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Amalgamation of Existing Laws or Labour Reform?

Santanu Sarkar (ssarkar@xlri.ac.in) teaches at the XLRI Xavier School of Management, Jamshedpur, Jharkhand.

The Draft Labour Code on Social Security, 2018 of the National Democratic Alliance government was expected to reform existing labour laws and improve the state of the economy and labour. However, a close reading of the proposed code suggests that it is an amalgamation of existing laws, and the government has neither removed redundant provisions nor overhauled the existing provisions to make employment benefits available to employees in a quicker, simpler, and effective manner. The alteration of taxonomy and unification of older laws in the new code is likely to weaken the legal doctrine by destroying the comprehensibility of the law, and will lead to poor implementation.

The second National Commission on Labour (NCL) set up in 1999 recommended that labour laws, which are fragmented and incoherent but are broadly based on common purpose, should be simplified through unification. After a decisive mandate in May 2019, the National Democratic Alliance (NDA)–II government is keen to act on these recommendations to improve the ease of doing business in India. This unswerving decision of the government to simplify labour laws has been doggedly defended by the neo-liberals. To attain a growth rate of 7%–8% has been an “unwritten golden goal” for every government’s performance ever since the liberalisation of the Indian economy in 1991 (Kohli 2006; Ahluwalia 2002).

However, one of the consequences of economic liberalisation is the springing up of new avenues of employment in India’s informal sector and deregulation of employment in the formal economy. Consequently, precarious work, rapid casualisation, contractualisation of work and employment, and the new economy have posed challenges to existing legal norms. For some, archaic labour laws are the biggest stumbling blocks to achieve economic liberalisation and, for others, these laws are meant only to protect a fraction of the workforce who are in the formal economy (7% of the total workforce). Meanwhile, workers are faced with declining wages, dreadful working conditions, and employers’ non-compliance of health and safety standards, coupled with the government’s lackadaisical attitude towards social security for labour across sectors. However, these conditions do not deter the government to pursue further reforms for the informal sector workforce.

One big step already taken by the NDA government in this direction is the proposed unification of labour codes. Against this backdrop, a careful, in-depth, and critical analysis of the proposed labour code, one of the projected reform initiatives of the NDA government, is warranted in order to understand how this reform will affect the beneficiaries of labour laws (Ministry of Labour and Employment 2019a). A litmus test is needed to check if the proposed codes, for the sake of simplifying, will cut through safeguards that the current labour laws promise. Neo-liberalism has already begun moving the goalposts of these reforms to cajole capital. Labour law reforms has spurred debate amongst academia, intellectuals, and trade unions. Despite opposition, the current government has been able to persuade its counterparts in a few states to amend their respective state laws in favour of capital. The cases of Rajasthan and Madhya Pradesh merit special mention (Financial Express 2017; Sengupta 2018).

This article tries to evaluate the Draft Labour Code on Social Security, 2018 (henceforth, the code), one of the proposed labour codes, in the purview of one of the comprehensive labour laws, that is, the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (Ministry of Labour and Employment 2019b). An in-depth examination on compliance, coverage, complexity, ease of implementation, and uniformity to reduce arbitrage would help in understanding whether the code is favourable to workers or if it disadvantages the included minority from the formal economy as well as the excluded majority from the informal economy. The objective of this article is examine whether the unification of labour codes was a serious exercise carried out by the government by cautiously dropping redundant provisions, adding fresh provisions, and judiciously overhauling the existing provisions in order to make benefits available to labour in a quicker, simpler, and effective manner, or whether it simply managed to codify laws through an amalgamation of existing laws.

Applicability and Coverage

The code has seemingly broadened the social security net by including every single person working anywhere in India (including Jammu and Kashmir, which was not included under the act of 1952) keeping to the government’s aim of having a unified code for workforce in both formal and informal economies. Phraseology like “workers employed by any entity,” on the face of it, implies the removal of spatial blocks within the connotation of beneficiaries under the act (for example, “establishment engaged in work as per Schedule-I and factory with 20 or more persons”). By privileging an all-encompassing definition of “employee,” which includes anyone “providing services, regular or part-time, to any entity,” the draft code takes cognisance of the multitude of employment relationships that are more common today—contractual, temporary and casual—than what existed back in the 1950s when the act was enforced.

