Are Lay Offs And Salary Cuts The Only Way Forward?

Rapidly spreading pandemic, Covid-19, has brought the country to its knees. The announcement of the Lockdown 1.0 on March 24, 2020, brought all, except for essential services, to a grinding halt.

With startups to large business houses left to fend for their sustenance, an important question of their survival arises. Can they tide over this crisis without salary cuts or laying off workforce?

 ‘Lay Off’ On Lay-Offs And Salary Cuts

On March 20, 2020, the Ministry of Labour & Employment had directed the Chief Secretaries of all States/UTs to issue an advisory to the employers of public/private Establishments “…to extend their cooperation by not terminating their employees… or reduce their wages.”

The advisory further says that workers who take leave should be said to be on duty without any consequential deduction in wages during this period. And that if the place of employment is non-operational due to COVID-19, employees of such unit will be said to be “on duty”.  By asking employers not to “weaken the financial condition of the employee” which would hamper their “morale” to combat the epidemic, the advisory strikes a humanitarian chord.

Region-wise initiatives are being taken by the Chief Labour Commissioner’s office to comply with this “advisory” as was seen in Spice Jet’s case.

Next up, on March 29, 2020, the Ministry of Home Affairs ordered State Govts/UTs to take certain measures for the “effective implementation of the lockdown” and “to mitigate the economic hardship of the migrant workers” under Section 10(2)(l) of Disaster Management Act, 2005 (DM Act).

One such measure is:

“All the employers, be it in the Industry or in the shops and commercial establishments, shall make payment of wages of their workers, at their work places, on the due date, without any deduction, for the period their establishments are under closure during the lockdown”

These were Central Govt. measures.

A few weeks ago, on March 22, 2020, the Govt. of NCT of Delhi had ordered a lockdown under Delhi Epidemic Diseases, COVID-19 Regulations, 2020 (COVID Regulations). Interestingly, the order stipulated that employees of private establishments (including temporary/contractual/outsourced etc.) who are to stay at home shall be treated as “on duty” and be “paid in full.”

Legal Backdrop

The Industrial Disputes Act, 1947 (IDA) is the central legislation for industrial establishments, employers and their workmen. IDA provides for lay-off and retrenchment of workmen in certain cases.

Lay-off means the failure, refusal or inability of employer to give employment to a workman on account of certain factors including natural calamity. Retrenchment connotes termination of the workman’s service for any reason (excluding cases of voluntary retirement, superannuation, non-renewal or contractual termination or termination for ill-health).

Where 50 or more workmen (but less than 100) are employed, a workman is entitled to compensation for the laid-off period equalling to 50% of the basic wages and dearness allowance. If the workman and employer agree, compensation can be avoided after the 1^st 45 days of lay-off. And if the lay-off continues beyond the 45-day mark, the employer can retrench the workman, if other conditions are met.

For an industrial establishment with 100 or more workmen, the only marked difference is- the employers of such establishment(s) require prior permission from the appropriate government or authority before laying-off or retrenching a workman.

More importantly, IDA gives overriding status to such provisions over anything inconsistent contained in any other law.

What This Means

Appreciating the governmental measures, so far, in the above legal backdrop raises few questions.

• Can an ‘advisory’ by the Ministry of Labour & Employment supersede employer’s rights under the IDA?

Since it is undeniably an advisory, Central Govt. can only “seek” cooperation. Not enforce it as is seen in certain cases. Moreover, this advisory is not supported by provisions of IDA, which on the contrary permits lay off in certain cases including natural calamity.

One thing is surely clear. Industrial establishments requiring prior permission to lay-off and retrench workmen can easily anticipate the authority’s response to such a requisition, if made.

• Can ‘orders’ issued under laws for disaster management and containment of epidemic deal with employment matters?

Section 10(1)(l) of the DM Act, under which the order of March 29, 2020 was issued, only speaks of measures in response to threatening disaster situation or disaster. It, thus, requires consideration whether a direction to pay workmen’ wages during the lockdown is a measure in response to a disaster.

Likewise, the object of COVID Regulations is prevention and containment of COVID-19. Such regulations do not expressly confer any power to direct payment “in full” to employees of private establishments.

What is most interesting – the two ‘orders’ are only concerned with paying wages till the lockdown continues. They don’t address the issue of lay-off. It is only the ‘advisory’ that implores employers against cutting down its labour force.

In other words, the only thing curtailing employer’s choice to lay-off is an ‘advisory’ that arguably lacks the force of law.

General Criticism

Besides the cast of legal doubt over such measures, the govt. had its heart in the right place. Such measures, though temporarily, do provide a shot in the arm for workmen. However, these are more knee-jerk measures than an indication of a sound economic policy.

By forcing employers to retain and pay their employees, the already strapped businesses might default on their lenders. And if the businesses close, then the very employees the govt. is working to protect would be left unemployed for good. Economy can rebound quickly only if the businesses are allowed to stay afloat.

Viewed from any angle, these are sweeping directions covering in its fold all types of establishments, employers and employees. This begs the question- if the idea behind such measures was to protect migrant worker class or those in dire need of money, why stretch it to all classes of employees, some of whom can be placed in high income brackets?

Some even view these measures as outrightly impractical and onerous. If experience has taught us anything- it is that draconian laws/regulations never bear the desired fruit. Case in point is the absolute liquor ban in states like Gujarat and Bihar which backfired with proliferation of illicit alcohol trade.

Here too, many quarters have started witnessing lay-offs and salary cuts despite the govt.’s insistence to not lay-off.

The Way Forward

Perhaps, the answer to this sticky dilemma lies in not continuing this blanket restriction. But in bringing clarity on this issue and implementing measures addressing concerns of both workmen and employers.

Using two ministerial arms to tackle the issue of workmen lay-offs and salary-cuts raises more questions than it answers. Formulating a clear and practical policy that is legally valid can be the 1^st step to usher in certainty.

On the practical front, large business houses have already announced pay cuts for the top management. This alone may not suffice. Establishments may be encouraged to dialogue with trade unions to agree upon voluntary pay cuts. Analysing and renegotiating contractual covenants of not just labour class but employees in managerial capacity is cumbersome but required.

Govt. may equally consider relaxing this unqualified restriction by targeting select industries and class of workers where such regulations are needed the most. Fresh fiscal stimulus from the government which subsidises workmen wages as is being done in other countries can also be considered, if feasible.

The govt.’ s decision to finance employee provident fund contribution of both employers and employee for establishments having up to 100 employees is a welcome move in this direction.

With the nation under Lockdown 2.0, bleeding business house’s clarion call is for clarity and workable policies.

[The article is co-authored by Rohan Batra, Partner and Prince Todi, Intern at RR Law Chambers.]

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.