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Amendment in the definition of Factories: Its consequences on labour and factories

Factories Act is labour legislation that has existed since the late 19th Century and was initially enforced to keep a check on the condition of Industrial workers. Its prime objective was to protect the workers employed in factories against industrial and occupational hazards. It focused on regulating the working hours, weekly off, provisions regarding ladies and children. It imposes upon the owners and occupiers obligations to protect the workers. It was amended in 1911, 1923, 1935 and 1987. But the important amendments were made in 1948, which included safety of working place & machinery, health provision working hours, weekly off, paid leave, etc. It came into force on 1.4.1949 and is applicable to the whole of India including Jammu and Kashmir. The last amendment to the Factories Act, 1948 was made in the year 1987, wherein a separate chapter was inserted relating to the hazardous process. However, comprehensive Factories (Amendment) Bill, 2014 including the amendments of sections 64 and 65 of the Act, was introduced in Lok Sabha on 7th August 2014. The said Bill was referred to the Department-related Parliamentary Standing Committee on Labour for examination and report, which presented its Report on the said Bill on 22nd December 2014 to Parliament, which was under examination till the dissolution of 16th Lok Sabha. The string of amendments proposed by the union government to various sections of the Factories Act has been endorsed by the Ministry to deliver on its promise to vastly improve India’s position in the World Bank’s Ease of Doing Business Index. But many experts and trade unions argue that the proposed amendments go about this task by decreasing regulatory mechanisms that protect workers’ rights, safety and health. This would only lead to a competitive easing of norms to facilitate investment without protecting the further erosion of labour rights.

What does the Standing Committee Report said?

The Factories (Amendment), 2014 propose to amend section 2(m) of the Factories Act, 1948 relating to definitions of “factory”. In clause 2 (m) Regarding the definition of the “factory” Following changes in sub-clauses (i) and (ii) will be carried out – (a) in subclause (i), after the words “whereon ten or more workers”, the words “or such number of workers as may be prescribed by the State Government” shall be inserted;
(b) in sub clause (ii), after the words “whereon twenty or more workers”, the words “or such number of workers as may be prescribed by the State Government” shall be inserted;
(c) after sub clause (ii) but before the following proviso shall be inserted, namely: “Provided that the number of workers specified in sub-clause (i) and sub-clause (ii) shall not exceed twenty and forty workers, respectively.”

Reasons given For the Amendments:

Labour is in the Concurrent List. As per the Federal system, the formulation of Factories Act is within the jurisdiction of the Central Government whereas its implementation is done by the State Governments. Some State Governments propose State amendments to Factories Act from time to time depending on their requirements. These amendments are enacted by the approval by the Central Government. There have recently been demands by a few State Governments for increasing the threshold limits in their States for application of Factories Act. It is with this view that the proposal to provide flexibility to States within their jurisdiction for deciding on these threshold limits has been made. However, since, it should not become excessive delegation the limits have been capped to 20 and 40 workers with power and without power respectively. This will provide flexibility to the State Governments to amend their State Laws as per their requirements.

The stand taken by the Labour Ministry

As mentioned earlier, the Government proposes to enhance the threshold level of employment from 10 to 20 workers (in case of factories using power) and from 20 to 40 workers in case of factories (not using power) vide Clause 2 (m). The Committee received a number of suggestions from various quarters voicing if the amendments are carried out, the number of factories and their workers will be thrown out of the coverage of the Factories Act and workers will be at the mercy of employers on every aspect of their service conditions, rights and protective provisions laid down under the Act. The Unions further represented that as per the estimates made by the Annual Survey of Industries, enhancement of the threshold level of employment in an establishment to 40 workers will take out more than 70 per cent of the factory establishments in the Country out of the coverage of the Factories Act.

The reason given by the ministry for the proposed amendments was not able to convince the committee as the committee asked for evidence about the pressing circumstances for enhancing the threshold.