An interesting point about the code’s applicability is the government’s subtle attempt to correct its “lapse” of removing mandatory pension from the act in 2014. The code tried rectifying it partly by protecting those who qualified for pension. The code is made applicable to them as well as the non-employees to whom the pension scheme applies based on income. However, income slabs (broad categorisation) have been created and linked to pension for the first time. For example, employees with income up to (threshold) “X” are entitled to receive pension, “X1.” This reaffirms the “defined contribution” over “defined benefit” feature of pension schemes under the code. To “universalise” applicability, the code’s coverage of “entities” at first glance seems broader than that of the act. It even encompasses units irrespective of nature and quantum of work, and includes “enterprise” and “household.” Besides, there are no exclusion criteria unlike what we see under the act (for example, cooperatives with less than 50 persons or establishment under the control of government do not come under the act) because the code has only one list of excluded entities (Part I of Schedule I). But, when we closely compare the number of excluded entities between the code and the act, it is quite evident that there are more excluded entities in the code than in the act.

Implementation and Regulation

The extent to which the code will succeed in fulfilling the task of having a unified policy taking care of every citizen’s social security hinges on the implementing machineries. In-depth analysis suggests that the code is an embodiment of “an ambitious policy with inadequate support system.” The change in the composition of the central board signifies reduced representation of all the decision-making parties. Does it mean those who shall be elected or nominated will be burdened with more responsibilities unless the government intends to restrict the ambit of subjects on which the central board shall have jurisdiction to take decisions? So, is the government planning to work with a lean structure having absolute power?

Likewise, changing the constituents of the monitoring authority by including the “Regulatory General of Social Security,” functioning underneath the National Council as its secretary member, will only empower the executive heads of the state. The proposed Social Security Organisation (SSO) will substitute officer(s) appointed under the act. Not only has the code added the National Council as an apex body over the central and state boards, but it has also vested special powers upon the minister, regulator general, as well as the secretary of the Ministry of Labour and Employment under the code, which are presently with the central fund commissioner. This structural change epitomises a fair degree of centralisation, which may be counterproductive to the effective implementation of a large social security programme.

Nevertheless, a degree of federalisation and delegation of power to the states is an important feature of the code (Section 19.1, 19.3 of Part D). The code proposes to shift the Employees’ Provident Fund Scheme, currently administered by the central board, to the State Social Security Fund with state boards to be constituted in each constitutional political unit (the state and union territory). This board will have the power to administer the fund. According to advocates of the code, this move is to offer greater autonomy to the states for effective fund utilisation and accountability. For example, the appointment of the commissioner of social security in each state who will work under the superintendence of the state board in place of the Central Provident Fund Commissioner, according to the defenders of the code, will optimise the span of control of the authorised officers and enable them to take prompt actions in case of complaints and grievances. However, they fail to recognise that delegation of absolute authority to the states may cause problems in standardisation of procedures.

Federalism, according to Part XI of the Constitution, is asymmetric in that the devolved powers of the constituent units (that is, the centre and state) are not the same. In examining the distribution of the executive and administrative powers between the centre and states, as per Section 18 of the code, the state board is found to carry the responsibility of administering the Social Security Fund as well as be responsible for establishing facilitation centres to carry out registration of workers and transfer of information, receive complaints, fill forms, and file returns. In this direction of decentralising, the code further empowers the state to delegate record-keeping functions to the local bodies.

