established unions. This is not surprising for all of them thrive on the back of ‘organized labour’ which, as we noted earlier, that form a minuscule proportion of the working people. This is why the principle of a Workers Council is of such paramount importance for it really protects the interests of those who are not part of the ‘labour aristocracy’, and will, probably, never be.


No change in labour laws can be accomplished without both sides realizing that the winner-takes-all attitude will just not work. This is why the emphasis on citizenship and transparency in the opening section of this paper. It is true that there will still be entrepreneurs who might not register their workers, but these will be for blatantly low and vile reasons. They can no longer claim that byzantine laws forced them to take steps against their better instincts. Under the scheme proposed here, as long as management allows ‘severance pay’ and other benefits to workers, they are free to downsize or even close down their operations.

If, inspite of all this, promoters of companies still resort to the practice of not hiring labour formally, it can only be because they wish to renege on workers compensation. When such a case is spotted, it will have to be severely punished. Contract labour, likewise, is not abolished but, once again, those who are contracted to work elsewhere are on the muster rolls of their parent firm. In that organization they are properly registered and eligible for compensation that other workers are entitled to everywhere.

Obviously, certain other laws must come in place to make these labour laws function smoothly. The finance minister’s statement in his budget speech, alluded to earlier, regarding the establishment of bankruptcy laws, is a step in the right direction. In addition, the more resolutely we move towards a cashless economy, the greater the chances of workers being hired in an open and transparent fashion. It is needless to emphasize that while discussing labour law reforms we keep in mind that our workers have no social insurance they can really fall back on. In this context, to deny them severance pay, or PF and gratuity, would be the most heartless thing to do, something that cannot be accepted by any yardstick of citizenship.

To start afresh on labour laws a lot needs to be done by the management. It is really up to the promoters and their officials to establish an atmosphere of goodwill. It is this category that must take the first step for a lot depends on them. Once that happens, it will be easier to get working people to accept that the good of the organization depends on both classes working in tandem. It is not a good idea at all to be in a relationship of either exploitation or patronage. What should matter most is that we are all citizens first.

Towards this end, it would be a wise move for the management to go the German way and appoint workers’ representatives on the supervisory board of a company. This has worked in that country and there is no reason to believe that it will not succeed here. It must also be acknowledged that workers are not fired simply because it pleases the management to do so. A good worker is an asset which is why the tactics used to keep units small and fire workers every 240 days actually damages both sides in the not too long run. By accepting the fact that workers too need protection as citizens, owners and shareholders of a company get greater room for manoeuvre. This is the only way citizenship can be advanced within the factory gates.



1. Preet Rustagi, ‘Informal Employment Statistics: Some Issues’, Economic and Political Weekly 50(1), 2015 , pp. 67-71.

2. Arjun Sengupta, National Commission for Enterprises in the Unorganised Sector. Report on Conditions of Work and Promotion of Livelihoods in the Unorganised Sector. Government of India, New Delhi, 2007.

3. A. Srija. and V. Shirke Shrinivas, An Analysis of Informal Labour Market in India (Special Feature). Confederation of Indian Industry, New Delhi, 2012.

4. T.H. Marshall, Citizenship, Social Class and Other Essays. Syndics of Cambridge University Press, London, 1957.

5. J.C.B. Annavajhuila and Surendra Pratap, ‘Worker Voices in an Auto Production Chain; Notes from the Pits of a Low Road’, Economic and Political Weekly XLVII, 2012, pp. 46-59.