India’s Labour Code Overhaul: The Cost of ‘Ease of Doing Business’ for Workers

The notification of India’s four new Labour Codes—a monumental effort to consolidate 29 fragmented laws—has been hailed by the government as a radical step towards modernizing the economy and boosting the ‘Ease of Doing Business.’ Yet, beneath the veneer of simplification lies a deeply contested reform that, according to central trade unions and labour advocates, systematically dilutes foundational worker protections in favor of enhanced managerial flexibility. This structural overhaul presents a stark dichotomy: while the Codes introduce groundbreaking universal social security for the unorganized and gig workforce, they simultaneously compromise the job security and collective bargaining rights of workers in the organized sector, raising profound questions about the ultimate cost of this economic liberalization.

The four codes are:

1. The Code on Wages, 2019
2. The Industrial Relations Code, 2020
3. The Code on Social Security, 2020
4. The Occupational Safety, Health and Working Conditions Code, 2020 (OSHWC)

Major Areas of Criticism

The main criticisms are concentrated in a few key areas, mainly concerning job security, collective bargaining, and working hours.

1. Dilution of Job Security (Industrial Relations Code)

• Increased Threshold for Retrenchment: The most contentious provision is the increase in the threshold for mandatory government approval for layoffs, retrenchment, or closure from 100 to 300 workers. Critics argue this effectively allows companies with up to 299 employees to “hire and fire” at will without government scrutiny, severely undermining job security for a large portion of the workforce.
• Fixed-Term Employment (FTE): While the Code grants FTE workers equal benefits to permanent staff, unions fear this will lead to the casualization of employment, where companies replace permanent workers with easily terminable fixed-term contracts to avoid long-term liabilities.

2. Weakening of Trade Union Rights (Industrial Relations Code)

• Restrictions on the Right to Strike: The Industrial Relations Code introduces new, stricter conditions for strikes, including a mandatory 14-day notice period, even for workers not covered by an arbitration proceeding. Critics see this as a significant curtailment of the workers’ right to protest and collectively bargain.
• Marginalization of Smaller Unions: The Code designates the trade union with over 51% membership as the sole negotiating union, which critics argue will marginalize smaller or dissenting unions and restrict plural representation in the negotiation process.

3. Increased Working Hours (OSHWC Code)

• Potential for Longer Shifts: Although the weekly working limit remains at 48 hours, the OSHWC Code allows states to increase the daily working hours from 9 to 12 hours (with consent and overtime pay). Trade unions fear this will be exploited by employers, leading to a mandatory four-day week of 12-hour shifts, which could negatively impact workers’ health and work-life balance.

4. Definition of Wages and Social Security Contribution (Code on Wages)

• Lower Take-Home Pay: The Code on Wages standardizes the definition of ‘wages’ such that allowances cannot exceed 50% of the total remuneration. While this ensures a higher contribution base for social security (PF, Gratuity), critics point out that it could lead to a reduction in the immediate take-home salary for many employees, especially those in higher pay brackets.

Technical elaboration of the major criticisms across the four codes:

1. Industrial Relations Code, 2020 (IR Code)

The core criticism of the IR Code is that it systematically weakens the bargaining power of workers and promotes a “hire and fire” environment.

A. Increased Threshold for Layoff/Retrenchment Approval

• Technical Detail: Section 77 of the IR Code raises the employee threshold for requiring prior government approval for layoff, retrenchment, or establishment closure from 100 employees (as per the Industrial Disputes Act, 1947) to 300 employees.
• Criticism: This change allows a significant number of establishments (those employing between 100 and 299 workers) to execute mass terminations without government intervention. Critics argue this removes the single most effective legal deterrent against arbitrary job loss, leaving workers in the vulnerable 100-299 employee segment without the security of pre-approval checks. This is seen as a move that formalizes employer discretion over job security.

B. Restrictions on the Right to Strike

• Technical Detail:Section 62 mandates a minimum 14-day notice for a strike in all industrial establishments. Furthermore, a strike is prohibited during:
  • Pendency of a conciliation proceeding and seven days thereafter.
  • Pendency of proceedings before a Tribunal or National Industrial Tribunal and sixty days thereafter.
• Criticism: This provision effectively makes it extremely difficult for a union to organize a legal strike (an important tool for collective bargaining). By extending the mandatory notice period to all establishments and linking the prohibition to lengthy judicial/conciliation processes, trade unions argue the code strips workers of their most potent form of protest, particularly when dealing with urgent disputes.

C. Promotion of Fixed-Term Employment (FTE)

• Technical Detail: The IR Code formally introduces Fixed-Term Employment (FTE), granting such workers the same statutory benefits (wages, social security, leave, gratuity after one year) as permanent workers.
• Criticism: While ostensibly beneficial, unions fear this will lead to the widespread casualization of employment. Employers may strategically shift permanent roles to a series of fixed-term contracts to:
  1. Avoid the perceived difficulty of terminating permanent employees under the Code.
  2. Eliminate long-term liabilities like promotions, wage progression, and continuous service benefits that accrue to permanent staff. The employment concludes automatically upon the contract’s expiry, bypassing the legal definition of retrenchment in many cases.

