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It’s time to bite the bullet

“The view of this author is that these orders / advisories are illegal.”

Covid-19 has shut down industries across the world leaving millions unemployed and destitute. Surely, they cannot be left to the mercy of market forces when there is no market. We need to find solutions for them as also for almost everyone else who has suffered as a consequence. One of the responses of our Central and of most State governments has been to issue orders / advisories under the Disaster Management Act (DMA)/ Epidemic Diseases Act (EDA) directing employers to continue to pay salaries of their employees, even of casual and daily wagers. Those who have disobeyed these advisories have been threatened with prosecutions; some have had FIRs registered against them, throwing employers into a tizzy. Some employers have filed petitions before the Supreme Court challenging these orders, but relief has evaded them so far. The view of this author is that these orders / advisories are illegal. However, quite apart from their legality, they are also the wrong remedy. Here are the reasons why, as also some alternatives.

Loss of business confidence is one of the worst things that can happen to an economy that seeks to attract FDI. A change in policy whereby businesses are burdened with a substantial additional liability only to meet an immediate exigency which is not of their making, and which exigency has also impacted them drastically, sends a message to potential investors that political expediency would trump business sense in this country and hence, their investment might not be safe. Even as it dissuades new FDI, this policy would also bankrupt or significantly weaken the financial strength of the existing large industrial companies who provide the backbone on which smaller industries are able to exist. When the lockdown is lifted, they will find it more difficult to pick up the pieces and start afresh. Furthermore, about 80% of those employed in our country are in the informal sector. Hence, this measure would at best give relief to the 20% who already enjoy better conditions of service than the vast majority, that too at the expense of the very employer who is able to give them those service conditions and whose survival alone can ensure future employment. [As we are already witnessing, large segments of the informal sector are unlikely to obey these orders.] This amounts to killing the goose that lays the golden egg. The government has made a bad call and needs to change course ASAP.

Here I will not discuss the reasons why these orders are illegal. That is a rather long discussion that would also involve a fair bit of legalese and deserves its own space. For the purposes of this article I will merely examine where the legal battles arising out of them are headed and why these must be avoided and what kind of alternatives might be explored.

The Supreme Court is not the court of original jurisdiction in such matters and, though it has issued notice on many such petitions, is unlikely to decide them. It is notable that as of now it has not granted relief in any matter. Thus, by the time these petitions come up for final hearing, the lockdown would probably have been lifted and they will then not address the question of past arrears but leave it to the parties to litigate over before relevant fora. [Or, the Supreme Court may not even decide these cases on the ground that in the absence of exercise of the power of lay-off, the question was moot.] The effect of that would be that thousands of prosecutions and money claims would be filed in local courts all over the country against managements that disobey these orders. Many managements will challenge these prosecutions and claims at the very threshold by filing petitions before their respective High Courts contending that these orders were illegal and are not required to be obeyed. These will eventually wind their way up to the Supreme Court. Since in addition to the orders of the Central government there are several orders of different State governments, some of which cite the DMA while others cite the EDA while some don’t cite either, these will have to be separately decided. The “appropriate government” in some cases would be the Central government while in most cases it would be the relevant State government and whether an order of the Central government would apply to establishments under the State governments would be questioned. The facts specific to each case might also have a bearing on the outcome. This is evident from the simple fact that under the Industrial Disputes Act (ID Act) establishments employing less than 50 workmen are treated differently from those employing between 50 and 99 workmen which are treated differently from those employing 100 or more workmen. Some States have local amendments or local Acts that supplant or supplement the ID Act. Various judgments have examined whether such State Acts are complete codes or if the Central Act would apply where the State Act is silent on a given aspect. This is further compounded by the fact that what constitutes one establishment is often a matter of dispute as also the question who is a “workman”. Furthermore, the law in relation to those who are not “workmen” is different. In view of these advisories, (instead of terminating them or sending them on lay-off) some employers have directed their employees (both workmen and others) to go on compulsory leave despite the fact that there is no power under law to give such a direction. Surely some would challenge such orders also. Though many employers have the option to declare lay-off of workers, most of them have not exercised that option for fear of inviting prosecution and have, instead approached the Supreme Court (or some High Courts). Hence, even if they were to succeed on point of law, they may not be able to benefit thereby since they had not invoked the relevant provision. Consequently, multiple cases would have to be decided by the Supreme Court for the law to be known by the lower courts with sufficient clarity to be applied to individual cases. If the Supreme Court also considers equities between the parties, it will further complicate the law and leave a huge discretion with the lower courts that would massively increase the variables. If the Supreme Court rules that these orders were valid (or grants some relief to workers on grounds of equity), then the second round of litigation in all these cases will start, this time on merits / equities. Even thereafter, a large number of matters challenging the final orders of these courts will end up before the various High Courts. All this will cost a lot of time and money, increasing costs all around, thereby making our products uncompetitive in international markets while also delaying other commercial litigation and cause further suffering to an already suffering people. It would also sour relations between managements and employees leading to further disputes that would make it even more difficult to resume operations with full vigour for a considerable period.