The secretary of the labour ministry said:

“On thresholds actually we have got suggestions from all stakeholders. There is clearly no convergence. We have presented it to the Committee also. There is a wide array of suggestions that have been received from the Unions, from industry and from others. I would like to submit a couple of points for the consideration of the Committee and then it is for the Committee to take a view on the matter. State Governments have their own stage of development, they have their own local conditions, they have to keep in mind, employment, employability, they have a lot of responsibilities under the Constitution. And not permitting the State Governments any scope for adjusting to local conditions is actually very desirable because they believe that there are enough precautions that are there in the scheme of things. I mentioned that Section 85 empowers a State Government to declare any factory under Shops and Establishments Act that they will be covered; and that there should be flexibility to States within their jurisdiction for deciding the threshold limit. However, it should not have been excessive delegation. And that is the only reason why we have put the caps at 20 and 40 because there should not be excessive delegation and it has to be within the norms.”

The Secretary further stated:
“The argument which is being given is that, if you look at the numbers you had mentioned, if you want to remain under 20, compliance is easier. So a lot of companies stay at 20 and they do not go beyond 20...As I said, one could argue either way but this is a perspective which is a very strong perspective...The State Governments do have a particular perspective which they have been representing to the Union Government. It is in the response to that, without according excessive delegation, that this provision has been kept”.

Asked to further elaborate, the Secretary Ministry of Labour and Employment submitted:
“The cost of compliance could have very many perspectives and I presented the perspective. I am saying this and this is for the Committee to take an over al view looking to the apparent demographic dividend that we have and how to do we leverage employable living...”

The Committee then desired to know whether it was at all legally required to empower the State Governments in view of the enactment of the Factories Act by the Rajasthan Government. In reply, the Secretary, Ministry of Labour and Employment deposed:
“The particular State Government got it. But it required a presidential assent for them to be able to do it. That is why the amendment. The logic of the amendment is that there will be an enabling provision which the State Governments may exercise as per their local conditions and local perspectives.”

Labour reforms will help improve the ease of doing business which, in turn, will improve investments, stimulate economic growth and fuel the demand for right-skilled workforce. The system of formal education in India has been unresponsive to the signals coming from the labour market. But hopefully, with the recent regulatory reforms, the education system in India will be forced to become more responsive. For over 25 years, India has been in the process of integrating itself into the global economy through liberalisation of trade and investment. But, unfortunately, India, unlike China, has not yet been able to obtain the full benefit of globalisation through more productive and better-paying manufacturing jobs for its large young population. In the global market for goods and services, there has been a market failure in India as far as low wage manufacturing jobs are concerned, while the market has worked efficiently for high wage IT jobs. The major factor contributing to this paradoxical outcome is that the IT sector units are governed by the Shops and Establishment Act and not the Factories Act. There are over 40 labour laws which regulate factories. These impose too onerous a burden. Large firms can easily deploy the manpower and other resources to meet the transaction costs required for record keeping, reporting and managing the regulatory regime.

Small firms and start-ups find this too heavy a burden. They, therefore, have an incentive to remain small rather than grow. The unfortunate result has been that job growth in the organised sector has been extraordinarily disappointing while it has been taking place in the unorganised sector at a much faster pace. This is the opposite of what happens in any rapidly industrialising economy.

Criticism of the change in the definition of Factories

The changes in the Factories Act would mean that the small manufacturing units would not have legally binding responsibility for workers’ security. These include, for example, legal protection on hours of work, paid weekly off, basic amenities at the workplace, the security of and site facilities for women, the safety of workers and other rights relating to decent working conditions. Rather than addressing the issue of poor wages, overtime at the cost of health and rest of the workers is proposed as a solution which actually gives a cheap option to the employers to avoid employing new workers. An article on labour reforms published on mainstream weekly in which the author did some field work in Bombay and the findings are highlighting the problems which will not be solved by this amendment. The finding reveals that most of the work processes in garment manufacturing, even by some of the biggest brands, is outsourced to small work units. Strangely, almost all the work units using electricity and with more than 10 workers that I visited in 2013 were registered under the Bombay Shops and Establishments Act 1948 rather than the Factories Act.

