Labour reforms in India are long overdue and have been in the discussion table for at least over a decade now, without making any progress whatsoever. The complex web of labour laws, far too many stakeholders involved in the process, corporate sector’s ingenious ways to circumvent the existing laws and generally peaceful industrial relation climate in the country (barring a few stray incidents) have pushed this crucial reform process to the backburner.  The real tragedy is this: cost of doing nothing to reform labour laws is far too high to be ignored which the policymakers fail to appreciate!

The larger aim of implementing labour reforms must be three fold: (a) rationalise the existing laws to make it easier for compliance by the employers; (b) provide specific rights and protection to the labour while minimising opportunities for misuse; and lastly, (c) create a strong institutional framework  to ensure strict adherence and swift dispute resolution mechanism. These reforms should result in creating a conducive atmosphere for both the employers and employees that should help the country in tapping its vast potential of the labour while enabling the employers to be globally competitive.

Following are the specific actionable points on Labour Reforms that can be implemented by any government with reasonable political capital and an appreciation of the importance of these reforms for the long term growth of this country:

1.      Rationalising the existing laws:

Currently, there are over 50 different laws relating to labour management, starting with the ubiquitous Provident Fund and Gratuity all the way up to “Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979” and “Working Journalists and other Newspaper Employees’ (Conditions of Service and Misc. Provisions) Act, 1955”, many of which have outlived their purpose of existence.

At the same time, so many laws end up in causing undue increase in cost of compliance for employers as well as provide rent seeking opportunities for inspectors.  It is also reasonably safe to assume that, if one strictly applies all these laws, almost 90% of industrial undertakings will be in breach of one law or the other.

There is an urgent need to rationalise these laws, by meaningfully combining similar laws and keeping it to the minimum, while strengthening the institutions to ensure strict compliance with these laws.  Some of the specific actions include

•  Altogether removing sector-specific laws such as those for beedi workers, journalists, dock workers, cine workers etc.

•   Combining laws that are meant to achieve identical outcome; for instance, acts related to social security such as provident fund, gratuity, ESI and pension, acts related to working conditions such as Factories, Mines and Plantation, and acts aimed at achieving greater social good such as child labour ban, bonded labour ban, equal remuneration, maternity benefits, etc. can be combined.

•    Aligning laws that are similar across states to ensure easy compliance. For instance, minimum wages act should be uniform across all states and across all industries instead of each state classifying 300 sectors and specifying minimum wages for each sector.

These are the ‘low hanging fruits’ that can be implemented without seriously affecting any large class of beneficiaries, while at the same time these changes will ensure easy compliance and stricter adherence.

2.      Retrenchment of labour to be made liberal:

Today, the rules of the land make it highly complex for a large employer (i.e. with over 100 employees) to retrench even one labour; this needs government permission, obtaining which is a bureaucratic nightmare. This law, created in 1947, has long outlived its purpose and has caused the largest of heartburn for employers and is the one that needs most urgent reform.

The larger purpose of this Act – a noble one – is to prevent indiscriminate “hiring and firing” of labour, which could cause serious economic and social difficulties for large section of blue collar workers who may not have the necessary skills and expertise to find alternate employment.  At the same time, employers whose fortunes are susceptible to huge vagaries of the domestic and global markets cannot be expected to bear the burden of high wage bill on the face of a downturn, precipitating the issue that may lead to default, bankruptcy and more. A fine balance between these two diverse interests should be struck to ensure harmonious functioning of the enterprise and minimal disruptions in the life of large sections of labour.

The following reforms could go a long way in addressing the concern of all the stakeholders:

•        Minimum Threshold: The Act should allow certain minimum threshold percentage of labour, say 10% of workforce in any given year, as flexibility for employers to retrench to align their cost structure with the market demand. Beyond such threshold, permission from designated authority may be made mandatory for retrenchment.

•        Compensation based exclusion: The Act should exclude “protection” for labour who earn above certain compensation levels (say Rs. 25,000 per month). Such exclusions will ensure that the Act is aimed at protecting only those who deserve such Govt. protection and not misused by otherwise employable highly qualified technical labour.

•        Contribution towards Training & Redeployment:  Employers can be made to mandatorily remit certain contribution to a central fund, to be administered independently for training and redeployment of retrenched labour. Such contribution can be linked either to number of retrenched labour or number of labour employed, akin to an insurance policy contribution. An independent authority (such as NHAI or TRAI) can be formed to utilise these contribution towards imparting vocational / technical skills for retrenched labour. Though the existing institutional setup (such as employment exchange and labour department) can be used for the same purpose, anecdotal evidence suggests that forming an independent authority, with clearly defined mandate, has been able to deliver much superior outcome than utilising existing infrastructure (e.g. CPWD vs. NHAI).

 •        Responsibility only with Employer: The responsibility for compliance with the laws of the land should be restricted to the employer, and not to those who engage such employer (which the current laws aim to do, without much success though).  For instance, engaging a contractor for security or transport by a corporate should not come with the baggage of verifying the contractor’s compliance with labour laws.  Such measures, though well intentioned, lead to unhealthy practices such as choosing only small size contractors or splitting the contract into multiple small scale companies, etc. These measures have unintended consequences of denying benefit of scale to these industries, duplication of costs, etc.  Compliance with law must be the responsibility of the concerned employer/contractor and adherence must be ensured by the respective authorities.

3.      Transparent and efficient dispute resolution mechanism:

One of the vexatious issues for the employers as well as for the labour union is the inordinately long legal process involved in dispute resolution.  The Industrial Disputes Act and its accompanying machinery (Conciliation officer, Court of Inquiry, Labour Commissioner, Tribunals, etc.) is too archaic and overloaded to handle the modern day disputes.

A complete revamp of the dispute resolution mechanism, with time bound disposal of disputes and provision for alternate resolution mechanisms (such as Arbitration) are the need of the hour.  A track record of timely resolution of labour disputes have a host of tangible benefits including fear of noncompliance, absence of frivolous disputes, minimal deterioration in value of assets to recover worker dues (in the event of bankruptcy/closure), dismantling of the inspector raj and effective redeployment of labour within useful working life of the affected parties.

Ideally, the dispute resolution mechanism should be an independent institution with necessary judicial powers and adequately staffed. (Case in point is Debt Recovery Tribunals for banks, which showed a promising start but ended with similar clogging of cases, largely due to short staffing).  Transparent disclosure of the performance of such institution at each unit level and close monitoring of the performance by the concerned ministers can make a vast difference to the speed of disposal.


Many of the labour laws were well-intentioned at the time of introduction when there was widespread unemployment and usurious labour practices by a section of entrepreneurs.  The labour market, in line with the general economic development, has witnessed significant changes over the last two decades and today, in most developed states, there is a huge short supply of labour (even unskilled labour).  This is an ideal time to implement far-reaching labour reforms that are long over-due with least resistance from various stakeholders.  While the changes in Acts can be managed by the political executive, implementation of the same can be made effective by bring them under an independent authority and strengthening of the institutions.

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