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Addressing changes to Labour Laws

Updated: Sep 22, 2020

- Varsha Aithala

Background overview and objectives:

As of 2019, estimates show that the MSME sector contributes to 6% of the manufacturing GDP, 25% of the services sector, more than 33% of India’s manufacturing output and remaining 34% of the total exports across a diverse range of commodities. The Covid situation has been particularly harsh on small business owners and startup entrepreneurs in the country. To help revive these flagging businesses, particularly in the manufacturing sector, employers associations and business owners have been demanding relaxations from the government from the strict labour law regime until such time as they are able to return to pre-Covid levels of productivity.

The following section of the primer gives a brief overview of the main labour law compliances that owners of small businesses and early stage startups need to consider while reviving their enterprises, following the phased relaxation of the nationwide lockdown situation.

FAQs and Solutions:

1. What labour law requirements should I keep in mind if I have to let go off some of my employees now?

  • First identify the category to which the worker belongs - permanent worker, temporary or fixed term worker or casual labour. This classification does not apply to a worker whose role is primarily supervisory, administrative or managerial.

  • If you terminate a permanent worker, it could be considered a layoff: Layoff means the failure, refusal or inability of an employer on account of the shortage of coal, power or raw materials or the accumulation of stocks or the breakdown of machinery or natural calamity or for any other unconnected reason to give employment to a workman whose name is borne on the muster rolls of his industrial establishment and who has not been retrenched.

  • Under the Industrial Employment Standing Orders Act, 1946 and Industrial Employment Standing Orders Central Rules, 1946, you must provide a written notice of minimum 1 month for a monthly-rated worker and 2 weeks for other workers or 1 month or 2 week’s pay in lieu of this notice.

  • If your business employs more than 50 workers who are permanent, for layoff, you have to award compensation which is equal to 50% of basic salary + dearness allowance for the days laid off (excluding holidays or weekly closing day) to all employees who have completed at least 1 year of service.

  • For a business that employs less than 50 permanent workers, all laid off workers are entitled to full wages for the laid off period.

  • If the worker is a woman, she cannot be dismissed or discharged from service during her maternity leave.

  • However, an order under the Disaster Management Act overrides other legislations so that will have to be taken into consideration. As good practice, it is advisable to avoid laying off employees on account of the lockdown.

2. How do I make changes to employee contracts?

  • Terms of employment need not always be in writing. They can be oral or implied terms. Implied terms could include, for instance, duty of care, duty to maintain confidentiality, duty to put in best efforts etc.

  • To minimise your liability, you should enter into fixed term employment contracts with your workers. Since the contract is only for a specific period, it expires automatically after the duration, if not renewed. A fixed-term worker is not entitled to any termination notice or pay in lieu thereof.

  • If you have entered into permanent contracts with your workers, note that these workers can only be terminated only following strict procedures prescribed by the law. A modification to the terms of their employment which could lead to termination is considered a layoff.

  • For all categories of employees, review the terms of their employment offers which usually contain specific requirements for changes or termination. You cannot change the terms of employment unilaterally, employee consent is required. For a ‘workman’, any changes to the specified service conditions like compensation or grade classification can only be made after providing 21 days’ prior statutory notice and notice to the labour authorities.

  • Check for a prior notice of termination requirement and the minimum period of notice which could typically range from 30 to 90 days.

  • Check if the employment terms specify your obligations to pay off sums due to the employee including wages/salaries upto the last working day, unpaid leave and benefits, immediately following termination.

3. What options do I have if I don’t want to let go of my employees?

  • You can renegotiate the terms of the employment of your workers by agreeing to provide for staggered payment of salaries and other perks due for the period of the lockdown. Please make sure to reduce the renegotiated employment terms to an agreement.

  • You can come to an arrangement with all or some of the employees where they remain employed, but do not have to attend work, without the requirement of paying them a full salary for that period.

  • You can come to an arrangement with your employees to adjust their accrued annual/privilege leaves for absence from work during the lockdown period.

  • If you are registered as a company*, you can offer future perks like ESOPs in lieu of the salary for the lockdown period. Employee Stock Ownership Plan (ESOP) is a benefit plan for employees which gives them ownership interest in the company. Please check the existing limit on providing stock options and whether your company’s MoA, Articles of Association and bye-laws if any provide authority to offer these stock options to employees. Note that ESOPs incurs tax liability on the employees on exercise of this option.

*This provision does not apply if your business is organised as a limited liability partnership (LLP) or as a limited partnership (LP).

4. How do I track remote contractors who work by the hour? Are all categories of workers in my business eligible for full salary during the lockdown?

  • The Contract Labour (Regulation and Abolition) Act, 1970 restricts employment of short-term workers without benefits. The Payment of Wages Act, 1936 makes the employer responsible for payment of wages to all permanent, temporary, casual & badli* workers in case a contractor fails to make this payment.

