By Priyanka Venkat
‘Hire and Fire’ contracts are set to gain traction among industries, following a recent announcement by the Union Government. The Union Labour Ministry has issued a draft proposal that allows all sectors to enter fixed-term employment contracts. Once implemented, companies will have the right to hire as per their need and let go of a large number of workers without requiring permission from the government.
‘Jobless growth’ has now become a common phrase used to describe the growth in the rate of unemployment in the country. As per estimates put forth by the International Labour Organisation, the total number of unemployed individuals in 2018 is expected to rise to 3.5%, higher than its earlier projection of 3.4%. While Modi recently tried to negate the claim of poor employment generation, the numbers say otherwise. As per the ILO’s latest report, the number of unemployed will increase to 18.6 million in 2018, from 18.3 million last year. There is, therefore, a need to explore whether the move to support such contracts would boost employment or deter it. Understanding the implications of this move requires a deeper understanding of fixed-term contracts. So, let’s go to the basics.
What does fixed-term employment imply?
An essential fixed-term employment contract is one in which a company hires an employee for a specific period. The nature of the job is temporary and the payment to the worker in such a contract is fixed in advance and is not changed till the contract expires. The employment contract also has a provision where the employers can terminate the contract before expiry on certain grounds.
To understand the changes that the government wants to bring about, let’s take a look at the Industrial Disputes Act. A common problem faced by industries is the need to downsize because of problems such as low-profit margins or a large accumulation of stocks, to name a few. So, that’s where the word retrenchment comes in. Companies lay off workers to reduce costs. This, however, opens up a new problem—what protects workers from being incessantly dismissed in the name of retrenchment, by companies that view them as just numbers on a sheet?
A closer look at the Industrial Disputes Act
To remedy this, conditions were laid down under the Industrial Dispute Act of 1947 to protect such workers. For instance, workers employed for a period of one year continuously cannot be retrenched without the company paying them retrenchment compensation, in addition to fulfilling other conditions provided in the act.
However, industries soon began finding these conditions burdensome on their payroll, especially seasonal industries that required additional workers only for a specific season or for a project.
To address these concerns, the act was amended in 1984. A sub-clause was introduced, which basically stated the situations in which workers will not be considered as retrenched. In other words, it refers to situations where they will not attract retrenchment protections. Now, this is where it gets interesting. As per the amendment, there are two situations where the worker will not be considered as retrenched. First, if the termination of the worker is a result of the contract not being renewed again on expiry.
Second, if the contract specifies the manner and method through which the worker can be terminated. Such an amendment can be highly misused by companies looking to save costs. Companies have an incentive to employ workers on a fixed term basis, rather than providing regular employment. This is exactly what happened. Euphoric at this amendment, companies began taking on workers on a contractual basis and then renewing the contract after very short gaps of one or two days. This was done to deceive authorities into thinking that these were now new contracts (not renewed on expiry) so as to not attract retrenchment provisions. The Supreme Court, in a ruling, stated that such contracts renewed in artificially short gaps of time are fraudulent.
What does the draft proposal entail?
Now, let us move back to the present. The draft proposal on the fixed term employment contract issued by the government is a part of the Industrial Employment (Standing Orders) Central (Amendment) Rules, 2018. As per the draft, companies can hire workers on a fixed term basis and can do so without the need of a contractor. There are two important differences between fixed-term contracts proposed now and those of the past. Firstly, the workers will receive benefits akin to those given to permanent workers. This makes them entitled to statutory benefits available to permanent workers, which includes the same work hours, allowances, and wages. Secondly and more importantly, the employers are not obligated to give any notice to workers on non-renewal or expiry of the contract, and consequently, not required to pay them for the same. The draft, however, also states that workers who have been employed for three months consecutively should be given a notice of 15 days, and those who haven’t will get the reason of being fired in writing.
Take a look at the draft rule. The draft rule subject to the Industrial Disputes Act says, “no notice of termination of employment shall be necessary in the case of temporary and badli workmen; and no workman employed on fixed term employment basis as a result of non-renewal of contract or employment or on its expiry, shall be entitled to any notice or pay in lieu thereof, if his services are terminated”.
Autonomy to states
This is not all. The Union Labour Ministry also gave its approval to some states to amend the Industrial Disputes Act. Rajasthan, Assam, and Madhya Pradesh have amended the act and raised the threshold limit for which the government has to be notified for retrenching workers or shutting down the factory, from 100 to 300 workers. Maharashtra is also looking to pass such legislation soon. This move by the Centre is an important indicator of how the government plans to implement such a labour reform.
To get the ball rolling, the Centre is encouraging states to implement such reforms to bypass the opposition that it would face in Parliament. Bringing about the reform through states, especially considering that most state governments are on board with the reform (BJP is in power in 19 out of 29 states), makes it easier and quicker to implement such a move. A senior labour ministry official in an interview with The Economic Times said, “Moreover, even if the proposed legislative changes get passed in Lok Sabha, they are stuck in the Rajya Sabha where the government still does not enjoy a majority.” He said that considering that it is hard for the Centre to make these amendments, it is supporting states in making these amendments by intervening at the chief ministerial level.
The implications of the move
The reason put forth by the government for such a reform is to improve the ease of doing business in the country and consequently increase investment. Industries have welcomed this move. They believe it to be a good situation for both employers and workers. Employers get the freedom to hire workers as per their need, thereby reducing costs as they require workers only for a definite period or for projects of a fixed duration. Proponents say that the workers are protected too, as the middleman (contractors) is eliminated, and workers receive benefits given to permanent employees.
However, everyone isn’t too convinced about the move and it is likely to face a backlash from trade unions. Earlier in 2016, the government had amended the rules to include fixed-term employment in the apparel manufacturing sector. It did this despite strong opposition from trade unions. It backed its move by highlighting the seasonal nature of the industry, and consequently how such a move would increase hiring of workers through the fixed term arrangement.
However, it proposed to replace ‘fixed-term employment in apparel manufacturing sector’ to just ‘fixed-term employment’ in the draft notification later, indicating that it is now applicable to all sectors. In the earlier rule, after the 2016 amendment, workmen were classified as “Permanent, Probationers, Badlis, Temporary, Casual, Apprentices, and Fixed-Term Employment in Apparel Manufacturing Sector”. In the amendment put forth now, workers are classified as “Permanent, Probationers, Badlis, Temporary, Casual, Apprentices, and Fixed Term Employment”.
Criticisms of the move
The Centre of Indian Trade Unions (CITU) strongly opposes this move. On January 10, Tapan Sen, the general secretary of CITU, wrote a letter accusing the labour ministry of issuing the draft without the usual discussion with central trade unions that occurs before amendments in labour rules. There also exists a certain amount of ambiguity regarding the benefits promised to the workers through this move. Even if workers receive the benefits offered to permanent employees, it will still be proportionate to their period of service, which is short. This means that regardless of the benefits, every worker who is employed on a fixed term basis will begin as a beginner with a probation period and the remuneration granted at entry level. The benefit may, therefore, not amount to much, considering that employment is granted only for a short period because of the very nature of fixed-term contracts. This move could consequently discourage companies from hiring permanent workers, to maintain lower costs. The stability offered by permanent employment to workers could be lost in the trade-off.
A reform of this nature could go either way. Regardless, it is recommended that while the objective of improving ease of doing business is an important one, it is also imperative that government does not lose sight of the demographic it promised employment to—the workers.
Featured Image Source: Flickr
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