India & Labor and Employment Laws: Are They Good or Bad for Business?

India has a long and vibrant history dating back to 2500 B.C, filled with a rich cultural heritage that spans the entire breadth of the Indian sub-continent and beyond. Recently, India has seen considerable socio-economic and political developments that have made it a major Asian attraction for commerce and corporate business. Some of these development include, but are not limited to, the privatization of major government institutions, major increases in economic growth, trade, recognition as a global nuclear power, and acceptance into the G20 as an emerging nation.

Developments in the political arena have also contributed to the increase in global trade with India. Adoption of more democratic concepts has been on the increase and there are some major examples to showcase India’s social and political evolution in the direction of a U.S- based government model.

All this is important to understand because a discussion of the labor and employment law of India’s labor is incomplete without a basic understanding of the current and dynamic changes contributing to these same labor and employment laws.

The discussion should include India’s movement to more democratic concepts in its labor governing laws, international pressure to adopt a more streamlined, business-friendly employment system to accommodate foreign investors and Transnational Corporations (TNCs).

In other words, India’s strong adoption of increased global trade and investment policies has resulted in increased global pressure to adopt policies and laws that are considered to be acceptable by the global community.

Trade and Labor Treaties

It’s important to note that some trade agreements may contain sub-agreements that stipulate some labor standards as we see in the case of the North American Free Trade Agreement (NAFTA) and US labor laws.

In the case of the International Labor Organization (ILO), India’s government has ratified almost 40 separate conventions. To compare: The U.S has ratified 14 (only 12 in effect) and the United Kingdom has ratified roughly 60 conventions. Although, this doesn’t necessarily correlate directly to the amount of established labor and employment regulations a nation has adopted, it is still worth noting for illustrative purposes. More specifically, India has not adopted Convention 87 of the ILO, or Convention 98 of the ILO guaranteeing Freedom of Association and The Right to Collective bargaining, respectively.  This mean that the blanket coverage provided to freely create, join and manage representative organizations and the right to collectively bargain are not guaranteed in India.

To explain further, ratification of an ILO convention is equivalent of the signing of a treaty; it is governed by international law. It is important to note that the commonly accepted principle of sovereignty still applies under any ILO convention. In other words, local and national laws always precede any international agreements. Therefore, let us enter into a discussion of both statutory and common law of the Republic of India to determine whether the lack of a comprehensive labor code is beneficial to foreign business or disadvantageous.

Governing Structure, Constitutional and Statutory law

For illustrative purposes we will use the United States as a model of comparison throughout this analysis. The U.S was chosen as a model of comparison due to the authors’ familiarity of U.S labor and employment law and India’s movement to model U.S socio-economic and political systems.

Employment and labor disputes in India are governed by a local and regional set of civil court systems, applying a set of laws to include but is not limited to:

1. The Industrial Disputes Act (1947)
2. Minimum Wage Act (1948)
3. Trade Unions Act (1926)

However, Central and State governments are given authority by the Industrial Disputes Act of 1947 to create labor courts and industrial tribunals to resolve both collective and individual labor and employment issues. Apeals for employment disputes can go the state high courts or to the supreme courts.  In general, corruption is a major issue in India. When central or state governments create these courts, they act with a local jurisdiction but are held in high regards.

More specifically, the Supreme Court of India’s Delphic pronouncements carry almost mythical power in India.

These laws and governing bodies essentially create a system that relies on changes in the socio-economic dynamics of the country. One can see from the preceding brief description of the governing bodies and laws involved that there is no real specialized structure (comparison is made to highly structured labor laws in developed nations) to resolving labor and employment disputes, but rather local judges and governments engage each case as it comes. In addition, labor and employment disputes are subject to cases that take years to resolve, this contrast highly regulated approaches such as Germany, France or even the U.K.

Therefore a more detailed discussion of the labor and employment laws would not be relevant. A discussion of what is good for employers is now relevant

What Employers Want in India

For illustrative purposes, lets us say that employers wishing to business in India seek reduced costs, higher profit margins, legal protection for their investments, cultural alignment to ease the management of the workforce, low regulation to increase flexibility in managing their employees and an employer friendly legal system.

Generally, one can assume that a non-comprehensive labor and employment code is 1) less regulated and more flexible, 2) differs based on local and regional labor and employment laws 3) causes increases in employment growth ⁽⁹⁾.

We can generally assume that the past two statements are generally correct but cannot provide additional material to prove so. However, common sense yields that employers want greater flexibility, increased profits and growth while a deregulated market provides these things.

However, a non-comprehensive labor and employment code can have contradictions in its theory and applications because it relies on common law in conjunction with statutory law; although, judges consider precedent decision to make future decisions, they are not necessarily required to differences in jurisdictions or case types (economic vs. employment) augment the lack of a comprehensive system to govern labor and employment disputes and curb the opportunity to use precedent decision by judges in India. Put more simply, there are holes and inconsistencies in a labor code that is not comprehensive.

From an employer’s perspective, this can be positive or negative depending on their business outlook towards doing business in India. This brings us to a discussion on employers’ ethical stance and conduct.

Employers’ Ethical Conduct

In additions to the difficulties presented by a labor and employment code that is not comprehensive. Employers wishing to do business in India must now face the ethical dilemma of exploitation or investment. This issue originates to Employer’s outlook to his employees as resources or investments.

A major issue and hindrance to India’s growth and to the resolving of employment and labor disputes is its rampant corruption. Stated briefly, employers can be subject to fraudulent claims from employees as it is common in India for this to happen. Bribery and misinformation can cause financial and brand damage to organizations wishing to do business in India.  However, this can be mitigated by other factors such as the careful selection of employees.  This is an issue if the employer wishes to do be business in good faith.

However, if the employer wishes to engage in the corruption itself then it becomes a larger dilemma. As noted earlier the judiciary in India is well-respected and is mostly free of corruption. Governments however, can appoint new employment tribunals, similar to the system of the U.K to resolve employment and labor disputes. The issue here is mostly one of corporate ethics and would likely not become a legal issue, as improvements to the laws are being made to adopt a more business friendly system for global trade. (This was mentioned in the introduction)

However, if we are to assume normal employer behavior we would at least assume they plan to act in an ethical manner and corruption would be considered a risk, mitigated by other factors and not an opportunity for business.

Wrapping it up

As mentioned throughout, India has experienced socio-economic growth, improvement in labor law, increased foreign investments and an increased adoption of global trade principles. Corruption and the lack of a comprehensive labor code would be risks any employer must face when making the decision on whether to do business there. However, These risks are being mitigated and reduced over time by social and political changes and the adoption of a modal closer to the U.S system where a deregulated labor market creates opportunities for innovation and creativity.

The lack of a comprehensive labor and employment code in India can be looked on as either a positive or a negative and that would depend on the employer’s ethical stance. If assumed to be normal and with minimal expected ethical conduct, the lack of structure to the Indian labor code would probably allow for reduced costs for labor and employment and higher risks from fraudulent claims.