Crossing the threshold

KIRAN KARNIK

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FOR long years it has been an article of faith in Indian industry that labour laws are a major impediment to industrial growth. ‘Labour reform’ – i.e., changes in the laws governing employment of labour – has, therefore, been seen as a step against the working class, an industrialist or capitalist versus labour issue. Viewed through this prism, it has inevitably assumed major political dimensions and generally been perceived as politically sensitive. Yet, as we argue here, changes in labour laws or labour reform is as necessary to safeguard the interests of workers as it may be for industry.

The key issue from the viewpoint of industry pertains to flexibility: the ability to add or remove employees and to hire contract labour. This has conventionally been interpreted as an attempt to exploit labour (through unfair contracts) and to bring in a hire and fire policy in which any employee can be fired at any time at the whim of the employer. Such a desire may well have been on the minds of many industrialists some years ago. However, the approach of organized industry – and, indeed, of many industry captains – has evolved, and today few of them are really looking at an open-ended hire and fire policy with regard to regular employees.

In a globalized world, industry has to produce products and services that are competitive. While there is growing space for niche products, or for differentiation – and market share – based on quality or distinctiveness, the bulk of the market is for commoditized products that compete on cost. Since profit margins are small, the dividing line between success and failure, between survival and closing down, is a thin one. In this the cost of labour is a key factor, making wages and labour productivity major determinants of industrial success. Globalization and open market access has meant that this is important not just for exports, but also in the domestic market. This has, in fact, increased the pressure on Indian industry with regard to cost, including that of labour.

Another factor accentuated by globalization is the unevenness of demand. Some of this is due to seasonal factors. For example, exporters of leather jackets suffer a big drop in demand in summer; many exporters see a big and welcome spurt in demand just before Thanksgiving and Christmas; fashion garments have to cope with seasonal demand patterns and also sudden spurts for certain styles or colours. Coping with these changes in a cost-optimal manner requires an ability to scale up and then scale down the size of the labour force. This reasoning is advanced by many manufacturers as an argument for permitting flexibility, i.e., adding or laying-off workers easily and cheaply.

 

Another reform on which industry is keen is the simplification of procedures and forms. The cost of compliance is seen as being wastefully high, with a great deal of paperwork, multiple and separate inspections, duplication and the requirement to maintain physical registers. Apart from adding to the cost of doing business, these take up management time and attention. In addition, as is well known, inspections are frequently a means to seek and receive bribes. Even companies which are fully compliant are sometimes subject to harassment by inspectors who raise all kinds of frivolous issues. Many companies – some by choice, others by compulsion – find it convenient to pay a price to ‘settle’ the issues. Worse, since a bribe has to be paid anyway, the temptation to cut corners is very high. As a result, not only is there corruption, but the safeguards (for example, regarding safety) are compromised.

In such a situation, where a bribe allows a company to bypass compliance requirements, the risk-reward matrix is skewed in favour of corruption. In a competitive environment, the price of honesty can be a company’s downfall. As a result, a framework that facilitates corruption penalizes honest companies and works against the interest of the workers. In such a context, labour often demands stronger laws and more safeguards to protect their rights. The focus shifts from strict and honest implementation of existing regulations to the creation of more laws so as to close loopholes. The discourse inevitably becomes one of labour versus management.

 

Over the years, government has sought to put in place a legal and regulatory framework aimed at protecting the rights of labour, resolving disputes and handling extreme situations like the shutdown of a company. At the same time, it has kept in mind the objective of encouraging small enterprises and facilitating their operations. As a result, many laws have exemptions for enterprises below a defined size (in terms of number of employees). In some cases, benefits are available to workers only after a specified period of employment. Since crossing these limits entails extra cost, there is a built-in incentive for companies to stay within them. Sometimes this has been done by violating the sprit, if not the letter, of the law. Thus, big enterprises, in the past have set up new, limited size companies to circumvent the laws. Even small enterprises that are successful would rather create a new unit than expand the existing one so as to stay within the limit of employee numbers. Similarly, many companies hire temporary workers wherever possible, limiting their employment duration so as to avoid providing benefits that would otherwise accrue to them.

