Introduction
India has been facing a serious economic slowdown and COVID-19 has thrown up a multitude of further challenges for businesses. A lockdown was imposed across the country from 25 March 2020 onwards to prevent the virus from spreading. On 1 May, the Chairperson, National Executive Committee, National Disaster Management Authority (Chairperson, NEC) issued an order (Extension Order) under the Disaster Management Act, 2005 (DMA) directing extension of the lockdown till 17 May. The Extension Order proposes relaxations which may permit some businesses to commence operations: SEZ/EOU units, manufacturing, on-site construction and private offices up to 33% strength have been permitted even in red zones which are hotspots1. That said, a complete shutdown over the past month has had a crippling effect on businesses, many of which have no option but to cut costs and mitigate any further impact. The government has provided some relief in terms of loan repayment moratoriums, extensions in compliance timelines, direct and indirect tax concessions, etc. but payroll costs remain a major source of concern for businesses.
So far, the government's approach has been to secure employees' livelihood. Orders and advisories to this effect have been issued by authorities and governments. The key order is of 29 March issued by the Chairperson, NEC under the DMA which directs states/ union territories to ensure that employers continue paying wages to workers without any deduction during the lockdown (Wage Order)2 . The Ministry of Labour and Employment, Government of India has also advised employers not to terminate employees in an advisory of 20 March 2020 (Termination Advisory)3 . States / union territories have mirrored these orders and advisories.
The orders/ advisories are wide and subject to interpretation. Labour authorities have been taking a strict view so far and while the legality of the Wage Order has been challenged before the Supreme Court, no relief has been granted as yet. Despite the relaxations proposed in the Extension Order, the Wage Order and Termination Advisory have not yet been modified or withdrawn. As a result, employers do not have much choice to tackle the situation as of now and any coercive action against employees could be seen as a violation of DMA which is punishable with imprisonment and/or fines. Below, we look at 3 of the most common options that employers have been considering in this situation and the challenges associated with each option currently.
Lay-off
Lay-off appears to be the most attractive option for employers at this time given that it has statutory backing under the Industrial Disputes Act, 1947 (IDA). That said, this option is not available to all employers since lay-off provisions under IDA apply to only select establishments (discussed below).< /p>
Process: As per IDA, lay-off is when an employer is unable to give employment to 'workmen' (employees other than managers, administrators or supervisors) on account of certain specified events including 'natural calamities'. IDA lays down the rights and entitlements of workmen in a lay-off. For the first 45 days, workmen are entitled to be paid 50% basic pay and dearness allowance. If the lay-off continues for more than 45 days in 12 months, workmen are not entitled to wages assuming such an arrangement has been agreed. Employers employing less than 100 workmen also have the option to retrench workmen after 45 days. If the workman's employment contract or the establishment's standing orders provide more favourable terms, those would need to be offered to the workmen.
Applicability: Lay-off provisions under IDA do not apply to all employers but only to 'industrial establishments' which are factories , mines or plantations. Further, employers can use this option only where the power to lay-off is recognized under the workman's employment contract or the establishment's standing orders. This is because the Supreme Court of India has held that IDA does not confer any power to lay-off but only describes employee rights in case of a lay-off5 .
Lay-off provisions generally do not apply to contract workers but employers would need to check for exceptions under special laws or contracts with the contractor. For instance, the Bombay Industrial Relations Act, 1946 treats contract workers at par with other employees and they are entitled to the same benefits as employees are under the establishment's standing orders. For employees other than workmen and contract workers, there is no concept of lay-off and employers would need to obtain consent from employees for a reduction in wages during the lockdown (see next option).
Challenges: Employers could face several challenges in laying-off employees. Government permission is required to lay off employees in establishments that employ 100 or more workmen, unless the lay-off is due to a natural calamity. Lay-off provisions have not been tested in the context of epidemics and it is not clear whether COVID-19 would qualify as a 'natural calamity' (although the Ministry of Finance and the Ministry of Shipping, Government of India have taken the view that it does). Workmen could challenge the lay-off as illegal and could raise an industrial dispute before labour courts/ tribunals. If it is found that government permission was required but not obtained, the employer can be punished with 1 month's imprisonment and/or fines under IDA6 . There could also be a dispute as to the payment arrangement beyond 45 days of lay-off if this has not previously been agreed.
