Labour codes a step in right direction, but face a long road of reforms

Reforms modernise a tangled legal regime and open new opportunities, yet overtime rules, size controls and paternalistic mandates still limit true choice for workers

Mumbai in the 1970s and ’80s was a warning written in soot. Mills and factories that had once powered the city were in lockouts or declared sick. India’s industrial licensing regime would not allow those firms to live. India’s labour laws would not allow those firms to die. While waiting for closure permissions from labour inspectors, job opportunities ossified. Rules that claimed to protect workers in practice, killed jobs and trapped capital. 

This history of industrial disputes has cast a long shadow over every debate on labour reform. On November 21, India to great credit brought into force four labour codes, replacing 29 previous laws. The new codes promise a more coherent regime. But how far do these codes expand economic freedom for workers? Seen through that lens, the new regime has made excellent breaks with the past, but some challenges remain. 

New freedoms for workers 

The most beautiful change is the law’s recognition of women as persons with agency. Women were kept out of whole occupations or pushed out of the workplace at sunset. The Occupational Safety, Health and Working Conditions Code, 2020 flips the presumption. Women can work in all establishments and in all kinds of work, including at night, albeit with consent and subject to safety conditions. 

The codes also make it easier for workers to find formal jobs in growing firms. For decades, Indian law treated growing beyond 100 workers as a kind of original sin. Factories with 100 or more workmen needed government permission to retrench workers or close units. Many firms simply stayed below 100 on paper. The Industrial Relations Code shifts the main threshold to 300 workers. Below that number, basic protections and compensation rules still apply, but the state no longer stands between a failing firm and an honest exit. When employers know they can close if they must, they are more willing to hire. Workers gain when there are more employers to choose from. 

There are other quiet gains. Fixed-term employment is now clearly legal, expanding the choice of arrangements for workers. Workers on fixed-term contracts must receive the same wages and statutory benefits as permanent workers for the period of their contract.  

Where freedom still falls short 

Working hours are the sharpest example. The new law sets a daily limit of eight hours and a weekly limit of 48 hours, and it holds on to an overtime premium of twice the ordinary wage. On paper, this looks like strong protection. In practice, a very high overtime premium and rigid daily limits make it difficult to secure extra hours in the formal system. Workers who want longer shifts and higher monthly earnings cannot get them in a legal, transparent way. Economic freedom would give workers more room to negotiate hours within a clear weekly cap at a more moderate premium. 

The new codes have also not internalised that economies of scale are good for job creation and worker prospects. By keeping heavy controls on establishments with 300 or more workers, the law still treats large firms as a problem to be contained rather than as engines of opportunity. Workers then end up in a landscape of dwarfs, with fewer large employers who can offer internal mobility, training ladders, and more formal bargaining power. A framework that encouraged size and scale would give workers more choice across employers and a better chance of moving up over a working life. 

The codes also retain a paternalistic picture of what a good job should look like. They mandate in-kind benefits such as canteens, welfare officers, and committees even in relatively small establishments. Many workers would rather have more cash in hand and choose their own mix of food, childcare, or savings. Real freedom lies in letting workers bargain for the mix of wage and benefits that suits them. 

The unfinished work 

Parliament has taken an important step. It has replaced a mess of laws with a more coherent framework, raised some thresholds, and expanded important freedoms, especially for women. But if the test is economic freedom for workers, the job is not done. 

The next stage of reform should cement more economic and earning freedom for workers. Our overtime rules need to be reset so that a worker who wants to earn more by working a little more, can do so in a legal, predictable way instead of through off-the-books arrangements. Intrusive controls and welfare mandates should apply only at much higher thresholds, so that more firms can grow to a size where they offer training, promotion ladders, and real bargaining power to their employees. Inspectors should spend their time on serious violations, so that the law protects workers where the risks are greatest and leave more space for free agreements elsewhere. 

Labour law is not only about employers and factories. It is about how much control the state claims over ordinary people and their decisions about work. The new codes do increase economic freedom for workers. Whether that promise is realised will depend on what Parliament does next and on how states use the discretion they now hold.

The author is cofounder and CEO of Prosperiti, an economic freedom think-tank in Delhi