Co-author/Editor: Nakul Gupta
Preface
This is the first article in a series examining legal issues related to corporate office employees. The idea for this series germinated from conversations with a former colleague who was a Human Resources leader for a large corporation. She noted that Human Resources practitioners often had questions on the legal aspects of their work but either didn’t know how to frame the question or who to ask it to.
This series will focus on corporate employees or ‘white-collar’ workers. The reason is that this sector of employees is the one that has seen tremendous structural changes over just the last three decades in India. The first epochal event for corporate office employment was the opening of the economy in the early nineties. This was followed up quickly by the advent of the information age. Recently, COVID again shook up this sector.
This series of articles is primarily aimed at Human Resources practitioners but will also be useful for corporate employees themselves in understanding their rights and responsibilities as employees.
Why Do These Misconceptions Arise?
At the unskilled or semi-skilled worker level, there is a larger disparity of power between the employer and the workers than at the skilled level. For the unskilled or semi-skilled worker, the alternatives to the current employer may be limited. This would not be the case for skilled workers especially highly educated ones working in metros. Thus, the opportunity cost for a low-skilled worker to pursue legal means to resolve a dispute with his employer is low. On the other hand, for a high-skilled worker the cons may far outweigh the pros in pursuing legal action against his employer.
Thus, even a particular class of workers hasn’t agitated much in court that doesn’t mean that everything is fine. It could simply be a case of that class not being incentivized to litigate. However, incentives change over time and so the danger is apparent.
Much like the case of an unexploded World War II bomb in a field – just because it’s not exploded so far doesn’t mean that it won’t explode tomorrow.
A Warning
There could be an endless number of misconceptions and they may vary from person to person. The ones listed below are based on discussions with laypersons and the author’s own observations from his long corporate career.
The scope of the misconceptions discussed in this article is also limited to where they concern the categorization of workers. Again, this is mainly for brevity (it’s already a lengthy article) but also because categorization of any entity is a good first step to take whatever the subject.
Misconception No. 1: Corporate Employees Can’t Invoke the Industrial Disputes Act
What is the Industrial Disputes Act
The Industrial Disputes Act, 1947 (“ID Act”) is the most powerful and controversial labour legislation in India. It was enacted benevolently, to prevent industrialists and companies from exploiting poor labourers. At the time that the Act was implemented, India did not have much of a middle-class. There were capitalists and labourers and the power was concentrated in the hands of the former.
From the mid-19th century onwards, international labour movements had come to realise that it was not enough to plead ‘privity of contract’ when it came to the relationship between employers and labour. The power differential was so stark that it was impossible for fair contracts to be agreed between the two parties. Therefore, the State inserted itself in the process and purely civil contracts started to have some statutory aspects as well. While employers could still set the terms and conditions in the employment contract there were minimum legal requirements that they had to adhere to. For example, in certain nations minimum wages were instituted.
Similarly, the ID Act has various protective provisions such as fixed process for retrenchment of labour. Retrenchment in layman’s terms is laying off a worker for reasons other than indiscipline, superannuation, or disability.
Since 1947, India’s economy has obviously evolved into something quite different. The reader is most likely someone who works in an air-conditioned corporate office, hunched over a computer rather than on a hot factory floor. When one thinks of such a corporate employee, one would not contemplate that such a person would resort to the ID Act to resolve a dispute with his employer. Even so, corporate employees do have many grievances with their employers as the recent fracases around moonlighting and ‘quiet-quitting’ have shown.
It is true that corporate employees don’t usually invoke the ID Act, but whether they can or not is another matter.
Definitions
The definition of ‘industry’ is so wide in the latest edition of the ID Act and following from the Supreme Court’s judgement in the Bangalore Water Supply case[1], that it doesn’t bear analysing at length. The only employers who should pause and reflect whether the Act applies to them are religious or charitable organisations.
The interesting definition in the ID Act is that of ‘employee.’ Instead of ‘employee’ the ID Act refers to ‘workman.’ Over time, this definition has expanded and become more inclusive. Currently, any employee providing ‘skilled’ or ‘technical’ labour is included however, any employee in a managerial, administrative role is excluded. Employees in a supervisory capacity are also excluded if their monthly wage is over Rs. 10,000.
Immediately, certain types of corporate employees can be removed from consideration. For example, any key managerial personnel, department heads, company secretaries occupy either managerial or administrative roles.
