The Code on Industrial Relations 2020 – Tracing Its Effects on Your Business 

Last Updated at: Feb 08, 2021
Business registration - Industrial relations

Labour laws play a significant role in any business. They govern a company’s relations with its employees as well as the government. Changes in labour law can primarily impact your finances, hiring rules, and other obligations towards employees. Recently, the government proposed to replace 29 existing labour laws with four codes. One of these codes is the Industrial Relations Code, 2020. In this post, we present to you changes made to existing labour laws by way of this code, in simple terms. We also assess the impact this has on your business compliance obligations. 

What are the Major Advantages of the Industrial Relations Code, 2020 to Business Owners?

  • The key objective behind this act is to reduce business costs for labour while modernising labour regulation.
  • Easier filings – Under the old regime, there was the multiplicity of labour compliance under several laws – such as employee state insurance scheme, gratuity, PF, workmen’s compensation, etc. The code subsumes these laws into one comprehensive legislation. This would reduce the time and cost spent in several annual and quarterly filings 
  • Less litigation and faster dispute resolution – It renews focus on negotiation and arbitration for disputes with workers, thereby encouraging non-court, non-tribunal settlements. This would free up precious business resources (personnel, money, time) locked in litigious matters. 
  • Smooth functioning and less regulation – Strikes without notice are declared illegal for all businesses. Similarly, greater freedom is granted to a business in designing its working hours and other employment policies. 
  • Incentivises businesses to grow – Under the old regime, a small business faced greater regulation as it grew in size and employed more people. This has been called ‘perverse incentive’ – where small businesses often stay small to avoid greater financial burdens of labour law. By increasing the threshold of employees to 300, businesses can hire more without extra compliance costs. 

Main Features of the Code

Definition of a Worker – The code clarifies doubts emerging over the definition of workers, mentioned in several different labour laws. It states that workers would include, besides all persons employed in a skilled or unskilled, manual, technical, operational, and clerical capacity, all supervisory staff drawing up to ₹18,000 a month as salary. 

Laying off employees

  • Under the new code, laying off employees can have become harder. Now, the prior permission of the government is needed for establishments that have more than 300 workers. Laying off refers to dismissing employees due to adverse business conditions, such as the inability to pay existing debts such as salaries, closure of business, etc. 
  • For businesses meeting this threshold, an application must file 90 days before closure. 
  • However, if employees offer alternative employment not requiring any special skill or causing undue hardship to him. 

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Termination of an Individual Worker

Under the code, disputes regarding discharge, dismissal or termination of services of an individual worker would be an industrial dispute. Therefore, the business can drag to the Industrial Tribunal for adjudication. 

Prohibition on Strikes

  • The new code on industrial relations prohibits any strike or lockout without notice in any industrial establishment. Previously, this restriction limits to only public utility services. A notice that is at least 60 days before the strike has to be given.
  • Moreover, there can be no strike during conciliation proceedings, or case pending before an Industrial Tribunal. This is likely to reduce the chances of work disruption. 

Quick Resolution of Disputes

The code provides for two members in the Industrial Tribunal, instead of one in the earlier regime. If a matter remains unresolved at the conciliation stage, the tribunal can be approached directly. 

Fixed-term Employment – Addressing Flexibility and Exploitation

The Industrial Relations Code, 2020 introduces the concept of fixed-term employment for short-term labour. This is a creative invention under the new act that provides great flexibility to businesses in hiring employees for short assignments. Under contract labour, often, a middleman (contractor) would be involved. However, the new law bypasses this to allow direct hiring under fixed employment. 

Gratuity and Other Statutory Payments for Fixed-term Employees and Contract Workers

  • A business has to ensure that all statutory entitlements and service conditions equivalent to those of a regular employee with the offer to solid term employees. 
  • Under the Industrial Relations Code, gratuity becomes payable by a business to both permanent and fixed-term employees. This is applicable if work is complete for a period of one year. 
  • Gratuity is a fixed sum payable either on retirement, superannuation, death, or suspension of services of an employee. This is payable at the rate of 15 days’ wages for every completed year of service.
  • The gratuity provisions become applicable when ten or more employees get employment on any day in the last twelve months 
  • Thus, this provision may lead to greater business outflows – especially where fixed-term consultants get involvement. However, for short term assignments involving less than one year of work – no gratuity is payable. 

Increase in thresholds for standing orders

The threshold for employees for standing orders on routine matters increases from 100 to 300 workers. These standing orders relate to matters such as the classification of workers, termination of employment, work hours, grievance redressal etc. This gives small and medium-sized businesses greater flexibility in hiring and dismissing workers. 


Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.