Explained: Impact of Labour Codes on IT/ITes Companies

 

Animay Singh
Simpliance COE

Biography

Madhu Damodaran
Simpliance COE

Biography

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Labour Codes on IT/ITes Companies

Introduction

Under the existing scheme of labour laws in the country, there have often been doubts over whether particular laws are applicable to IT/ITes companies. For example, the question of whether the Industrial Employment (Standing Orders) Act is applicable to IT companies. Furthermore, there has been a concerted effort by several State Governments to bring IT/ITes outside the scope of certain laws to promote investment and ease of doing business. The new labour codes have introduced a plethora of reforms towards the same objective.

In this article we shall analyze the impact of each labour code on the IT/ITes sector and provide key insights on the same. The compliance changes that will have to be made will also be examined to provide a holistic view. Recommendations provided will be specific to the IT/ITes sector and are subject to change as the Rules relating to the labour codes are still in the draft stage.

Code on Wages, 2019

The Code on Wages is the labour code that has subsumed laws relating to payment of wages, bonus, minimum wages and equal remuneration. An impact analysis of the same on the IT/ITes sector reveals the following:

  • The definition of wages under Section-2(y) has a broad set of implications relating to salary structure, payroll processes and computation of statutory benefits. Our earlier blog studies the Impact of the Definition of Wage on Salaries and Payroll and provides recommendations for the same. However, for the sake of clarity, its effect can be summed up as follows:-

  1. Fluctuations in salaries of personnel earning large amounts through allowances/emoluments/bonuses (year-end/performance)

  2. Increase in statutory contributions in cases where fluctuations occur

  3. Possibility of skewed gratuity payments due to large sums earned in last month of employment

  • Section-17(2) of the Code on Wages requires wages payable to an employee to be paid within two days of removal, dismissal, resignation, or retrenchment. This will require exit formalities and HR processes to be completed expeditiously and for dues to be settled within the prescribed period. It is important that companies take note of this and make the necessary changes to their internal processes.

  • Section-14 of the Code on Wages requires employees drawing a minimum rate of wages to be paid double the same for hours worked in excess of normal working days. In other words, the overtime rate shall not be less than twice the normal rate of wages.

Code on Social Security, 2020

The labour code that subsumes relevant Central labour laws relating to provident fund, employees’ state insurance and other statutory benefits is the Code on Social Security. An impact analysis of the same on the IT/ITes sector reveals the following:

  • The proviso to Section-53(2) mandates payment of gratuity to fixed term employees. It reduces the continuous service requirement of five years to one year in cases of fixed term employees. While this is not explicitly clear from the language under the Code on Social Security, it becomes clear under the Industrial Relations Code. We shall examine the same in the subsequent section.

  • Chapter-IX of the Code on Social Security introduces social security for gig, platform, and unorganized workers, respectively. Rule-51 of the draft Central rules of the Code on Social Security provide clarity on how aggregators can pay contributions towards their gig and platform workers. While this may not impact most IT/ITes companies it is a significant concern for those employing freelancers in consultative, development, design etc. capacities

  • Section-67 of the Code read with Rule-38 and 39 under the draft Central Rules provide for the law relating to creche facilities. Every establishment with fifty or more women employees shall provide/maintain a creche facility. The facility can either be located within the establishment or at an appropriate distance from the establishment such that it is accessible to women employees, including those working from home. A common creche facility of the Central/State Government, municipality, private entity, NGO or group of establishments who pool resources to set up a common creche is another option given to employers.

Industrial Relations Code, 2020 

The labour code that subsumes existing Central laws relating to industrial disputes, trade unions and conditions of work in industrial establishments (standing orders) is the Industrial Relations Code. An impact analysis of the same on the IT/ITes sector reveals the following:

  • The definition of industry under Section-2(p) has been revised to bring it in consonance with the Supreme Court’s decision in Bangalore Water Supply & Sewerage Board vs. A. Rajappa. The result of this is that IT/ITes will now be considered an industry and thus will come under the definition of industrial establishment or undertaking as per Section-2(r) of the Code.

  • Thus Section-3 and 4 of the Code will become applicable to IT/ITes establishments. The former requires industrial establishments with 100 or more workers to constitute a Works Committee as required by an order of the appropriate Government. It is the duty of the Works Committee to promote measures that facilitate amity and good relations between the employer and workers. To that end it is mandatory that the number of representatives of workers in the Committee cannot be lower than those of the employer. The total number of members in the committee shall not exceed twenty.

  • The latter i.e., Section-4 requires every industrial establishment employing 20 or more workers to have one or more Grievance Redressal Committees. The Committee’s main function is to resolve disputes arising out of individual grievances. It shall consist of an equal number of members representing the employer and the workers, the total number shall not exceed ten. IT/ITes companies would be required to establish a Grievance Redressal Committee when the Codes are brought into force.