This is hardly the time for the luxury of litigation over these matters. We need to find a quick way out of this mess in a manner that would be fair to all sides. This article addresses the question of how, we might quickly amend some aspects of our labour laws in a humane way so that we are able to fairly solve the current problem as also to give a solution for the longer term that gives a signal to industry so as to attract FDI. I will first address the immediate problem.

First of all, the government needs to clear the uncertainty that has been injected into the law by these orders and which could devastate the industrial landscape. Even without these orders the law was difficult enough for employers to find a reasonable resolution of the current problem without considerable financial damage. [I am not going into these complexities but there are many.] The government needs to find a fair solution to a situation which is not the fault of either party. In my view a possible fair solution would be for the government to offer to pay 25% of the prescribed minimum wages of all employees who have been in employment for 6 months or more, provided the management pays another 25% of their actual Basic + DA. (Perhaps the State governments could also be required to pay an additional 15-20% of the prescribed minimum wages.) The employer would have a window in which it would declare its intention to avail of this provision and would then pay the money to the employees up front and thereupon furnish proof of payment (both of these wages as well as of the previous 6 months) before he receives the refund (which would have to be time-bound). When the employers have so declared their intentions, the government would know the outlay it would have to make on this account. This would, naturally, have to be done by way of an enactment and, considering the urgency, first by an ordinance so that the present uncertainty goes away, and all parties are able to plan accordingly. This might even encourage many employers in the unorganised sector (where the records of employees are often fudged) and who might avail this option to avoid expensive litigation which could also result in a much higher liability. Once such employers (in the unorganised sector) have so declared these workers to be on their rolls, the workers would also gain a status that they might have lacked. Furthermore, in my view the casual and daily rated workers should not be within the scope of this provision (the law does not require the employer to pay them anything) and the government should find other ways to grant them relief. This would also extend to employees who do not fit into the definition of “workman”. Managements are not permitted under law to lay-off such employees and they also cost them a lot more. These persons are in a better position to withstand a reduction in emoluments and must also be required to do so.

I now come to what the government needs to do now to immediately simplify the law so as to attract FDI.

Chapter VB of the Industrial Disputes Act (ID Act) requires factories (as well as mines and plantations) that employ 100 or more workmen to obtain the prior permission of the government if they wish to retrench or lay-off workmen or to close down the undertaking. In actual experience such permissions are rarely granted. Managements are thus forced to negotiate the terms of separation with their workers who, naturally, drive a hard bargain, often leaving little for the management to take away. Hence, managements often prefer to allow the enterprise to go sick, even as they siphon off the money into other ventures. Now, because of the Insolvency and Bankruptcy Code (IBC), some of these enterprises are able to shut down and have their assets sold and used to pay off the workers before there is a complete erosion of its net worth. This benefits nobody for even the workers merely receive their statutory dues and not the golden handshake they had hoped to negotiate, while the management is able to salvage little because the process has already been delayed much. What this author proposes is a higher payment for the workers at a time of the management’s choosing so that the management is also able to salvage something from its embers. More importantly, by placing an upper ceiling on the payments to the workers and doing away with the need for governmental permissions as proposed herein, the investor is able to know with certainty what it would cost him to unilaterally shut his venture down or to reduce his work force at a time of his choosing. At the same time, the workers are assured much higher separation benefits. It also provides lower and upper limits to the compensation that parties may expect, thereby also providing a framework for negotiations.

The ID Act requires an employer who wishes to reduce his workforce (whether by retrenchment or closure) to pay to his workmen (apart from the other retiral benefits) retrenchment compensation at the rate of 15 days’ wages for each completed year of service. In the event of retrenchment, he is also required to observe the principle of last-come-first-go (LIFO), thereby giving preference in service to employees who have been in service longer. It has already been noted that factories employing 100 or more workmen also require the prior permission of the government.

What is proposed is that the ID Act be amended to give an option to all employers to retrench workmen or to shut down regardless of

 

  • the activity in which it is engaged,
  • its size and
  • the LIFO principle;

but upon payment of enhanced compensation. This could be anywhere from 30 to 45 days’ wages for each completed year of service (in addition to other terminal benefits as per law). [Perhaps those to which Chapter VB applies could be required to pay 45 days’ whereas others could be required to pay 30 days’ wages.] Thus, the existing provisions would continue to apply, and the law would permit this as an option to the employer.