It is these attempts to skirt the law that frequently result in industrial strife. In recent years the huge increase in ‘contract labour’ (temporary workers, with salary and benefits differentials compared to regular employees) has caused much upheaval, including occasional bouts of violence. Industry’s defence is that volatile demand necessitates adjustments in output and, therefore, in labour. Since production peaks are temporary, the additional workers required have to be on a short-term basis, to be let off when the production is to be reduced.

Present laws also specify constraints on working hours (48 hours per week, or 60 hours with overtime; not more than nine hours a day and, including overtime, not more than 10 hours a day). Industry finds these numbers inadequate, and wants an increase. CII, the industry association, has recommended an increase in the limit to 72 hours a week and 12 hours a day. It (as also others) has sought a change in the law which does not permit women working between 7 pm and 6 am.

 

Almost all sectors of industry and many companies have multiple trade unions. Sometimes they compete on a populist, raise-the-ante basis; on the other hand, there are cases when some collude with the management at the cost of workers’ interests. In many cases, the union represents the voice of the ‘regular’ employees, and contract workers are left to fend for themselves. Occasionally, the latter have organized a union of their own and there are instances when the two unions have clashed.

By and large, trade unions are present only in organized industry. Estimates indicate that as much as 90% of labour is in the unorganized sector. They are the ones who are most exploited, with no job security, no safety nets and grossly underpaid. It is this very segment that has no collective voice and, effectively, gets no protection from the administration. On the other hand, some argue, better employment terms could be offered to such workers if the labour laws were more flexible. In the present scenario, companies are unwilling to offer any kind of regular employment to such workers for fear that they will become ‘permanent’ employees and cannot be removed if need arises. In fact, there is a strong view that trade unions protect the rights of existing ‘regular’ employees at the cost of stifling greater employment.

 

The argument is that rigidities in dealing with labour and the increasing wages won for them by strong unions is a deterrent to hiring more regular employees; therefore, many companies resort to hiring temporary workers on contract. Despite a degree of legal protection, they are easier to lay-off, are paid less and do not have the protection of a union. It is also widely believed that – possibly because their job can be easily terminated – they work harder.

Some of these viewpoints will be vigorously contested, but the fact is that they represent widely-held perceptions. The legal and regulatory framework has, in effect, created a chasm between ‘management’ and ‘workers’, putting them on opposite sides of the table. Exploitative management is, unfortunately, not uncommon and in many – if not most – situations, management is able to call the shots. Excessively militant, disruptive and unreasonable unions – a few even indulging in violence – are rare, especially in recent years. Yet, the relationship is often seen as a zero sum game, with a winner and loser – the loss of one being the gain of the other.

It is time to change the terms of discourse. In a competitive world, the success of an individual company, the health of a sector and the development of a country depends on management and labour working together for mutual benefit. Workers are an asset; their productivity is key to the well-being of a company, and this is best enhanced through training, a conducive work environment and motivation. An unhappy or dissatisfied workforce is unlikely to be very productive. Therefore, enlightened employers, in their own self-interest, need to ensure worker-friendly conditions.

 

These may seem like homilies and unrealistic dreams of an utopia. Yet, this is increasingly a reality. One example is the IT sector. The business process outsourcing/management (BPO/BPM) segment employs a very large number of so-called ‘ordinary’ graduates (i.e., graduates in humanities and social sciences). There is no shortage of such youngsters in India – in fact, unemployment rates for graduates are quite high. However, the industry soon realized that there is, in fact, a shortage of employable graduates – those with the right basic skill-sets and attitudes. As a result, companies have gone to great lengths to attract and retain such people. Comparatively high compensation levels have been accompanied by a whole host of perquisites and facilities. In addition, companies have undertaken extensive training programmes to provide the required skills and to regularly upgrade them. So important is the human asset that the retention rate (of employees) is given almost as much importance as profitability, with the clear understanding that the former has a direct effect on the latter.