  • Chapter-III of the Code relating to trade unions is now applicable to IT/ITes companies. Trade unions with at least 10% of workers or 100 workers whichever is less, engaged or employed in the industrial establishment or industry can apply for registration.

  • Section-14 explains recognition of a Trade Union as the negotiating union as well as creation of a negotiating council in case multiple registered unions exist. It provides that where there is only one Trade Union of workers registered then the employer shall recognize the same as a negotiating union. Whereas if more than one registered Trade Union of workers functions in an industrial establishment, then the Trade Union having 51% or more workers on the muster roll of that industrial establishment shall be recognized as sole negotiating union.

  • If more than one registered Trade Union of workers cannot meet the 51% threshold then there shall be a negotiating council consisting of representatives of Trade Unions that meet the above criteria. Those Trade Unions that enjoy the support of at least 20% of the total number of workers on the muster roll shall be entitled to one representative for each twenty percent.

  • Due to the above-mentioned inclusion of IT/ITes in the definition of industry and therefore industrial establishment, Chapter-IV relating to Standing Orders also becomes applicable to them. Thus, IT/ITes companies would have to maintain a set of model standing orders. Although it has not been released yet, it is likely that the Central Government will release a set of specific Standing Orders for the IT/ITes sector.

Occupational Safety, Health and Working Conditions Code, 2020

The labour code that subsumes existing Central laws relating to factories, contract labour, building and other construction work and other aspects such as mines, docks, sales promotion employees etc. is the Occupational Safety, Health and Working Conditions Code (OSWHC Code). An impact analysis of the same on the IT/ITes sector reveals the following:

  • Every establishment in which fifty or more contract labour are employed are covered by Chapter-XI of the OSWHC Code. The Chapter provides for two types of licenses to engage contract labour, the first being a work specific licence that is issued electronically. A work specific licence is valid only for the concerned work order whereas the second type of licence is a national licence valid for a period of 5 years in multiple establishments across the country. Thus, IT/ITes companies with pan-India presence can apply for the latter to reduce their compliance burden significantly.

  • Every establishment employing 500 or more workers shall constitute a Safety Committee whose tenure shall be 3 years. The Committee shall consist of a senior official of the organization as Chairman, a safety officer who shall be the Secretary, a medical officer, and a representative each from the production, maintenance, and purchase departments

  • There is also a possibility of conflict between the provisions of the OSHWC Code and the respective State’s Shops and Establishments Act as there are provisions relating to working hours, annual leave, weekly holidays etc. Thus, the implementation of the OSHWC Code by State Governments introducing Rules will be essential in determining whether this conflict materializes or not.

Conclusion

The above sections provide insight into the various changes brought about by the new labour codes and their effect on IT/ITes companies. One overarching aspect that IT/ITes companies need to be aware of is the difference between employees and workers under the Code. While it may seem like the Codes use the terms interchangeably, the terms are employed to define the scope of the respective Codes. For example, the Industrial Relations Code, 2020 applies largely to workers whereas the Code on Social Security, 2020 uses the term employee for the most part.

Employee has a wider import whereas worker is limited by the capacity an individual is employed in, as well as a wage cap of Rs. 18,000 per month under the Codes uniformly. Thus, IT/ITes companies need to identify the set of individuals who are employees and those who are workers to effectively alter their HR policies to bring them in consonance with the new labour codes.

If you have any doubts or queries regarding the changes being brought in by the new labour codes on your establishment, drop your thoughts in the comments below.

Disclaimer: This blog is meant for informational purposes and discussion only. It contains only general information about legal matters. The information provided is not legal advice and should not be acted upon without seeking proper legal advice from a practicing attorney.
Simpliance makes no representations or warranties in relation to the information on this article.

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5 thoughts on “Explained: Impact of Labour Codes on IT/ITes Companies”

  1. If more than one registered Trade Union of workers exceeds the 51% threshold then there shall be a negotiating council consisting of representatives of Trade Unions that meet the above criteria. Those Trade Unions that enjoy the support of at least 20% of the total number of workers on the muster roll shall be entitled to one representative for each twenty percent.

    There seems to an error here. Recheck. In a multi union set up, only if none enjoy 51% support, then need of forming negotiating council would arise

    1. Hi,
      The article clearly mentions the phrase ‘cannot meet’ as is provided under Section-14(4) of the Industrial Relations Code, 2020.

      Regards
      Animay

  2. It/ites are not a separate species either among employers and employees, and labour laws shld apply to them as it does for other industries, this question of “does this apply to it/ites or any exemption to it/ites” is on a wrong footing. The honeymoon period shld end for it/ites in terms of exceptions and exemptions.

    1. Hi,
      That is a very valid point, labour laws are enacted to ensure that there is a balance between employers and employees and to that end your point is quite relevant. Thank you for your contribution.

      Regards
      Animay

  3. This is a very informative and helpful post, very honest and practical advise. Thank you so much for a detailed post. It’s very helpful for all .Specially this complete information will be helping to all. Thanks!

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