*A ‘badli’ worker is employed in an industrial establishment in the place of another workman whose name is on the muster rolls of the establishment, but who is temporarily absent. A workman stops being a ‘badli’ if he completes 1 year of continuous service in the establishment.

The order passed by the Ministry of Home Affairs dated March 29, 2020, directs the States/Union Territories to ensure that all employers pay wages to their employees, without any deductions for the lockdown period. On May 15, 2020, the Indian Supreme Court granted a stay(1) on this requirement of the MHA Order of March 29, 2020.

  • The advisory issued by the Ministry of Labour and Employment as of March 2020, requires employers to not terminate workers and to pay wages for the lockdown period not only to the permanent workmen but also to casual labour, contract labour and inter-State migrant workers.

  • If your business shuts down due to the lockdown, employees are still deemed to be on duty and so, entitled to salary and other benefits as if they were employed. However since the Government has now relaxed this requirement, business owners and managers will not be prosecuted for failure to pay wages of their workers during the lockdown period.

5. What are the employee benefits that I am exempt from payment of during the lockdown period?

  • Wages: This refers to all remuneration payable to a worker in respect of his employment or of work done in pursuance of such employment. This includes the dearness allowance; the value of house accommodation, of supply of utilities or other amenities or of any service or of concessional supply of food grains or other articles; travelling concession; sales commissions or business commissions.

  • Provident Fund: If your business employs 20 or more employees, you are required to contribute towards the provident fund for all employees who earn less than Rs 15,000 monthly. The Indian Government will pay the EPF contribution on behalf of both employers and employees from May to August 2020. For this period, this contribution has been reduced to 10% of the employee’s salary from 12% for all establishments covered by the Employee Provident Fund Organisation.

  • Insurance: Under the Employee State Insurance scheme, if your factory and establishment employs 10 or more persons (and for Maharashtra and Chandigarh, 20 or more persons) whose monthly wage does not exceed Rs 21,000, you are required to make ESI filings for them. The submission deadlines for this for March and April are extended to April 15, 2020 and May 15, 2020 respectively.

  • Professional tax: If your factory is in Karnataka, you can file your monthly tax and submit the tax statement for FY 2020-21, by May 30, 2020 and for West Bengal, by June 30, 2020.

  • Bonus: Under the Payment of Bonus Act 1965, if your factory employs 20 or more workers, you are required to pay a minimum statutory bonus of 8.33% of the wages for each worker. To be eligible to receive this bonus, a worker should receive a minimum salary of Rs. 3,500 per month. For the employer, the requirement to make this payment for the lockdown period has not been relaxed so far.

  • Gratuity: The Payment of Gratuity Act 1972, provides that this payment should be made to an employee in recognition of the continuous years of service rendered by an employee to the enterprise, starting with a minimum of 5 years. It is calculated on the basis of the last drawn basic salary plus dearness allowance and the number of completed years of service. This requirement has not been relaxed for the lockdown.

6. What are the relaxations from labour laws that states are providing to business owners following the lockdown?

  • If your factory is in any one of these states: Assam, Gujarat, Haryana, Himachal Pradesh, Madhya Pradesh, Maharashtra, Punjab, Rajasthan and Uttarakhand, you can benefit from the recent relaxations of the Factories Act,1948 from the provisions relating to weekly hours, daily hours, overtime and provision of rest intervals for workers, for 3 years, so long as you satisfy the following minimum conditions:

    • Workers should work 12 hours in any day and 72 hours in any week

    • After every 6 hours, a worker gets at least 30 minutes of rest

    • Hourly wages payable will be proportionately determined based on the hours worked

*Uttar Pradesh has withdrawn these exemptions following a recent order of the Allahabad High Court)

  • If your factory is in Gujarat and you employ contract labour, the contractor’s license which may have expired continues to be valid so long as it is renewed by May 15, 2020.

  • If your factory is in Karnataka or Telangana, your state governments are actively considering providing similar relaxations to the Factories Act, Industrial Disputes Act and the Contract Labour Act. These may be particularly useful to you, if you are an MSME in the manufacturing sector.

Where to go next?

For further information, you can refer to: disputes can be raised as an individual worker or as a group.

(1) The MHA order was challenged in a bunch of writ petitions including: Rajesh Inamdar v. Union of India & Otrs.,WP ( )/2020; The Twin City Industrial Employees Association v. Union of India, Diary No. 11018 of 2020; Ficus Pax Private Limited v. Union of India & Ors, Diary No.10983 of 2020; Ludhiana Hand Tools Association v. Union of India, Diary No.10993 of 2020 and Kerala State Small Industries Association v. Union of India (unreported)

Varsha Aithala currently works as Research Fellow at Azim Premji University, Bengaluru and is a consultant at Justice Adda. She has significant corporate practice experience and has worked in several leading law firms in India and in an international law firm in the UK. She is qualified to practice English and Indian laws. She graduated from NALSAR University of Law, Hyderabad and holds a master’s degree in corporate law from the University of Cambridge.


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