This is, of course, an example from a people-based sector; manufacturing, it can be argued, is very different. However, at a broader level, it is important to note that the larger part of employment in India is, in fact, in the services sector (not in manufacturing). Also, that the overall supply (or availability) of candidates for jobs in the BPO/BPM sector far exceeds demand, as in the manufacturing sector.

In the context of a changing scenario, how should the legal framework be modified? There has for some time been talk of ‘labour reforms’, with a lot of pressure from industry to amend and simplify laws so as to facilitate growth and investment. A few states (notably Rajasthan and Madhya Pradesh) have already made changes in various labour related laws. However, instead of incremental and patchy solutions, it would be good to take a more comprehensive look at these laws, including their underlying philosophy.

 

Any change in laws must obviously be determined by its purpose and objectives. In this case, there are multiple – fortunately non-contradictory – aims. These include:

1. Expanding employment opportunities. This is crucial, given that about 10 million people are entering the working age population every year.

2. Ensuring competitiveness, especially in the context of globalization and open markets, and promoting exports.

3. Establishing and enforcing the rights of all workers to fair, equitable and reasonable compensation; safe and comfortable working conditions; social security in the form of health care (including for their family) and post-retirement benefits; and safeguards against arbitrary dismissal or lay-off, with appropriate grievance redressal and independent appeal mechanisms.

4. Safeguarding workers’ rights to organize and for collective bargaining.

5. Enhancing the capabilities and skills of individual workers, and thereby building the skill-base of the country.

6. Developing an atmosphere of trust and goodwill between management and workers, through an alignment of interests and active involvement and participation of workers in major decisions affecting the enterprise.

7. Encouraging entrepreneurship and the creation of new enterprises by minimizing obstacles; facilitating the early shut down of non-viable enterprises, down-sizing and mergers with adequate compensation to workers who may be laid off.

The present legal and regulatory framework includes the Industrial Disputes Act, Factories Act, Trade Union Act, Contract Labour (Regulation & Abolition) Act, Sexual Harassment of Women in the Workplace Act and the Industrial Employment (Standing Orders) Act. There are thus a plethora of laws, not all of them in harmony with each other. It is, in many ways, in keeping with our polity and style of governance: excessive legislation and poor implementation. In addition, ambiguities and procedures based on discretionary powers facilitate corruption. Consolidation of the legal framework and fewer laws, with greater clarity and better enforcement, are clearly needed.

 

The Centre for Public Awareness and Critical Theory (C-PACT) of Shiv Nadar University recently looked at labour relations, specifically in the framework of the Industrial Disputes Act. Working over many months and after a series of consultations with all stakeholders, it has evolved a set of recommendations that may be of particular help as the country moves into the next stage of its evolution and growth.

Probably the most seminal and far-reaching of its recommendations is to do away with various thresholds specified in the Industrial Disputes Act (IDA). This act provides for thres-holds on the size of the enterprise and on the number of days worked, on the basis of which various exemptions are provided. One of the demands from industry, now included in the new framework by the states of Rajasthan and MP, is the change in numbers so that exemptions are available to bigger enterprises (for example, Rajasthan has enhanced the cut-off limit for prior permission for retrenchment, lay-off or closure from 100 to 300 workers).

 

Two major thresholds laid down in IDA are with regard to notifying the government before workers can be dismissed (this is not necessary if the unit has less than 100 workers), and the number of days of continuous employment (240) which entitles the worker to full compensation if dismissed. These limits, as was discussed earlier, tempt management to employ workers for short periods. The C-PACT study recommends that all workers must be on the muster rolls and deemed to be permanent after a probation period not exceeding three months. Accordingly, they will be entitled to provident fund, ESI and gratuity, to be calculated from the time they join. Dismissal on account of res-tructuring or closing down will entitle workers to severance pay of 45 days salary for every year of work. The only exception to this will be for work that is not intrinsic to the unit. In such cases, these should be limited to 5% of the unit’s employees, and must be emp-loyed through a contractor’s firm. Such persons will thus be on the muster rolls of the contractor’s firm.

In the case of seasonal industries (to be defined carefully and the eligible enterprises listed), there can be some leeway and the concept of fixed period contracts could be introduced. However, the employees will be on the muster rolls and entitled to PF and ESI. For periods below 180 days, hiring must be through a contracting agency.