The confusion lies with certain corporate employees who are fashionably referred to as ‘individual contributors’ nowadays. For example, a newly recruited management consultant from a top B-school. In actuality, the work of such a person would neither be managerial nor administrative nor supervisory in nature even if their official designation is ‘manager.’ If the ‘dominant nature’ of the person’s work is skilled or technical and a solo contribution, then per the ID Act he would fit within the scope of ‘workman.’
‘Dominant nature of work’ is an important caveat to this discussion. Take an example of an experienced tech worker. After many years of work, he might have reached such a level of skill and recognition in the organization that he is routinely asked to supervise younger workers even though officially his role is meant to be that of an individual contributor. The court would ask how much of this person’s working hours are consumed in a supervisory capacity. If the answer is ‘the majority’ then he would be deemed to be working in a supervisory capacity.
The discussion becomes murkier after considering more case law. In a seminal case, the Supreme Court made the following observations[2]:
- In the definition of ‘workman’ in the ID Act, the words ‘skilled’ and ‘technical’ need to be considered in the same context as the words around them. From reading the judgement, the Court seems to be suggesting that having skilled or technical knowledge may not be the same as doing skilled or technical work.
- Two people doing the same kind of work can be differentiated under the ID Act based on their relative incomes. Therefore, the person who earns less may fall within the ambit of the ID Act while the higher earner may not be able to rely on the provisions.
Implications
From the discussion, we should conclude that whether a corporate employee can invoke the ID Act is a question of fact – has he been working in an individual capacity, does his work fall within the included or excluded categories in the definition of ‘workman.’
Even if a corporate employee is eligible to invoke the ID Act, will he do so? All individuals act in self-interest whether they do it consciously or not. In normal times, a highly educated individual contributor would not bother with seeking legal fights with an employer. Not only would it be a waste of time which he could spend in getting another job, but also because formal employment is still low in India and he might worry about acquiring a negative reputation in the corporate world. However, there are certainly scenarios in which this reasoning can turn on its head. For example, in a universal economic downturn when mass layoffs are happening a person might see greater benefit in ensuring his career survival by any means necessary.
Course of Action
- In framing processes, policies and documentation, HR professionals should be very careful in structuring the roles of employees. As far as possible, job descriptions, employment contracts and employee handbooks should match the communication to employees as well as employees’ real work.
- For example, a conglomerate seeks to hire a Chief Technological Officer (“CTO”). The management corporation of the conglomerate would hire this person, therefore it would not be possible ‘on-paper’ to assign any actual reportees from the group companies to this person. The person would have to rely on ‘influencing’ others to his way of thinking. In front of a court, this person’s lack of reportees would work against classifying him as a manager. In such a situation, the HR professional needs to draft the job description in such a manner that the CTO’s other managerial aspects shine.
- Other indicators of managerial responsibility include his overall responsibility for the department strategy, the fact that he directly reports to a senior executive or the quality of MIS that he generates.
- HR can also structure the compensation for managers such that one component is clearly due to the person’s seniority and managerial responsibility. Total compensation is also a big indicator of managerial responsibility.
- Clear organization charts without excessive crisscrossing lines of reporting and a top-down depiction of hierarchy are a must.
- In downturns, it is often the individual contributors who are laid off to reduce costs. It is also in such times when employees are more likely to seek legal remedies for their grievances. Organizations should proactively seek to allay the shock of layoffs perhaps through higher severance packages, policies to help laid off workers find alternative employment or policies to give preference to laid off workers when hiring resumes. Although such policies would increase the cost to the organization, in comparison to the tangible and intangible costs of litigation (including reputational damage) they might be beneficial in the long run.
Misconception No. 2 – Corporate Employees Are ‘Non-Unionizable’
The Law
Unlike in Misconception No. 1 where there are shades of grey, this misconception is unequivocally incorrect. In fact, the Constitution guarantees all citizens the fundamental right to form unions and associations. However, as is the case with all the fundamental rights, the State is allowed to impose reasonable restrictions on the freedom to form a union as well.
The main central law governing trade unions is The Trade Unions Act (“TU Act”). There are a few interesting points about definitions within the TU Act:
- ‘Employers’ are mentioned several times but are not separately defined.
- The definition of ‘workmen’ seems to be an after-thought within the definition of ‘trade dispute.’