The former is supposed to cover establishments which carry on any business, trade or profession only and not the establishments where manufacturing is carried out. Thus, the workers of such manufacturing units are deprived of the benefits that are provided in the Factories Act. Under the Factories Act 1948, the employer is obliged to provide a clean environment, proper ventilation, sufficient lighting, clean drinking water and sanitation within the premises. But, most of the employers fail to provide even these very basic facilities causing them severe inconvenience and posing public health problems too. The Act limits working hours to nine hours a day with a compulsory break every five hours. However, I found employers often exploiting the homelessness of the migrant workers to encourage them to use their workplace also as accommodation which meant just a place to sleep on the floor at night. This sets hidden terms and conditions on such workers whose working hours are stretched to 10-12 hours a day with serious implications for their health. This is further reinforced by piece rate wages.

The avid reformists argue that units applying greater number of labour are more efficient and productive and workers also stand to gain from the increased productivity. This argument is too flimsy given the fact that such units would not be registered; hence in the absence of a regulatory framework, the fruits of the enhanced efficiency and productivity of the workers would accrue exclusively to the employer. Moreover, with further weakening of the inspection system, even relatively larger units may continue manipulating the registration system. The present amendments can at best legitimise the de facto corrupt practices of the employers, domestic and foreign, carried out in collusion with the Labour Department.

It is also argued that the proposed reforms would equally benefit labour. Business is a dynamic process. Investors want to ensure that a corresponding dynamic labour process exists in the host country. A completely flexible labour market, with minimum liability and free from any fetters created by the state or the labour unions, would make India a preferred destination for investments thereby creating new jobs. Absence of such a business-friendly labour environment also pushes capital to adopt deceitful dealings in order to survive in the cut-throat competitive environment. A buoyant market has an inherent mechanism to take care of the workers’ interests. The problem with such arguments is that these conveniently bypass the question as to what kind of new employment would be generated. Would they adhere to decent work standards or further deteriorate the existing work standards? As the majority of the poor in India is constituted by the informal workers, any reform proposal must be evaluated on the criteria of decent work which requires a substantial increase in the earnings and improvements in the work conditions of the informal workforce. Thus, more employment is not at all sufficient for the Indian working class, rather they need better employment. In a recent interview the former governor of RBI Raghuram Rajan also highlighted this problem the main problem is not jobs but the quality of jobs. The best example for this is recently the post-graduate doctorate holder candidate applied for sweepers’ job in railways.

The labour unions of India have expressed their grave concerns over the proposed labour reforms. A highly objectionable part of the reforms process is the lack of dialogue with those who would be the most affected parties—the workers and their unions. The Cabinet approved these amendments without organising any tripartite consultations involving the unions. The haste with which the government rushed to introduce the Bill in the Lok Sabha shows how much disregard it has for the deliberative processes and the interests of the workers. This also shows the dangers of majoritarianism. The mask of reforms is peeled off. It seems that we are headed for another phase of a fierce battle between capital and labour.

The main argument from the side of the Government is that by increasing the threshold of a limit of the factories would result in formal employment in organised sector enterprises. To counter this argument an article was published in Hindu Business Line[1] which argued that informal employment is mainly casual, part-time or temporary. In such jobs, no clear employer-employee relationship exists. Therefore, such jobs are mainly out of the framework of labour laws. Formal jobs are mainly of a permanent nature and are regulated through labour laws by the state. Formal or informal employment can exist in both the organised and unorganised sectors. It provided some data which is a revelation. It says: “Employment in the organised sector has increased from 54.6 million to 101.60 million. But much of the increase in the workforce in the organised sector is accounted for by informally employed workers. The share of the informally employed workers in the organised sector which was close to 38 per cent has increased to more than 67 per cent. As a matter of fact, the share of the formally employed has steadily declined from 62 per cent to below 33 per cent.”