For dispute resolution, the C-PACT report suggests that while an organization may have multiple trade unions, there should be only one Workers Council, whose office bearers should be elected through a secret universal ballot. It could have external advisors or mentors, but the office bearers must be employees of the organization. The workers will also elect a representative to the board of the company.

Despite these steps – intended to create mutual trust and shared goals – there are bound to be disputes. A three stage process is suggested to handle these. First, all disputes will be taken to the Workers Council. If it cannot be sorted out at that level, the matter will be taken up by a Conciliation Board. This will have elected representatives from management and workers with an external Chairperson. If the dispute is still not resolved at this stage, it will go to the Labour Tribunal, whose decision will be final. The time frame for a decision at each level will be fixed (IDA too has this, but then provides room for exceptions): 10 days at the first (Workers Council) level, a month for the Conciliation Board and not more than three months for the Tribunal. An additional stipulation is that during the period of deliberation by the different bodies, strikes are not permitted (IDA has a similar provision).

 

The numerous discussions and informal consultations done by C-PACT indicate that provisions along the above lines may be broadly acceptable to both workers and employers, even though each may feel that the proposals are not fully satisfactory. This could, therefore, not only change the industrial relations scenario, but would be a major step towards building a convergence of viewpoints between workers and employers. This would contribute towards the ease of doing business and create a conducive industrial climate. It will facilitate growth and expansion, leading to the creation of new jobs.

Yet, there are bound to be some disputes and unresolved festering issues. Given that there is an asymmetrical division of power, with emp-loyers able to call the shots in most cases, the regulator seeks to enforce the laws that ensure parity and fairness. However, the reality is that employers are often able to subvert this through various means. The media, through investigative journalism and wide reach, is able to sometimes provide a corrective. Increasingly, civil society organizations too are able to play a role by influencing both, the end consumer (of the company’s products) and investors. We have seen instances where allegations of labour exploitation (by multinationals with factories in developing countries), duly publicized, have forced the companies to shut down their ‘sweat shops’ and improve working conditions. Now, many companies – particularly high visibility ones – strive to provide and publicize the special benefits that they provide to their workers.

 

This non-regulatory ‘enforcement’ mechanism is indeed a powerful one because it leverages the same market forces that the company thrives on – goodwill and demand from customers, and its reputation – which affects the market price of its shares. This works where there is a strong and vocal civil society. India is well placed in this regard, though recent attacks on civil society organizations are cause for deep concern. Progressive elements within the government and enlightened, law-abiding corporates need to work on strengthening civil society as a means of ensuring fair and harmonious industrial relations – and for much more.

As we move towards an era in which there is no informal labour and one in which labour has easy mobility, it is necessary to ensure mobility of basic rights (PF, health and insurance, gratuity, leave, retirement benefits) as a worker moves from one employer to another. Already, in the case of PF, such mobility has now been ensured. Technology plays a major role in this and has so far remained largely untapped. Its more extensive utilization for a variety of purposes would be greatly beneficial. For example, with bank accounts now becoming almost universal, there must be a requirement that all wages be paid only by electronic means, with direct transfer to the employee’s bank account. This will eliminate many present malpractices.

 

Similarly, the use of technology for filing various returns and for maintaining electronic records (rather than paper ones, as presently required) will enable far better monitoring of management compliance, while reducing corruption. This step will be welcomed by industry. Further, a combination of better monitoring capability, efficient regulation and strong deterrence can – if effective – make possible self- certification by management for many matters. This would reduce the cost of compliance and be specially welcomed by small businesses and start-up ventures.

The last decade has seen growing ‘informalization and contracting’ of labour. Hopefully, a new legal framework will put an end to this and the 10 million new workers each year will all be ‘regular’ employees, enjoying the full complement of rights laid down by the law. A satisfied workforce that is motivated and well trained will result in higher productivity – the benefits of which will far outweigh any additional costs that companies might have to bear. It is time now for such a new compact between labour and management, catalyzed by a new and progressive legal framework.

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