- The definition of ‘workmen’ is even more inclusive than in the ID Act. Workmen are ‘all persons employed in trade or industry whether or not in the employment of the employer with whom the trade dispute arises.’
From the definition of workman in the TU Act there is no confusion about whether a particular corporate employee fits the mold or not – it is a wide and inclusive definition. The interpretation of ‘workman’ in this Act has also been confirmed by several court judgements[3]. Similarly, an employee may be a member of a trade union that spans several organizations.
There are state level legislations governing trade unions as well. For example, in Maharashtra the relevant statute is known as The Maharashtra Recognition of Trade Unions and Prevention of Unfair Labour Practices Act.
Why Don’t Corporate Employees Unionize
There are several reasons highly skilled and remunerated corporate employees may not unionize:
- Short durations in each rung of the ladder before receiving a promotion or short stints with employers.
- Typically, unions are formed by the same class of employees earning similar wages. For white collar workers, the remuneration may vary drastically from individual-to-individual.
- As discussed in Misconception No. 1, employees will subconsciously weigh pros and cons of actions. In most situations for white collar workers there would be very little benefit to unionizing.
Even though white-collar workers don’t unionize often, when their work-life situation changes drastically they may group together with others in a similar situation for security.
Consider the case of a tech worker or an engineer. While, some tech workers will grow into management roles, most will remain individual analysts or coders albeit honing their skills over time. Until recently, tech workers have seen tremendous demand driven by the global startup boom. However, if there is a global recession and opportunities outside current employment dry up, tech workers may unionize.
This is not a hypothetical scenario. In the US, which is a notoriously anti-union jurisdiction, during peak-COVID many tech workers joined local unions [4]. This has also been the case in India of late [5].
Course of Action
- Intra-company unions, should they ever form, are likely to be unstable for the reasons mentioned earlier. It is the pan-industry trade unions that will be more stable and effective. Organisations should not see these unions as adversaries rather as natural outcomes of a maturing sector of the workforce.
- Organisations have a statutory duty to provide good working conditions and such trade unions can serve as a good tool to temper any extreme tendencies that may develop especially nowadays when growing rapidly at scale is a common desire amongst new companies.
- HR departments must train the team on trade unions to develop sensitivity around this important aspect of the profession. This would be especially useful for new recruits or middle managers who may not have dealt with unions in their careers.
Misconception No. 3 – Written Contract Maketh Employee
The Law
In India, The Indian Contract Act (“ICA”) governs contracts. On reading section 10 of the ICA, it is indirectly evident that even non-written agreements (oral agreements) can be valid contracts unless otherwise specified by another law. Courts have also confirmed the same.5
The various labour matters are concurrent subjects in the Constitution which means that there are both Union and state level legislations that govern the employer-employee relationship. Therefore, whether a written employment contract is necessary to constitute an employer-employee relationship depends upon the state in which the worker has been hired.
In general, there is no such law that prohibits an oral employment agreement. The issue arises if there is a dispute between the parties to an oral agreement because it is hard for the aggrieved party to prove the existence of the agreement. Courts have ruled that if an aggrieved person is claiming the existence of an oral agreement, the burden of proof lies with the aggrieved person [6].
If a person claims to have been employed basis an oral agreement, he will find it easy to prove such a claim from the conduct of the parties. If he can present employees of the company that can attest that he showed up for work every day and worked as an employee or even if he can prove monthly transfers of money from the employer into his account, it will make for a strong case.
Pitfalls of Oral Agreements for Employers
Oral agreements for employment are more common in the informal sector and amongst small businesses. However, larger organizations may also hire workers on a casual basis without putting pen to paper.
As discussed earlier, since it doesn’t matter what has been written on paper only what can be proved, an oral agreement isn’t advantageous. In fact, it can be a double-edged sword – if an employer hires someone on contract basis but without a written agreement, that person could later claim to have been hired as a full-time employee and may even be able to present circumstantial evidence such as witness statements and financial statements that support his claim.
Course of Action
- There must be written contracts with any worker whether that worker has been hired as an employee or as a contract worker. Employers should see written contracts as a positive piece of documentation which allows them to manage the expectations of the worker and the tone of relationship.
- Written contracts must be clear and straightforward. Vague or fuzzy language can lead to unexpected and unwanted outcomes.