2. Code on Wages, 2019 (CoW)

The main concern with the CoW revolves around its technical definition of wages and the resulting impact on employee take-home pay.

A. Redefinition of “Wages” and Take-Home Pay

• Technical Detail: Section 2(y) defines “wages” for the purpose of statutory contributions (like Provident Fund, Gratuity) and caps the proportion of excluded components (allowances, House Rent Allowance, Conveyance Allowance, etc.) at 50% of the total remuneration.

Wages for Contribution >_ 50% x Total Remuneration

• Criticism: For many companies, especially in the service sector, allowances constituted more than 50% of the salary to minimize the employer’s and employee’s PF/Gratuity liability. The new definition mandates a higher percentage of the salary be classified as basic pay, increasing the statutory contribution base. While this increases the social security corpus (a pro-worker feature), critics point out it will result in a reduction in the monthly take-home salary for employees, leading to immediate financial strain.

B. National Floor Wage

• Technical Detail: Section 9 introduces a National Floor Wage to be fixed by the Central Government, below which no State Government can fix its Minimum Wage.
• Criticism: Workers’ organizations express concern that the fixation of a national floor wage, which is an average figure, might lead to a reduction in the minimum wage in states where the existing wage is already higher, thereby lowering the overall standard of living in high-cost-of-living areas.

3. Occupational Safety, Health and Working Conditions Code, 2020 (OSHWC Code)

The OSHWC Code is primarily criticized for introducing flexibility in working hours that is seen as a potential mandate for longer workdays.

A. Expansion of Daily Working Hours

• Technical Detail: The OSHWC Code permits the working day to be extended from 8 hours to a maximum of 12 hours (Section 25), provided that the total working hours in a week (including overtime) do not exceed 48 hours.
• Criticism: Trade unions fear that employers will universally adopt a 4-day workweek of 12 hours per day to maximize output while avoiding payment of overtime and effectively shortening the employee’s weekend break from two days to one. This is considered detrimental to the physical and mental health of workers and a reversal of the decades-long global struggle for the 8-hour workday.

B. Exclusion of Small Establishments

• Technical Detail: Many safety provisions under the OSHWC Code are applicable only to establishments exceeding certain employee thresholds (e.g., 50 for canteens, 250 for welfare officers).
• Criticism: The large majority of industrial and commercial establishments in India are MSMEs and fall below these thresholds. Critics argue that this exemption leaves a vast portion of the workforce unprotected by modern safety standards, particularly concerning issues like welfare facilities and occupational health.

4. Code on Social Security, 2020 (SS Code)

The SS Code’s criticism is generally focused on the mandatory contributions required from gig/platform workers and the implementation model.

A. Financial Burden on Gig/Platform Workers

• Technical Detail: The Code mandates contributions towards social security for gig and platform workers from the aggregators (1-2% of annual turnover, capped at 5% of the amount paid to the workers) and, by extension, potentially the workers themselves.
• Criticism: While the inclusion of these workers is lauded, there is concern that the contribution model may not be adequately defined or funded, leading to a portion of the contribution being passed on to the gig worker in the form of lower payouts, without guaranteeing proportionate benefits. Furthermore, the provision of a separate social security fund instead of fully integrating them into existing schemes (like EPF and ESI) is seen as creating a tiered, potentially inferior, system.

Provisions In Favour of Labour Interest

Despite the criticisms from trade unions, the labour code reforms include genuinely progressive elements aimed at addressing the long-standing issues of the unorganized sector and gig economy.

Conclusion

The new Labour Codes are not monolithically “anti-labour.” The analysis of the new Labour Codes reveals a dual-nature impact on labor, where they simultaneously offer universal social protection to previously excluded workers while introducing key provisions that weaken the job security and collective bargaining power of workers in the organized sector.

They represent a fundamental trade-off:

• Pro-Business: By increasing the retrenchment threshold (300 workers) and restricting strikes, they offer greater flexibility and lower transactional costs to capital, a major win for the “Ease of Doing Business” narrative.
• Pro-Welfare: By extending universal social security, minimum wage, and formalization to the previously excluded unorganized, gig, and platform workers, they are genuinely progressive for the most vulnerable sections of the workforce.

The core of the criticism from organized labor is that the codes sacrifice the rights of existing organized workers (job security and bargaining power) to achieve the simplification and welfare expansion. For workers in establishments with less than 300 employees, the reduction in job security is a substantial step against their interest. Conversely, for a gig worker receiving their first-ever social security benefits, the code is a massive step in their interest. The final impact hinges on the implementation of the rules by State Governments and the effectiveness of the inspector-cum-facilitator system in enforcing the new welfare guarantees without being diluted by the pro-employer provisions.