Labour law reform is considered as a key requirement for creation of new jobs as well as greater formalisation of existing jobs in India. In March this year, the Ministry of Labour and Employment brought out the draft social security code to amalgamate several Central labour laws and extend employment security to all workers. In this article, Sharmila Kantha discusses the positive features and practical aspects of the legislation.

India’s labour regulations have been cited as a key deterrent to job creation in the formal sector (Pachouri 2014). Of the country’s 473 million workers as of 2011-12, over 90% are informal workers, without recourse to social security such as pension, medical care, or other benefits (International Labour Organization (ILO), 2016).

There are as many as 44 Central laws and numerous State laws governing employment. Many of them are outdated, and confusion prevails over issues such as definitions of common terms like ‘worker’ and ‘wages’. Moreover, this plethora of laws and regulations relates mostly to formal sector enterprises − that is, manufacturing enterprises employing 10 or more workers and using electricity, or employing 20 or more workers and not using electricity − registered under the Factories Act, 1948.

Reform of labour regulations has been considered to be a key requirement for creation of new jobs as well as greater formalisation of existing jobs. As per the Economic Survey 2015-16, medium-sized manufacturing firms in the formal sector identify labour regulations as a significant barrier to growth. The Economic Survey for 2016-17 suggests that labour law reforms related to workers’ social security could create more jobs in the formal sector.

India’s draft social security code

As part of the overall labour reform imperative, the Ministry of Labour and Employment has undertaken a laudable initiative to amalgamate the 44 Central laws into four labour codes relating to wages; industrial relations; social security and welfare; and safety, health, and working conditions. In March this year, it brought out the draft Labour Code on Social Security and Welfare, which aims to regulate conditions for retirement, health, disability, and other forms of security for all workers, including those in the unorganised or informal sector. The code is meant to subsume about 15 labour laws, including Employees’ Provident Fund Act, Employees’ State Insurance Act, Maternity Benefit Act, and so on. It, thus, converges all benefits under a single umbrella legislation.

The code would establish a National Social Security Council of India to monitor the implementation of the various programmes under it, and promote universalisation of social security. The code calls for a social security fund and a gratuity fund in each state, and states would have the authority to determine the contours of their respective funds. There would also be central and state boards of social security to administer scheme funds.

Coverage

For the first time, the proposed regulation extends to the entire workforce and covers all informal sector workers. It includes farm-owners, agricultural workers, home-based workers, domestic workers, owner-cum-workers, migrants, and in fact, any person earning any income in cash or kind over the minimum wage². This is a most commendable initiative, but the real challenge may lie in actual implementation of the code.

The code’s coverage is rather sweeping and it does not seem to have any exclusion². For example, family members earning incomes may be already covered under certain schemes related to the head of the household. The code does not appear to give an option to those who may not need to avail of social security through contributions to government funds, and may also lead to forced double benefits for certain types of workers.

Definitions

A positive feature of the code is that it clearly defines the terms ‘worker’, ‘self-employed worker’, and ‘employee’. For example, it defines a wage worker as a person employed for remuneration in cash or kind, whether by an employer or contractor, or as home-based, temporary, casual, or migrant worker.

However, the draft social security code and the draft code on wages have different definitions for ‘employee’, ‘wages’ and other terms, which may lead to continued lack of clarity in labour regulations. The four labour codes should have the same definitions.

Registration

The government aims to provide all workers with a portable³ identification number, the Vishwakarma Karmik Suraksha Khata (VIKAS), linked to Aadhaar⁴. As per reports, the government would institute ‘unorganised workers identification number’ (UWin card). It is not clear whether VIKAS or UWin will be the designated portable card, or if both will be used. The VIKAS number would register workers under different categories, but these are not yet identified⁵.