Misconception No. 4 – By Cleverly Wording Contracts I Can Avoid Having Employees Entirely
Organizations will broadly try to either hire full-time employees or contractual workers for a fixed term. Employment contracts are known as ‘contracts of service’ whereas those agreed with contract workers are terms ‘contracts for service.’
As mentioned earlier, in India the relationship between employers and employees is not a purely bilateral one but is subject to laws and rules mainly to protect workers from exploitation. However, these laws and rules come at a literal cost, making it difficult for companies to adjust easily to a changing business environment.
On the other hand, contracts ‘for service’ are governed only by contract law and are bilateral in nature (with a few caveats). It is no wonder that employers have a long history of hiring needy workers as ‘contract labour’ when in fact those workers have all the hallmarks of full-time employees. There have been numerous judgements and even a central law to prevent such exploitation. The thrust of legislation and adjudication has been to firstly determine the real nature of the work being done and then to prevent employers from treating de-facto employees as contract workers.
Control and Supervision
Courts have developed a test [8] to see whether the aggrieved worker had been working as an employee or a contract worker. This test is known as the ‘control-and-supervision test.’ The early idea (in English case law) was that if a worker was hired to complete a certain task and in doing so was either controlled and/or supervised by the hirer (“Principal”) then he was working as an employee. On the other hand, if the worker was left to his own devices in completing the task then he was deemed to be working on a contract basis.
The test has evolved over time. Courts [9] recognized that organisations may need to supervise contract workers in the way they complete a certain task especially if the contract was through a contractor and was simply for supply of labour. In such a situation, the point of determination was whether the Principal had control over the employment of the workers – for example if the Principal paid salaries to the workers directly, or could choose which specific worker would work for them, or had the right to discipline a worker or to fire him.
The control-and-supervision test is straightforward even in corporate offices wherein the workers are hired through and allocated by a third-party contractor. Organisations advertising ‘staffing solutions’ are essentially white-collar contractors.
However, an issue arises when organisations hire individuals on contract directly. For example, an internet company hires a tech worker on a contract basis. The company will supervise the work of the worker and may also assign him to a manager. The company will likely restrict the tech worker from seeking other concurrent employment and may control his working hours and holidays. In such a scenario, which is commonplace, there would be very little obvious distinction between a full-time employee and a contract worker.
Factors Differentiating Employment from Contract Work
The difference between a contract of service and for service is one of facts and would vary from situation to situation. However, as a guidelines here are some factors that could be seen in favour of a contract ‘for service’:
- Fixed duration contract
- Termination at will of either party
- Reference to arbitration in case of dispute
- Specifically mentions that the contract doesn’t constitute an employer-employee relationship
- The work contemplated is ancillary to the core business
On the other hand, factors that work against a contract being seen as ‘for service’ are:
- Control over manner of work – for example, the worker is assigned to a team or manager
- Fixed hours
- No opportunity to work outside company
- Fixed holidays
- Worker expected to abide by company code of conduct (usually reserved for employees)
- Company can undertake disciplinary action
Course of Action
- A contract worker should not be handling the core work of the organisation except for short periods. There should rightly be concerns around confidentiality, protection of intellectual property, employee morale, business continuity etc.
- HR professionals should craft unambiguous contracts that clearly state the intention of both parties that the contract be one ‘for service.’ For example, it would be perfectly acceptable for the preamble of a contract to explain at length what the core business of the organisation is and the fact that the worker would be working on an ancillary task.
- Companies naturally try and protect themselves from all eventualities. In a contract for service however, this could be counterproductive as it could erode the veil separating employees from contract workers. There must be a discussion beforehand as to what clauses are utterly necessary to protect the company and which ones are just ‘good-to-have.’ Wherever possible companies should give the worker latitude in the ‘good-to-haves.’
Misconception No. 5 – ‘Part-time’ Employee Is a Valid Category of Employees
The Law
Under law, ‘part-time’ employees are partially recognized as a category but not in a way that will aid employers.
An overview of the main central labour laws shows that categorising an employee as ‘part-time’ does not affect the employee’s statutory benefit entitlements:
- We had discussed the definition of ‘workman’ in the ID Act earlier which did not refer to full-time or part-time employment at all. Section 25(B) of the same Act, describes a workman’s ‘continuous service.’ However, this section determines continuous service in terms of days worked rather than hours per day worked.