Nevertheless, an in-depth examination of this structural change reveals that, apart from presenting single window to beneficiaries and employers in every state, which under the act is carried out through unevenly dispersed offices of the regional provident fund commissioners, the processes have not undergone any major overhaul, as vowed by the creators of the code. For instance, if an employee or a member under the current system has to trail a designated number of steps under the act in order to borrow or withdraw amount to their credit, will the code reduce the number of steps involved? Moreover, asymmetry in power between the constituent units is reaffirmed. For instance, if the purpose is to decentralise, then why should the central government, and not the state governments, have the power to frame schemes for different classes of workers under the code? Portability in the schemes is not new. But, with the state government being the custodian of the Social Security Fund, the code may deal with convolution when an employee migrates from one state to the other.

In this line, there are several unanswered questions. For example, it is unclear whether the transfer of provident funds and payment of contributions will be caught in a cleft stick. Will employees be allowed to continue with the social security account in the source state (the state where the employee has originally opened and maintained the account), and will the host state (the state where they are presently working) have the freedom to collect contributions from employees? Or, will the source state continue collecting contribution? The transfer of account, amount, and benefits with employees migrating from one state to the other would embroil them in a cumbersome process, which has barely been anticipated by those who drafted the code despite an embarrassingly poor record of compliances under the Inter-state Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979.

Therefore, federalism might inhibit smooth execution. For example, as per Section 31.2 of the code, when an employee works in another state, the respective state board will remit the contributions made to the Social Security Account of the employee to that state where the account is originally maintained and the employee can claim every benefit except medical benefits from the host state. Does it mean that loans from their provident fund account or withdrawal of provident fund in a similar way can be applied for in the host state without wayfaring between the states? Will coordination between the state boards have a bearing on execution in such a case? Since the state boards are the nodal agencies for matters concerning the scheme, in the case of grievances, will the host state’s board take it up with the source state’s board? Likewise, in the case of disputes between the two states, will the central nodal agency intervene? These and similar questions remain unanswered.

Anomalies in Contribution

Contribution, defined as a percentage of the earnings of an employee paid to the provident fund and a matching contribution by the employer paid to the provident and pension funds, has been the lone basis for financing two major schemes under the act. While the code has not jettisoned the underlying principle of treating the social security fund as contributory, with organisations sharing equal responsibility in securing their employees’ future, the maximum employer’s and employee’s contribution is revised from 10% or 12% (depending on the size of the establishment) under the act to 17.5% and 12.5% under the code, respectively. Although the wage threshold is no more treated as a criterion for the payment of contributions, the wage ceiling will still have a bearing on the rate of contribution, a point that the article will elaborate on later. Besides, the break-up of 17.5% of the wage, which is the employer’s contribution, between the two funds is not explained. In addition, as per the code if the employer is liable to pay the increased contribution upfront and adjust it later with the employee’s wage, will that amount to cost to company (CTC), unlike in the act?

There is no change in the manner of payment of contribution by the employer and employee under the code, although a lot more was expected from the lawmakers. For instance, with respect to the liability of the principal employer to remit contribution for the contract labour engaged by him, to great dismay, the code (Section 43.4) has verbatim reproduced the provision laid down under Section 8A of the act. There is also ambiguity regarding the contract labourers engaged through a contractor who do not have a Universal Account Number (UAN)/PF code and on behalf of whom the principal employer shall pay contribution for contract labourers and deduct total contribution from the payment payable to the contractor. Anecdotal accounts suggest that the provident fund commissioner has blacklisted a few principal employers for using a single code for their own employees and contract labourers. This has created an alarm within the principal employers and might exacerbate non-compliance since employers will still fear using their UAN/PF code in making (online) payment for the contract labourers considering that it may make the contracts appear sham and bogus. Although the Employees’ Provident Fund Organisation (EPFO) proposes to change this process by allowing principal employers to furnish the location-wise details of their employees, for now, the ambiguity persists.