Non-employees or self-employed persons would also need to register themselves. Thus, every thela-wala⁶ , itinerant construction worker, dhaba⁷ cook, or truck attendant earning more than the minimum wage would come under the ambit of the code. High-income earning persons too would come under the mandatory provisions of the code. If a worker is employed in multiple entities, as, for example, a cook working part-time in several households or a worker undertaking deliveries for different shops, s/he must choose the employer through which s/he wants to register, and all other employers would need to be informed. No entity, including households, can employ an unregistered worker, and must register the worker within a stipulated time.

For informal sector workers, such as daily wage workers or agricultural labourers, who often keep shifting in and out of occupations, and are sometimes self-employed, and at other times working wherever work is available, compliance with this would be a huge challenge. It would also pose a challenge for employers to maintain records of the daily payments made to different workers over a period of time. As per the code, all entities are expected to maintain and furnish regular records of workers employed and wages and social security paid, which may be a stretch for one-person establishments and households.

Employers and entities employing more than the threshold number of workers must also register themselves, and the code provides for state governments to stipulate that smaller entities also register. The definition of ‘entities’ includes households employing workers. If the code aims to ensure that domestic workers are covered by social security norms, then future stipulations may require households to register as employers. The number of such workers is estimated at anywhere between 3.9 million and 10 million, and of late, their rights have been under discussion as they are not covered by any regulations.

However, registering each household which employs domestic workers may turn out to be difficult, while ensuring that they adhere to the norms of the code could be near impossible. The solution to provide much-needed protection to these workers may lie elsewhere and requires careful thought, rather than clubbing them with enterprises.

Worker contribution

Now comes the most interesting part of the social security code. Each and every worker and entity (including households) as defined in the code would need to contribute towards the social security fund to be set up by the state governments. The ceiling for contributions by employers is 17.5% of the wages, with certain establishments employing more than a threshold number of workers required to pay an additional gratuity at 2%. In the organised sector, workers would need to pay 12.5% of the wage or monthly income.

This requirement is extended to workers in the unorganised sector in the code, with the contribution stipulated at the same level of 12.5% of wages or monthly income for employees earning more than the minimum wage, and 20% for self-employed workers. For the owner-cum-worker category, the person would pay 17.5% in his capacity as owner and 12.5% in his capacity as worker , both for own self. Thus, a tailor operating out of home may find himself/herself setting aside 30% of income towards social security − quite a sizeable proportion. As per the 6^th Economic Census, employment in own-account establishments, that is, owner-cum-worker establishments, was almost 42 million or 72% of all establishments for 2013-14.

In general, it is difficult to believe that all the informal sector workers earning more than the minimum wage would be amenable to paying 12.5-30% of their incomes towards social security. For those at the margins, earning slightly more than the minimum wage, contributing to social security would mean that their disposable income would drop below this floor. Often, such workers may actually be below the poverty line if they are the sole breadwinners in their families.

This section of the code provides for the state government waiving such contributions for a maximum of five years for workers that it may identify at its discretion. It also provides for welfare funds to be set up for specific classes of workers (including domestic workers), and the central or state governments could make contributions to these funds. The code further empowers the state governments to pay contributions on behalf of specific workers, or refund contributions made by employers.

This is a welcome provision, provided the welfare funds are used to exempt workers earning below a certain threshold from payment. Such funds may also be deployed in employment-creating measures. For example, the Union Budget of 2016-17 proposed that the government contribute 8.33% of wages to Employees Pension Scheme (EPS) for new workers earning less than Rs. 15,000 for three years. In the garments and made-ups sector, the government has permitted workers earning less than Rs. 15,000 to opt for not contributing to EPF. The social security code as it stands currently could potentially extend such employment-generating incentives to include all sectors.

The Economic Survey for 2016-17 notes that employees with less than Rs. 20,000 salary per month end up paying 45% of the amount to statutory deductions including Employee Provident Fund Organisation, Employee State Insurance, and so on, and should have more options for social security when joining their first job. Extending this compulsion for informal sector workers with irregular incomes might prove to be an unbearable burden for them.