- The Supreme Court has also conclusively determined [10] that the central labour laws do not differentiate between part-time and full-time employees and therefore the same benefits would be available to both. The Court has noted that the important distinction is between an employee and a contract worker.
- Similarly, The Employees Provident Funds and Miscellaneous Provisions Act (“EPFO Act”), which governs employee provident funds and pension funds does not differentiate between part-time and full-time employees in its definition of ‘employee’ in section 2(f) of the Act.
- In an interesting case [11], a doctor was hired as a part-time medical officer at a company. His contract with the company specifically mentioned that he would not be able to avail provident fund benefits. However, the Calcutta High Court eventually found that benefits such as provident fund are not denied to ‘part-time employees’ under the EPFO Act. The Court also stated that the object of the EPFO Act is benevolent in nature and that for application of the Act’s provisions it does not matter if the employee’s work is considered core business or ancillary.
- The same conclusions can be drawn for The Payment of Gratuity Act, in which the definition of ‘employee’ (section 2e) is similarly inclusive and courts [12] have also reiterated that the Act does not differentiate between full-time and part-time employees.
However, there are also state-level laws governing employment and in these laws one might find recognition of part-time employment. For example, in the Maharashtra Shops and Establishments Act (Regulation of Employment and Conditions of Service) Act, 2017, section 17 recognises the right of employers to hire part-time employees but restricts such employees to no more than 5 hours of work per day and no overtime. These regulations also provide a formula for calculating the wages of part-time employees. However, these rules do not address or restrict the benefits or rights of such part-time employees vis-à-vis the rights and benefits of full-time employees.
The Confusion Around Contract Work and Part-Time Work
It seems that the primary reason employers hire ‘part-time’ employees in corporate offices is for piecemeal work and from the wording of contracts confuse ‘contract work’ with ‘part-time employment.’ Colloquially, these two terms may be interchangeable but in the legal world which lives by semantics, these terms connote entirely different practices.
As we discussed earlier, from just the conduct of parties it can be very difficult to distinguish between contract work and full-time employment. The same is true for the difference between part-time employment and contract work.
Course of Action
- Labelling a worker as a part-time employee offers very little benefit, if at all. As most employers actually want to hire contract workers to work for limited hours, the best practice should be to avoid using the two terms interchangeably. In terms of drafting the contract, the language should be clear and precise as also suggested for Misconception No. 4.
CYA And Then Focus on Incentives
We’ve discussed incentives a lot in this article. HR professionals should primarily concern themselves with understand what drives the decisions and actions of workers. However, because of the misconceptions discussed here as well as all the others not discussed, there may be glaring gaps in meeting statutory requirements or planning for business disruptions. Therefore, the best practice is to plug these gaps quickly, train the team in identifying future gaps and then get back to the core focus.
References
- (1978) 2 SCC 213 [Bangalore Water Supply]
- (1985) 3 SCC 371 [Arkal Govind Raj Rao v. CIBA Geigy of India Ltd.]
- 2002 (93) FLR 580 [Government Tool Room And Training v. Assistant Labour Commissioner]
- Heater, Brian. “Online Code Collaboration Tool Glitch Votes to Unionize.” TechCrunch, 13 Mar. 2020, techcrunch.com/2020/03/13/online-code-collaboration-tool-glitch-votes-to-unionize/. Accessed 30 Nov. 2022.
- cue. “IT Workers Turning to Unions as Tech Layoff Tsunami Reaches India | the Straits Times.” Www.straitstimes.com, 26 Nov. 2022, www.straitstimes.com/asia/south-asia/it-workers-turning-to-unions-as-tech-layoff-tsunami-reaches-india. Accessed 30 Nov. 2022.
- (2009) 2 SCC 582 [Aloka Bose v. Parmatma Devi]
- (1990) 3 SCC 1 [Mayawanti v. Kaushalya Devi]/
- (2021) 7 SCC 151 [Sushilaben Gandhi v. New India Assurance Co. Ltd.]
- (2009) 13 SCC 374 [Intl. Airport Authority of India v. Intl. Air Cargo Workers’ Union]
- (2008) 10 SCC 698 [Div. Manager New India Assurance v. A. Sankaralingam]
- (1996) ILJ 176 Cal [Bengal Ingot Company Limited vs The Regional Provident Fund Commissioner, West Bengal]
- 2020 LLR 250 [National Bal Bhawan v. Vandana]
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