Unlike the act, the code requires the principal employer to maintain the certificates of contributions when dealing with the contractors without UAN/employer code and expects the contractor to tender details of their employees before any settlement with the principal employer (Sections 43.5 and 43.6 of the code). These will remove the information asymmetry. The code also tries to bring clarity in few selected areas. For example, the ambit of contractors shall include subcontractors, and the recovery of contributions in the case of large establishments, which involve multiple contractors and subcontractors, through the revised process will therefore help both principal employers and contractors in maintaining records. But, the requisite manner for tallying certificates of contributions/deductions with details provided by the contractors has gone unnoticed by those who drafted the code. Moreover, ways for remitting contribution on the behalf of defaulter/contractors, which constitute one of the problematic traits of the act, has been left unclear.

Although the lawmakers have made a valiant move by including the self-employed and owner-cum-workers under the code, the payment of their contribution to the National Social Security Fund in place of the state funds may add to existing confusion.

Currently, under the act, provident fund contribution is 12% of wage or wage ceiling up to ₹ 15,000 by employees and a similar percentage is deposited by employers up to 12% of the wage ceiling. Both these contributions are deposited in a common fund. However, under the code, the process is not so simple for owner-cum-workers who are treated as both employees and employers. The code suggests that owner-cum-workers will pay their own employee contribution to the National Social Security Fund whereas, in every other case under the code, employee contribution is payable to the state funds. Owner-cum-workers who have employed workers under them will pay the worker’s contribution to the state funds for their workers. So far as the matching contribution from employer is concerned, that amount also has to be paid by owner-cum-workers as they are employers too. But, it is not clear if they will pay the matching contribution to the national fund or state funds.

The sheer magnitude of this reorganisation may make the whole process cluttered. Unless this reorganisation is carried out with utmost precision and deliberation, it will lead to chaos. Besides, for small owners and proprietors, paying both the employer’s and employee’s contribution could be onerous, even if it is a compulsory saving. Paying one-third of the labour cost may disincentivise the small entrepreneurs that form a majority of the informal sector, thus affecting the overall compliance rate.

Problems in Categorisation

The code intends to link the member’s social security with their income. There are four different provident funds and pension schemes for members having an income more or less than four different thresholds, and contributions will subsequently get determined. Under the code, the employees are classified into four socio-economic categories—Sections I, II, III, and IV—in decreasing order of economic status. A similar logic is applied in increasing the administrative charges from the current 0.65% under the act to 5% of the total contribution under the code for self-employed workers and owner-cum-workers who earn more than the income ceiling. In place of sharing the burden for those representing the informal sector or maintaining similar rates, the government’s initiative of increasing administrative charges will prevent self-employed workers from revealing their true income for the purpose of the code. While employees as well as non-employees (that includes self-employed and owner-cum-workers) belonging to Section IV have been exempted from paying contributions, employees from Sections I, II and III will be required to pay 12.5% of the wage or wage ceiling, whichever is less. Non-employees from Section III will pay 20% of the national minimum wage, and non-employees from Sections I and II will pay 20% of monthly income or wage ceiling, whichever is less, or the national minimum wage, whichever is more. Will it be easy for the government to get the exact income figure from participants in the informal economy?

While the jigsaw was formulated to plug the holes because of differences between “wage” under the act and the Minimum Wage Act, 1948, it may create bigger loopholes, and advance opportunities for employers who intend to reduce their financial burden. For example, 17.5% of the wage as the employer’s maximum contribution may give rise to serious accounting malpractices. Employers may choose to keep the “monthly wage” under the code lower than the minimum wage. The situation may be worse than the current one where employers get involved in accounting malpractices to maintain provident fund wage (under Section 6 of the act) as not only less than the statutory minimum wage, but even less than half of the CTC to lessen their burden.

