Labour codes are not a game-changer

Benefits depend on effective implementation, while deeper reforms to truly empower entrepreneurs and workers remain unfinished

Following the recommendations of the Second National Commission on Labour (2002) on consolidation of labour laws, the Ministry of Labour and Employment had drafted four labour codes on wages; industrial relations; social security & welfare; and safety and working conditions.

The Prime Minister’s Office identified the consolidation of labour laws as one of the ‘first 100 days’ agenda for the Narendra Modi government in April 2019, debated whether there should be one or four, and decided in favour of four for quicker passage and implementation.

The four codes were hurriedly passed through Parliament and notified by September 2020. Thereafter, it lost interest, and kept postponing their implementation for five years on the untenable excuse of some states not preparing the rules.

Finally, on November 21, the Union government decided to implement the ‘landmark’ codes to lay ‘the foundation for a future-ready workforce’ and ‘stronger, resilient industries’ for ‘Aatmanirbhar Bharat’.

The government claims the implementation of labour codes would help align India with evolving modern global trends, and empower both workers and enterprises.

Will the codes achieve it? Are they fit for purpose?

Enterprise unshackled?

The codes make some positive moves, albeit grudgingly.

Enterprises employing less than 300 workers (earlier it was 100) will not require the government’s permission to lay off, retrench, and terminate workers. Factories with less than 20 workers (earlier it was 10) with power and 40 (earlier it was 20) would not require registration as a ‘factory’ and would be exempt from compliance.

The codes, however, expand the government’s clutches, as they apply to smaller enterprises — factories, mines, service establishments — employing more than 10 workers, and require them to register and file returns.

Hazardous enterprises have been defined loosely and vaguely — any process or activity which involves danger to the health or safety of workers, or of persons living in the neighbourhood, because of the nature of raw materials, intermediate or finished products, by-products, wastes, or residues. Further, even if a single worker is employed in a hazardous process or activity, that enterprise will be notified as hazardous. Hazardous enterprises’ compliances are enervating.

The lives of India’s entrepreneurs are not going to become any easier.

Secure employment and wages?

The government believes written appointment letters, minimum wages for all workers, 50% of total wages and allowances as basic salary and dearness allowance, and improved ESIC coverage, will benefit the workers immensely.

Will these ‘reforms’ make a perceptible difference in the real lives of workers in the organised sector?

The organised sector employment is shrinking with automation and dark factories taking over the production of industrial goods. Employment is also fast becoming temporary, with more than 46% workers on ‘fixed-term contracts’. Thus, written appointment letters make only cosmetic changes in such a scenario.

A prescription for minimum wages for all is ultra-bureaucratic, and unimplementable.

About 1,700 existing ‘scheduled employments’ requiring fixation under the Minimum Wages Act will expand into an unending universe. This work has been so tedious and least value accretive that minimum wages have either not been fixed or have become outdated.

The requirement under the new codes — where a fixing minimum wage taking into account different skill-sets of unskilled, skilled, semi-skilled and highly skilled; geographical areas; arduousness of work like humidity; hazardous nature of occupations or processes; and many other norms — will ensure that the most minimum wages would never be fixed, or there would be hardly any meaningful difference between them for workers to feel ‘protected’.

The new statutory concept of ‘floor wages’ will increase the confusion.

The prescription of paying 50% of total wages as basic pay and DA will end up reducing the effective take-home pay of employees.

The ESIC is a rip-off of employers and employees. Every year, the ESIC saves from the contributions it receives (in 2020-2024, Rs 18,315 crore was received, and Rs 15,825 crore was paid as benefits). As of March 31, 2024, its financial investments were about Rs 1.5 trillion! There is no real increase in the employees registered with the ESIC in the last five years. Given this, the option for enterprises to voluntarily join the ESIC would hardly be exercised.

Better social security for unorganised workers?

The inclusion of gig and platform workers in the Social Security Code with an obligation on the aggregators to contribute 1-2% of annual turnover, and expansion of coverage for the unorganised workers, has a good potential for building social security benefits.

The codes provide for a social security fund to support schemes for unorganised, gig, and platform workers, covering life, disability, health, and old-age benefits.

Over 90% of India’s roughly 350 million non-agricultural workers are in the unorganised sector. If the Union government operationalises the fund, designs effective schemes, and ensures adequate financing, these provisions could deliver much-needed benefits to this vast workforce.

Not a game-changer

The four codes represent incremental progress as definitions get streamlined, benefits converge, and coverage for unorganised workers expands, besides providing some more leeway to entrepreneurs. However, there is nothing revolutionary or game-changing in it.

Its limited benefits can be harnessed if we keep our expectations modest, and focus on quick and thorough implementation.

The task of undertaking meaningful reforms, which liberate entrepreneurs and bring the right benefits to employees, remains unfinished.

Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream Dented’, ‘Commentary on Budget 2025-2026’, and ‘We Also Make Policy’. (X: @Subhashgarg1960)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.