The enhanced compensation will lessen the pain of the worker who has been let go and will give the employer the opportunity to weed out the less productive or more problematic employees or to quickly shut down an unprofitable enterprise so that the resources can be used by someone else to start another venture and which also would need to employ people. (Hence, there would be no net loss of employment.) An employee who is paid such enhanced compensation would be prohibited from raising any dispute about his termination unless the challenge is on the ground that the payment is not in accordance with law. In the event of such a challenge, if it is found that the payment is short then the employer can be required to pay compensation multiple times the shortfall but if the payment is found to be correct, then the employee should receive the compensation that would have been payable under the general provision i.e. 15 days’ wages for each completed year of service. To this end, at the start of the litigation, the employee could be required to deposit the additional compensation in court and the employer can be required to deposit the possible penalty amount. This will reduce the frivolous litigation indulged in by all sides while ensuring the quick disbursal of the amount due to the employees and enabling the employer to return to his business.

We must accept the fact that in the post-Covid scenario there will be a number of closures. Hence, this opening needs to be provided to enterprises that might have to shut down or retrench workers. With the new requirements to maintain SD, existing establishments might in any case not be able to employ the same number of people. Such a provision would enable the quick closure of such units. At the same time, and in order to enable willing employers to continue to employ all their workers, the law also needs to be amended to permit them to engage workers in 3 shifts so that SD (which is now mandatory) can be better maintained. The management must be given absolute discretion to decide which employee works in which shift.

We also need to think ahead of how and where alternate employment facilities should be created. Currently the big cities are the places where workers converge for employment opportunities leading to congestion (making SD harder) as well as high real estate costs. The government must encourage the migration of industries to smaller cities and towns by creating the necessary infrastructure as also granting tax incentives. Establishments that close down now could use the proceeds of sale of their real estate to start new ventures in these smaller towns. This might also address the problem that many establishments are likely to face when large sections of the migrant workers fail to return after the lockdown ends because of their harrowing experience during the initial phases of the lockdown. Many of these persons might not rejoin the workforce unless they are able to find an opportunity closer to their towns and villages.

These are some of the steps necessary to instil hope in industry which has suffered not only due to Covid but also due to misplaced and illegal government directives. If these problems are addressed, industries might be able to restart and entrepreneurs may not be afraid to start new ventures on the scales we need to provide mass employment. It will also enable our industry to reach the economies of scale that are needed to compete in world markets.

There is no gain without pain. Even if these orders are not withdrawn, there will be some short-term mass unemployment because many employers will not obey them. It is better to do this without the unnecessary pain of the consequences of these orders being disobeyed. The government must tide over this period with innovative interventions. The workers who have been separated with these larger packages would also be better able to tide over this period or even to start their own small ventures. The other terminal benefits (PF, pension, gratuity) are not insignificant in the cases of those from the organised workforce. The rest of the government’s focus should be on those who are even more marginalised than these.

We have been presented with an unique opportunity to regain the ground we lost to China many years ago to be the factory to the world, for companies and countries around the world are waking up to the risks of having most of their manufacturing located in China and are seriously considering relocating substantial parts of their capabilities in other countries. India is an obvious choice and offers many advantages, but for several good reasons we have historically not been a preferred FDI destination, one of them being our archaic labour laws. No investor wants his venture not to succeed but nobody invests money if he cannot be certain of an easy exit if deemed necessary in his absolute discretion, and with known costs so that he can plan both his entry and his exit. This is even more so in the new technology space where, though the payoff in the event of success is extremely high, the chances of success are low. While it is true that the laws of many countries do not grant industry the unfettered right to exit or to reduce their workforce, it is also true that our labour laws are perhaps one of the most restrictive. In any case, we cannot hope to attract MNCs by merely citing the examples of other countries that have similar restrictions. We must also be mindful of the fact that at this time many countries would be making a determined push to attract the investment that will leave China and for which they will offer many incentives. We must offer a better alternative while also addressing the issues presented by this epidemic so that we are able to also preserve what we already had. The movement of industry out of China could occur rapidly. This opportunity will likely not come again in a generation. We must be brave and stop clutching to age-old methods that suited a command economy and reinvent a new future which reflects the confidence of a resurgent India. We are a young nation both in terms of our nationhood and demographics. We must play to our strengths and seek to capture a significant share of world manufacturing by enabling manufacturing on large, even gargantuan scales. There are many silver bullets. We must bite them now.

 

Asia Law Offices advised a major transnational strategic collaboration between its client, UAE-Based Pharmax Pharmaceuticals, and Swiss pharma major Acino Pharmaceuticals.

ALO represented Pharmax in the structuring and closure of entire transaction documents of the significant collaboration.

The collaboration framework extends to licensing, manufacturing, and supply of Acino formulations within the gastroenterology and the cardiovascular space throughout the Middle East and Africa.