As per the code, the employee’s contribution in the organised sector shall be 12.5% of the wage or monthly income, whereas contribution in the unorganised sector, self-employed units, and households employing domestic workers shall be 12.5% of the wage for employees, 20% of the monthly income for the self-employed, and 12.5% of the monthly income for owner-cum-workers in the case of the wage or monthly income being greater than or equal to the wage ceiling. Contributions shall be 12.5%, 20%, and 12.5% of the minimum wage for employees, self-employed workers, and owner-cum-workers, respectively, in case the minimum wage is less than or equal to the wage, or monthly income is less than or equal to the wage ceiling. However, if the monthly income is less than the minimum wage, then neither employees, nor self-employed workers or owner-cum-workers in the unorganised sector shall have to pay their contribution. Although the minimum wage is set as the lowest threshold, this jigsaw may promote accounting malpractices as well since minimum wage, monthly income, and wage ceiling offer three different values, and one who intends to evade regulations would conveniently manipulate the accounting standards to record a value for each of the three that would lessen the burden. Interestingly, the monthly wage can still be lesser than the minimum wage. This corroborates that “monthly wage” under the code is not in harmony with “wage” under the proposed Wage Code. If those who drafted the code intended to keep the contribution as a percentage of maximum amount that one is legally entitled to receive or earn, then a greater parity between this code and the Wage Code is needed.

Although increasing the burden of personal contribution to 20% for non-employees would lead to compulsory savings, its implementation remains doubtful. First, the apex bodies do not have representatives of non-employees’ collective, and it is doubtful if the ones representing self-employed workers or owner-cum-workers would be selected from any national-level collective of informal sector workers. Second, even if advocates of the code try to offset the increased contribution with tax exempted compulsory savings (under Section 30.1 of the State Social Security, State Gratuity and the scheme funds are brought within the ambit of the Income Tax Act, 1961) for low-income non-employees, contributing one-third of their income would be a daunting task, and hence impractical. Third, a common threat not specific to non-employees per se is related to risks involved with fund management vis-à-vis members’ gain. As the code enlarges the scope of investments by proposing that contributions towards provident funds can be invested in equities up to an extent of 15% to 25% of the corpus, and be made available in case of providence, this higher risk from equities may impede members from contributing a bigger share of their income. Fourth, if non-employees form the major chunk of informal sector workers, the code may appear to majority participants in the informal sector as one more scheme launched by the government without a concrete plan of execution, unless a national database of self-employed workers and owner-cum-workers is in place.

Auditing and Inspection

While the provisions related to inspection have been omitted as per the amendment to the act, the code reintroduced it with few changes such as empowering the commissioner to not disclose the criteria and parameters for inspection. However, all matters related to social security have been unified into one code. Hence, the tribunal under the act loses its relevance. Instead, “Appellate Tribunals” constituted under the code shall hear appeals on matters such as gratuity, provident fund, and pension. This merger may affect speedy redressal of grievances. Instead of many courtrooms, the single office of judiciary may create a larger backlog of cases than the present condition.

The SSO, as per the code, shall maintain accounts of expenditures and incomes in a manner as prescribed by the central government, after consultation with the Comptroller and Auditor General of India (CAG). Audit expenses to be incurred by the CAG shall be payable by the SSO or establishment or Intermediate Agency, while, under the act, these expenses are paid by the Central Board. A functional change vis-à-vis management of accounts by distributing rights and privileges between three different organisations—that is, the SSO, establishment, and intermediary agency—indirectly brings additional expenses on the establishment and intermediary agency in particular. Hence, it raises questions regarding the proposed system’s sustainability in the long run.

Currently, the act allows establishments, classes of establishments, or classes of employees from an establishment to seek exemption from provident funds, pension schemes, and employee depository linked insurance. On the face of it, the code has not made a remarkable departure from the existing system, except for the power to exempt, which has shifted from the appropriate government under the act to state governments under the code. However, nitpicking helps bring to the fore a number of slighter changes that from a functional point of view appear trivial, but have larger implications. For example, under the code, no establishment shall be provided exemption or allowed to have an alternate mechanism unless it employs 100 employees and can establish it as a covered establishment under the code without any violation for a continuous period of five years. It means that small or new establishments would never be able to have their own trusts to manage provident funds, if they want to skip the bureaucratic tangles. Besides, the clause “complied as a covered establishment” is ambiguous since there is no trace of what constitutes as compliance in the code. In addition, when the code has provisions of imposing penalties on exempted establishments too (Section 96.2 of the code) when such establishments contravene or make defaults in complying with provisions of the code, the above provision appears controverting or redundant, to say the least. Restricting exemptions to a small section of establishments may thwart employees in small establishments from claiming better benefits than what is on offer under the code.

