Labour Codes: Reshaping India’s Labour-Intensive Sectors

The National Statistical Commission report on Unorganised Sector Statistics pointed out in 2012 that the unorganised or informal sector accounted for over 90 per cent of the country’s workforce. 

Cut to 2024, India's unorganised sector is a complex tapestry of compliance risk at best because there is no uniform implementation of labour laws pan-India. On this note, long- and short-term gains from the unorganised sector will be limited if underlying issues around implementation of a brand new set of Labour Codes are not addressed at the outset. For “Made in India” and “Viksit Bharat”, it is extremely crucial that the informal economy, which is comprised of the unorganised sector is formalised and put in the whole law regime, which can only occur with the Labour Codes.

By consolidating 44 labour laws into just four codes, the Indian government aims to reinforce trade and investment, ease compliance requirements, and enhance the ease of doing business. This legislative overhaul marks a pivotal shift that will not only improve working conditions for contractual and migrant labour but also streamline regulatory adherence, ultimately resulting in higher degree of compliance, positioning India as a more attractive destination for global investment.

What are the pain points?
The current labour landscape is fraught with issues related to job security, inconsistent regulations, and inadequate protection for workers. With multiple laws, ranging from central laws to state laws to municipal laws, the employers find it difficult to keep up with the large landscape of regulatory compliance. These gaps not only jeopardize the welfare of employees but also expose employers to compliance risks, as they grapple with the complex and varying labour laws. Recognizing these challenges, the Indian government is introducing new labour codes aimed at amalgamating and standardizing labour regulations across the country.

The codes are also set to introduce more uniform labour laws across India, reducing the burden on employers who currently need to comply with different returns, registrations and other compliance procedures emanating out of different legislations at different levels. By consolidating, the number of registers to be maintained along with the compliances to be done will reduce, without diminishing or compromising the aim and intention of Labour Laws. It is only going to ensure that a more robust system is in place, to ensure that the employers have a more streamlined process for compliance, eliminating duplicate or redundant compliances. 

Highlights of the New Labour Codes
The four labour codes introduced by the government cover key aspects of worker welfare and employer obligations:
1.    The Code on Wages – Establishes a standardized definition of wages and ensures timely payment across sectors, including contractual workers.
2.    The Code on Social Security – Expands social security coverage to workers in the unorganised sector, platform workers and gig workers
3.    The Occupational Safety, Health, and Working Conditions Code – Mandates safe and healthy work environments, especially in high-risk sectors.
4.    The Industrial Relations Code – Facilitates smoother industrial relations, dispute resolution, and job security.
These codes are expected to enhance job quality, increase labour market flexibility, and create more inclusive opportunities. Notably, they aim to formalize a larger segment of the workforce, bringing previously unregulated sectors under the ambit of social security, insurance, and standardized wages. 

Labour Welfare and Employment Index (LWEI): Promoting Labour-Friendly Environments
To incentivize states to adopt more labour-friendly policies, the Union Labour Ministry is working with NITI Aayog and other stakeholders to introduce a “Labour Welfare and Employment Index” (LWEI) by the next financial year. This index will rank states and union territories based on various parameters such as social security coverage, productivity level of workers, wage standards and uniformity in the implementation of labour laws and employment policies
The LWEI is designed to foster healthy competition among states to create conducive environments for business growth and enhance labour welfare. This index is expected to level the playing field for businesses by promoting uniformity in labour regulations, thereby making it easier for companies to manage labour compliance across states.

Implications for India’s Labour-Intensive Sectors
The implementation of these codes will likely have significant implications for India’s labour-intensive sectors, particularly in managing contractual and migrant labour more effectively.
Formalization of Employment: Formalization is critical as it  improves workers’ quality of life by identifying their contribution on paper while also strengthening companies by providing a stable, committed workforce with social security benefits.
Increased Labour Market Flexibility: The codes allow for more flexible employment practices, enabling companies to adapt to demand fluctuations without compromising workers’ rights. For example, provisions under the Industrial Relations Code support fair hiring and termination practices, reducing litigation risks and ensuring stability for both workers and employers.
Enhanced Compliance and Reduced Litigation Risks: By simplifying compliance requirements and offering a more standardized framework, the labour codes reduce the burden on companies to navigate varying labour regulations. As a result, businesses will be less vulnerable to compliance-related disputes, creating a smoother operational environment for employers and enhancing India's standing in the global market.
Promotion of Worker Well-Being and Safety: The Occupational Safety, Health, and Working Conditions Code mandates safe and healthy work conditions, which are essential for sectors with high levels of physical labour. Improved safety standards not only protect workers but also help companies avoid potential legal and reputational risks associated with unsafe working environments.

Global Comparisons and India’s Labour Rights Score
The Labour Rights Index (LRI), developed by the Wage Indicator Foundation, provides a comparative tool to evaluate labour legislation worldwide. In 2024, India scored 65 out of 100, lower than countries like China (73.5) and Hungary (96). 
This shows that India’s labour rights framework has room for improvement, there is a need for further alignment with global labour standards. 
The new codes represent an opportunity for India to enhance its labour rights framework, especially for contractual and migrant workers. With the adoption of the LWEI and uniform labour laws, India can aspire to achieve higher LRI scores, boosting its reputation as a labour-friendly nation on the global stage.

Streamlining for a Competitive Future

The codes promise to strengthen India’s labour-intensive sectors and make India more attractive for foreign investors.

For both employers and employees, the codes symbolize a future where rights and responsibilities are clearly defined and uniformly enforced, paving the way for sustainable growth in India’s diverse labour markets.

Proper implementation of labour codes entails reaping our demographic dividend, with additional measures such as the LWEI, India is setting a foundation not just for a labour-compliant nation, but for a truly labour-friendly one that can meet the demands of a rapidly evolving global economy.

(The article above has been curated exclusively for BW People publication, by Nagaraj Krishnan, Managing Director, Aparajitha Corporate Services Limited)