In absolute terms too, the share of the workforce in the formal employment in the organised sector has shown a marginal decline. This means that a sort of flexible specialisation has been occurring in the economy of India in the post-reform era when there were strict labour laws. Will the past trend get reversed if the government makes amendments in the so-called archaic labour laws? The answer is in the negative. If entrepreneurs can adjust the labour requirement in their enterprises according to requirements in an era of stringent labour laws, there is a very high probability that this process will get more accentuated when the labour laws are diluted. Also, there is a high probability that the dilution of labour laws will result in an increase in the precariousness of a large section of the workforce. According to the Annual Survey of Industries, in 2012-13, nearly 70 per cent of the factories in the organised sector employed fewer than 40 workers, and according to the NSSO 68th round (2011-12), more than 77 per cent enterprises employed fewer than 20 workers. Thus, amending the Factories Act 1948 and other labour laws will not be in the interest of workers. The government’s notion that labour reforms will result in the establishment of big enterprises seems to be quite unpalatable as worldwide, enterprises are getting leaner. In fact, there is barely any country where formal employment has increased after labour reforms were initiated. Now, leading firms (multinational enterprises) of the North are integrating smaller firms in the global value chains of the South at a rapid pace. The government should focus more on how to improve workers’ well-being, rather than spend its energy on getting labour laws passed in Parliament.

Findings of the Committee

The Committee notes the Government’s proposal to empower the State Governments to enhance the threshold level of employment from 10 to 20 workers (in case of factories using power) and from 20 to 40 workers (in case of factories not using power). A number of Trade Unions/Associations/Individuals have expressed the concern that if the amendment is carried out more than 70 per cent of the factory establishments in the Country will be out of the coverage of the Factories Act and workers will be at the mercy of employers on every aspect of their service conditions, rights and protective provisions laid down under the Act. The Ministry has contended that there have recently been demands by a few State Governments for increasing the threshold limits in their States for application of the Factories Act for which the proposal to provide the flexibility to States within their jurisdiction for deciding on these thresholds limits have been made. The Committee is not convinced with the reasoning adduced by the Ministry as State Governments are empowered under the Concurrent List to propose their own amendments to the Factories Act from time to time depending on their requirement. Needless to say, such a Central Legislation enhancing the threshold level to empower the States is not required. The Committee, therefore, do not accept the proposed amendment and they desire that status-quo be maintained, mindful of the serious apprehensions raised at many quarters including the Trade Unions over the proposed amendment to increase the threshold limit.

As argued by the Secretary on Labour Ministry in the Standing Committee report that it is not about the pros and cons of the amendments. “If I were on that side, maybe I will argue from that side”. I am only presenting for the consideration of the Committee the perspective which has been brought in by a number of State Governments. I am just saying there is a perspective”. The statement made by the Secretary is true because there will always be a tussle between factories and labour class as they always have a conflicting interest. So, the government a job becomes very important and difficult because for any change either party’s rights or duty will be sabotaged and enhance respectively but it is high time for labour reforms for the development of our country and match the level of China and Singapore which have flexible labour laws and there the employment rate is much higher and negligible poverty.

In a market economy, jobs are created primarily by private market participants. If the regulatory regime is coming in the way of job creation by market players, its review and reform should get the highest priority. The underlying premise has been that no government would have the political will to attempt labour reforms as the trade unions would not permit it and they were politically far too powerful. This is an unnecessarily timid view. India has been successfully undertaking major reforms, including the dilution of the fiscal autonomy of the States by amending the Constitution to introduce GST[2]. To encourage employment generation, there have been two strands: one, to increase the threshold of the number of workers over which labour laws would apply, and the other, to give some financial relief to those who generate new jobs. “But the most radical approach would be to have a state-funded comprehensive floor level social safety net covering unemployment (minimum income), universal healthcare and old age pension for all workers in the unorganised as well as organised sectors, exempting both employees and employers from contributions for this and to fund it fully with increases in corporate and personal income tax rates, which are presently far lower than in Northern Europe.”[3]
A softer version would be for the state to fully fund employee and employer contributions for wages up to a prescribed level and for employer and employee contributions to kick in thereafter to supplement what the state provides. The benefits of higher productivity of the workforce flowing from a comprehensive social safety net are not adequately appreciated.

The real advantage of this would be to do away with the distinction between the worker in the organised and unorganised sector and to create a regulatory regime which provides for a smooth transition from micro to small, to medium, and finally to a large enterprise. These are complex issues that need serious discussion. Given the severity of the challenge, radical approaches for job creation are now unavoidable.

[1] SP Singh, Amit K Giri, “Misguided Emphasis on Labour Reforms”,
[2] Ajay Shankar, “ Needless deadlock over labour reforms”
[3] ibid

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