Provisions on exemptions are not specifically laid down for provident funds or pension, but are written for all schemes related to social security which include gratuity. Therefore, the precision goes awry. The code seldom emphasises weighing contributions vis-à-vis benefits while considering appeals for exemption, which was a crucial point noted by the lawmakers under Section 17 of the act. Rates of contribution from employees should not be more than the stipulated rate while seeking exemption, which is not explicitly mentioned in the code. Likewise, the circumstances that would lead to the cancellation of exemption are elaborated on in more detail in the act as compared to the code. The clear distinction between exemption from pension schemes and the provident fund managed under the code is another aspect that was downplayed by those who drafted the code, although every employer understands it well that the criteria to be met for seeking exemption from two different schemes are different and the elaborate account is removed. This may cause abstruseness, as a fair degree of ambiguity is present even with respect to the concerned authorities who will exempt establishments and the ones who will offer exemptions to individual employees or a class of persons employed in establishments.

Conclusions

Overall, the changes discussed above perceptively imply major reforms, symptomatic of inclusivity instilled through the code, but an in-depth analysis unveils something different from what first meets the eye. Is there anything significant other than alterations of taxonomy and changes in nomenclature, to say the least? For example, replacement of the word “member” in the act by “covered worker” under the code hints towards someone who is completely ensured and entitled to many other benefits under the code. But, this change is obvious since multiple laws (including the law on gratuity) are codified into one.

The “cosmetic changes” brought in through the code are suspected to add to existing confusion. Multiple functioning units primarily from the states have limited freedom since they form part of a big web of competing power sources headed by the National Council. Autonomy, presently enjoyed by bodies such as the EPFO, Central Board of Trustees, and the Central Board, is curtailed. Instead, excessive power is offered to the executive arms of the state. The creation of state boards alongside having a tall hierarchy of power distributed unevenly at the centre is unnecessary.

From a careful reading of the provisions on exemption, it is clear that the unification of laws into a code would weaken the legal doctrine by destroying the comprehensibility of a law that is being squeezed into the code. The effectiveness of sheer consolidation is doubtful as the implementation of the code will be a challenge looking at the vast coverage of beneficiaries with minimal focus laid on the creation of systems to manage a huge number of accounts. To conclude, the code is highly ambitious, and is in dire need of a reality check concerning its genuine implementation. Simplification may squeeze the existing provisions in laws to such an extent that nuances are overlooked, leading to ambiguity at every step of implementation. A new labour code should improve the lives of informal sector workers, and not leave them in the lurch with its ad hocism and tokenism.

References

Ahluwalia, M S (2002): “Economic Reforms in India since 1991: Has Gradualism Worked?” Journal of Economic Perspectives, Vol 16, No 3, pp 67–88.

Financial Express (2017): “Labour Reforms Get Going as Maharashtra Joins Rajasthan, Madhya Pradesh, Haryana, Others,” 6 May, viewed on 17 June 2019, https://www.financialexpress.com/opinion/labour-reforms-get-going-as-maharashtra-joins-rajasthan-madhya-pradesh-haryana-others/656350/.

Kohli, A (2006): “Politics of Economic Growth in India, 1980–2005,” Economic & Political Weekly, Vol 41, No 14, pp 1251–59.

Ministry of Labour and Employment (2019a): “Labour Law Reforms,” Government of India, New Delhi, https://labour.gov.in/labour-law-reforms.

— (2019b): “Draft Labour Code on Social Security & Welfare,” Government of India, New Delhi, https://labour.gov.in/draft-labour-code-social-security-welfare.

Sengupta, A (2018): “BJP State Governments Push Labour Law Changes,” Newsclick, 18 May, viewed on 17 June 2019, https://www.newsclick.in/bjp-state-govts-push-labour-law-changes.

Updated On : 12th Jul, 2019

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