Introduction
The Industrial Relations Code (IR Code) introduced in India in 2020 is one of the most important reforms to the existing system of Labour Law. Under the IR Code, three existing Acts, the Trade Union Act, Industrial Disputes Act and Industrial Employment (Standing Orders) Act, all form part of a single integrated new piece of legislation. The IR Code is aimed at equitably modernising the relationships between employers and their workers, as well as equitably protecting employers and workers.
One of the topics most debated within the IR Code has been how layoffs and retrenchments (as well as the closure of a company) affect both job security and business flexibility and/or cooperation. Hence, it is vital to understand how the IR Code affects these areas so that all stakeholders - employers, employees, human resources managers, and legal advisors - can understand how best to protect their interests.
Background: Why Reform Was Necessary
Before the introduction of the IR Code, certain components of the Industrial Disputes Act imposed rigid limits on the number of employees an employer could lay off. In addition, the Act also required employers to go through extensive and complicated bureaucratic procedures before they would be allowed to make a layoff or retrenchment. These bureaucratic requirements created significant uncertainty for both employers and employees; employers faced significant approval timeframes and potential liability for litigation, while employees faced delays in receiving severance payments and ultimately disputes over severances.
The IR Code intends to eliminate these difficulties by creating simple and clear procedures; aligning labour laws and procedures with modern economic conditions; and retaining essential protections for workers.
Layoffs Under the Industrial Relations Code
When a company can no longer offer employment to workers due to various issues (such as a lack of raw materials), the workers will be referred to as having been "laid off", which means that there will not be enough work available for them at this time. When talking about layoffs specifically in terms of Indian Employment Laws (IR codes), employers with up to 300 employees will no longer have to get Government Authorisation to layoff their workers; this is a major difference from the previous law which stated that a business with 100 or more workers would have to get permission from the Government before laying off any of their employees. The new law (IR Code) allows greater flexibility in the way businesses operate, especially in industries that are cyclical in nature or based upon market demand.
Employees who are laid off, however, still maintain their statutory rights to receive compensation for their layoff. The IR Code provides for the payment of 50% of basic wages and dearness allowance to an employee during the period of layoff, up to certain prescribed limits. This ensures that employees continue to be afforded some level of financial security even though their employer may have experienced a decrease or cessation of work.
Retrenchment Provisions Under the IR Code
Retrenchment is a form of separation or termination of a worker that is not due to any type of disciplinary action against the worker, voluntary retirement on their part, or the worker reaching superannuation age.
Like lay-offs, the IR Code increases the threshold of the requirement for Government approval to retrench from 100 to 300 employees. Organisations with fewer than 300 employees may retrench their employees by following the prescribed notice and compensation requirements without first obtaining Government approval.
Although the IR Code provides for a degree of relaxation with respect to the conditions of retrenchment, it still provides for certain safeguards for workers. Employers must give:
a) the notice as prescribed in the IR Code or the wages instead of the notice;
b) retrenchment compensation in an amount equal to 15 days’ wages for every completed year of service to the employee.
These provisions of the IR Code are intended to facilitate the retrenchment process and to make it less likely to be a subject of prolonged dispute.
Closure of Establishments Under the IR Code
Closure is the process of terminating the business operations of an existing establishment or part thereof. The Industrial Relations (IR) Code permits closure by an establishment with up to 300 employees without first obtaining approval from the Government. This amendment was made to lessen the time involved in obtaining approval and to help ease the process of closure when required, as this is a critical factor in attracting investment and promoting entrepreneurship. However, all closures will still require adherence to the statutory notice requirements and compensation provisions for employees affected by the closure. State law specifies that a closure compensation amount will be 15 days' average salary for each completed year of continuous employment for all employees affected by the closure. All employees will receive an adequate financial safety net and protection as a result of these requirements. Close operations with establishments with more than 300 employees will require prior government approval before being permitted to proceed or taking place as a continual closure operation.
Impact on Employers
The IR Code provides Employers with increased certainty/flexibility regarding the size of their workforce. Businesses can now respond to changes in the economy, technology and marketing more effectively, thanks to the Enhanced Guidelines, allowing them to avoid the Long Wait caused by Regulations when responding to Downturns, Technological Advancements & Market Changes, etc.
The Simplified Framework provided by the IR Code also reduces the Amount of Time/cost spent on various types of litigation that cause delays & inefficiencies. Employers now have clearer forms of Legal Clarity in terms of the Thresholds and Procedures applicable to Restructuring Decisions, which helps improve Industrial Relations between Employers and Employees and boosts Business Confidence as well.
Impact on Employees
Employees view the IR Code in Mixed Reactions, with many expressing concerns over the Increased Discretionary Power of Management. However, the IR Code continues to protect Workers through its Mandatory Compensation, Automated Notice Requirements & Automated Procedures for Resolving Disputes.
The Structured Methods and Procedures associated with Layoffs, Retrenchments, and Closures eliminate uncertainty/delays associated with Making Payments to Workers after they have Lost Their Jobs, thus enabling Workers to receive their Financial Relief promptly. The IR Code also establishes Formal Procedures for Resolving Disputes and Reducing the Reliance on Lengthy Strikes or Protracted Legal Actions.
Balancing Flexibility and Security
The Industrial Relations Code (IR Code) provides a framework whereby the need for flexibility in employing staff is balanced with the need for security for those employed. This is achieved through the provisions of a high threshold at which the IR Code provides a path of least resistance (for employers) while providing safeguards and remedies for employees.
The ability to properly balance flexibility and security becomes more important in a changing economic environment where business competitiveness is vital, yet without jeopardising the livelihoods of employees.
Compliance and Practical Considerations
Employers are required to remember that although the threshold levels have been raised, compliance requirements have not. All documentation, the timely payment of wages, and the various notice requirements have to be complied with strictly. Any non-compliance may result in fines and legal action against the employer.
Employees should also be aware of their rights under the IR Code, as well as what compensation may be payable if their employment ceases due to any of the above-mentioned events.
Conclusion
The IR Code is a landmark development in India's labour regulation, due primarily to the provisions regarding Layoffs, Retrenchment and Closure. By increasing the threshold levels and simplifying the regulatory environment, it will result in enhanced flexibility for Employers and provide the same protection level for Employees that currently exists under the IR Code.
In order for the IR Code to achieve its desired outcomes, it will require the effective implementation by employers with open communication, the effective enforcement by the Government of India, and the responsible use by Employers & Employees. With the right balance of all of these factors, the IR Code can foster industrial development, employment generation and long-term industrial harmony within India.
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