Reduction in wages
This option is not permitted during the lockdown in view of the Wage Order. Employers can seek consent from employees for implementing a reduction during the lockdown but this may trigger collective bargaining with employees or unions who would likely resist the reduction. For workmen, it would be preferable for the employer to try and enter into a formal settlement with the union since this will bind the workmen who are party to it in terms of Section 18 of IDA.
A reduction of wages can only be considered post the lockdown assuming it is not restricted under the relevant employment contract. For workmen, the employer would need to follow an additional requirement: to give 21 days' notice of the reduction to workmen under Section 9A of IDA. The employer would need to wait out the 21-day period before implementing the reduction.
The Wage Order refers to all employers and workers and it can be argued that apart from employees, contract workers are also intended to be covered. Orders issued by some states also make specific mention of contract workers. While payment of wages to contract workers is generally an obligation of the contractor and not the principal employer, principal employers are likely to face difficulties in reducing contractual payments to the contractor during the lockdown unless the contractor consents. If a reduction is imposed on the contractor unilaterally, the contractor may reduce or withhold wages of workers and this would pose a risk of workers, or even the contractor, complaining to labour authorities against the principal employer which is likely to be a larger and more reputed organisation.
Retrenchment or termination
While the Termination Advisory is not binding like the Wage Order, terminating employees or contract workers (these workers are specifically covered under the Termination Advisory) during the lockdown would carry risk and is avoidable. Any adverse steps could result in employees complaining to labour authorities who could view this as defeating the purpose and intent behind the Wage Orders. Labour authorities have been extremely active across the country and have been issuing notices to employers advising them not to take coercive steps against employees (refer: SpiceJet, Capgemini and Indian Oil Corporation). A PIL by media employees is also pending before the Supreme Court to challenge terminations and wage cuts.
Retrenchment or termination is also an option that can be considered post the lockdown. For workmen, retrenchment would need to meet the following requirements under IDA: (1) 1 to 3 months' prior notice to workmen or payment of wages in lieu of such notice; (2) payment of retrenchment compensation at 15 days' average pay for each completed year of continuous service; (3) notice to the relevant state government about the termination along with reasons for termination (or government permission, in the case of factories, mines and plantations where 100 or more workmen are employed); (4) compliance with the 'last in first out' principle. If there are standing orders applicable to the establishment, those would also need to be followed.
Termination of other employees is governed by the shops and establishment law of each state and ordinarily requires employees to be given 1 month's notice (or longer, if the employment contract so provides) or payment in lieu of notice. This is subject to state-specific deviations: for instance, in Tamil Nadu, employees can challenge termination on the ground that it was not for 'reasonable cause' and a successful challenge would entitle them to be reinstated.
Conclusion
The intent to secure employees' livelihood is positive but the approach now needs to be a balanced one that considers the commercial impact that COVID-19 has had on businesses. There are already instances where employer considerations have come to be recognized. The Labour Secretary, Government of Karnataka recently withdrew its earlier orders directing employers not to terminate employees or deduct wages during the lockdown, based on representations made by employer associations. The Bombay High Court also recently passed an order stating that employers would be entitled to deduct wages for employees who voluntarily remain absent from work despite being in areas that are not subject to restrictions.
The Extension Order marks the intent of the Government of India to permit recommencement of business and operations in a gradual manner and in this situation, employers would require some freedom to take measures in respect of their employees in order to mitigate the commercial and economic impact of COVID-19 on their businesses, whether this be in the form of furloughs, leave without pay, reduced hours for reduced pay or other options for reorganising employment arrangements. With the relaxations proposed in the Extension Order, perhaps the time is now right to reconsider the approach in the Wage Order and Termination Advisory and have a more balanced approach to ensure sustainability of businesses.
Footnotes
2 https://www.mha.gov.in/sites/default/files/PR_MHAOrderrestrictingmovement_29032020.pdf
3 https://labour.gov.in/sites/default/files/Central_Government_Update.pdf
4'Factory' has been interpreted widely and there is precedent where IT/software companies have also been treated as factories under Indian employment laws.
5 Workmen of Firestone Tyre & Rubber Co. of India (P) Ltd. and Ors. v. Firestone Tyre & Rubber Co. and Ors (AIR 1976 SC 1775).
6 Section 25Q of IDA.
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