Way forward

Other parts of the code provide for maternity benefits, medical benefits, and accident compensation. However, unemployment benefit is not mentioned in much detail except to provide for setting up of an ‘unemployment benefit scheme fund’ that would subsume the existing unemployment benefit scheme of the Employees’ State Insurance Act, 1948, which is barely in operation⁸.

At this stage of its development, India needs to move towards greater flexibility to employers in employment decisions in order to build its competitiveness in a fierce global arena. A strong social security system could best enable this by offering protection to workers from temporary unemployment periods. The code does not appear to offer this provision.

A universal social security system for workers is an ambitious aspiration and a laudable initiative, but the government would need to provide this through its own contributions for poorer workers. The role of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGA) may also need to be reworked in this context. Rather than offering guaranteed employment for 100 days to those who seek it, the MNREGA allocation could be deployed to provide benefits for all workers, including for unemployment, medical insurance, or retirement benefits.

The sweeping universal coverage of mandatory registrations and contributions would need to be relaxed in practice for poorer workers so that the country can move towards higher job generation with adequate social security. Earlier also, we have seen legislations that, though well-intentioned, were simply impractical to administer. For example, the Land Acquisition Act outlined an acquisition procedure of almost five years. The draft social security code should take care not to fall into the same category.

Notes

1. As per the draft wages code, minimum wages will be set by the central government below which state governments will not be permitted to set wages. It is believed that the minimum wages will be raised substantially from current levels (Ministry of Labour & Employment, 2017). It may be assumed that workers earning less than the minimum wage would be covered under poverty-alleviation measures.
2. Section L of the code covers exemptions which may be granted by state governments to establishments (employing more than 100 persons) or persons providing more than the minimum provisions of the code. Such exemption is to be provided for up to three years at a time, and detailed records are to be furnished to government .
3. ‘Portable’ refers to a unique number linked to the individual worker that can be used for all work-related purposes, regardless of place of employment.
4. Aadhaar or Unique Identification number (UID) is a 12-digit individual identification number issued by the Unique Identification Authority of India (UIDAI) on behalf of the Government of India. It captures the biometric identity – 10 fingerprints, iris and photograph – of every resident, and serves as a proof of identity and address anywhere in India.
5. The current legislation provides for different categories of workers such as those engaged in manufacturing of beedis (Hindi for unfiltered cigarettes), audiovisual sector, limestone/dolomite/mica mining, construction, and so on.
6. Thela- wala is Hindi for cartpusher .
7. Dhaba is Hindi for roadside eatery.
8. The Rajiv Gandhi Shramik Kalyan Yojana was introduced in 2005 and currently provides 24 months of 50% payment to eligible workers who have lost their jobs due to retrenchment or closure of factory . By 2009, it had assisted less than 4,000 workers (Ministry of Labour & Employment, 2009).

Further Reading

Employee State Insurance Corporation (2017), Information on Benefits.

International Labour Organisation (2016), ‘India Labour Market Update’, ILO Country Office for India, New Delhi.

Ministry of Finance (2017), ‘Economic Survey 2016-17’, Government of India, New Delhi.

Ministry of Finance (2016), ‘Economic Survey 2015-16’, Government of India, New Delhi.

Ministry of Labour & Employment (2017), ‘Draft Labour Code on Social Security & Welfare’, Government of India, 16 March 2017.

Ministry of Labour & Employment (2017), ‘The Code on Wages Bill 2017’, Press Information Bureau, Government of India, 5 September 2017.

Ministry of Labour & Employment (2009), ‘Rajiv Gandhi Shramik Kalyan Yojana’, Press Information Bureau, 15 July 2009.

Ministry of Statistics & Programme Implementation (2016), ‘All India Report of Sixth Economic Census’, Government of India, 31 March 2016.

Pachouri, A (2014), ‘Labour Regulation and Job Creation in India’, End Poverty in South Asia, The World Bank blog, 20 August 2014.