25 March, 2020
Introduction
In order to reduce the impact of termination of employment and to provide security to employees from sudden loss of job in the private sector, a private member bill, namely the Terminated Employees (Welfare) Bill, 2020 (“Bill”), was introduced by BJP MP Mr. Rakesh Sinha on February 07, 2020, in the Rajya Sabha. In the absence of any specific law imposing an obligation on employers to provide post-employment benefits for the period of unemployment, this Bill provides pecuniary benefits to dismissed employees to overcome the general economic hardships resulting from loss of employment. The key provisions of the Bill are summarised below:
Key Provisions
1. Applicability and benefits: An employee will be entitled to unemployment compensation, health insurance benefits or any other benefits as may be prescribed by the Central Government (“Bill Benefits”), (in addition to provident fund, gratuity, leave encashment, etc.,) in case his/ her employment is dismissed owing to winding up of the organisation/ establishment due to:
- economic slowdown; or
- change in technology in the respective field; or
- the owner or director managing the affairs of the establishment becoming insolvent; or
- the orders of the court; or
- incurring losses and unable to carry on the business; or
- the change in Government policy.
2. Non-Applicability: The Bill does not apply to employees whose employment have ceased on the following grounds of:
- proven misconduct;
- cheating;
- indulging in fraudulent means and misappropriation of money; or
- having been found guilty by a criminal court of justice.
3. Definition of Employer: The definition of an employer in the Bill is not aligned to any of the existing labour legislations in India. It only includes owner or director of any private establishment or organisation where 10 (ten) or more persons are employed. All the organisations/ undertakings which are owned, controlled or funded by either the Central or the State Government have been excluded from the definition of “employer”.
4. Definition of Terminated Employee: An important definition under the Bill is “terminated employee”, which includes any employee whether on regular or temporary basis, or casual in nature or on contract, whose services have been terminated. Please note that the scope of the definition is very wide and does not exclude employees in a managerial or supervisory category like most labour statutes.
5. Duration: A terminated employee is entitled to the Bill Benefits only if such benefits are not part of the employer-employee agreement. Such benefits are available only for a period of 9 (nine) months (inclusive of notice period, if any) or till the time he/ she gets employed elsewhere, whichever is earlier.
6. Unemployment compensation vis-a-vis severance package: The unemployment compensation, which is to be paid by the employer under the Bill, should not be less than 60 (sixty) percent of the gross salary or as provided under the employment agreement (if any), whichever is higher. However, if the terminated employee is being provided with a severance package, which is higher than the unemployment compensation, then such employee will not be entitled to unemployment compensation under the Bill. Currently, the only legislation, which provides for severance compensation is the Industrial Disputes Act, 1947 (or the corresponding state industrial disputes act) (“ID Act”), which applies only to “workmen”, who have completed 1 (one) year of continuous service, as defined thereunder. Under the ID Act, upon closure, a dismissed employee is entitled to a minimum of 1 (one) month notice (or payment in lieu thereof) and retrenchment compensation (severance pay), which is calculated at the rate of 15 (fifteen) days average pay for every completed year of service or any part thereof in excess of 6 (six) months. It would appear that the unemployment compensation under this Bill would be in addition to retrenchment compensation as mandated under the ID Act, except where the retrenchment compensation is higher.
7. Payment of interest: An employer is duty bound to provide the Bill Benefits to terminated employees from the month following the month on which termination is communicated to the employee or completion of the notice period, if any, whichever is earlier. In the event, the employer fails to pay such benefits to the terminated employee within 1 (one) month from the date of termination, the employer shall be liable to pay interest at the rate of 12 (twelve) percent per month for such delay.
8. Creation of corpus fund: The Bill casts an obligation on the employer to create a corpus fund with contribution of at least 5 (five) percent of the net profits of the organisation. Additionally, the employer may solicit contribution from any organisation, individual or trust for maintaining the fund. This is an entirely new concept, which is not envisaged under the current labour law regime. Such corpus can only be used for the welfare of the terminated employees. The corpus fund may also be utilised for:
- payment of expenditure in connection with the education of the children of the terminated employees; and
- medical facilities, free of cost, in the manner prescribed.
9. Rulemaking and funding by the Central Government: The power to make rules under this Bill is vested in Central Government, along with an obligation to provide adequate funds for carrying out the purposes of the Bill.
Analysis of the Bill
While the Bill is intended to reduce hardships on account of termination of employment, there are some practical issues, which make the Bill unfeasible:
- Increased burden on employers: The Bill imposes substantial financial implications on employers (i.e., owner/ directors) as compared to their current obligations under law. To provide a comparison, currently under the ID Act, a workman would be entitled to 9 (nine) months of salary as retrenchment compensation, if he has worked for approximately 18 (eighteen) years of continuous service, while the Bill provides for an unemployment compensation to any employee, for 9 (nine) months (at the rate of 60 (sixty) percent of gross salary) or till the employee finds another employment, whichever is earlier, irrespective of the employees’ tenure in the organisation. Further, if severance package of an employee is lower than the unemployment compensation, then as per the current construct under the Bill, the employee could claim both the benefits. Further clarity is needed on this aspect. The Bill also mandates that the health insurance benefits of terminated employees be continued as per the same terms and conditions that prevailed during employment. Additionally, 5 (five) percent of the net profit is a significant amount for private companies, considering the economic competitiveness in India. Also, extending the Bill Benefits to senior management functionaries and to employees in well paid jobs would be counter-productive, and a more nuanced approach of offering such unemployment compensation benefits should be considered, so as to effectively address the needs of those who would genuinely require such support.
- Lack of clarity: The Bill is silent on how the situations will be dealt with in cases where the organisation is not making profits and how the employers are expected to contribute in case the organisation/ establishment is incurring losses. Further, some of the grounds for applicability are “economic slowdown” or “change in government policy”, “change in technology”, which are typically not in the control of the employer either. Hence, the exceptions to applicability should have been carved out to address these issues. Some other important aspects that need clarity are the interplay with other statutes such as the ID Act.
- Closure versus Reduction in Force: It is important to note that the Bill Benefits will only be triggered by the winding up of the organisation/ establishment. The term “winding up” has not been defined in the Bill, and unless the rules framed under this Bill provide clarity on this matter, it would appear that the benefits will only be triggered upon the permanent closure of a place of unemployment and not as a result of redundancies.
- Implications of non-compliance: The Bill does not provide any implications/ penalties, which the employers may be subject to for any non-compliance of the provisions of the Bill. With this, the Bill will merely remain a toothless remedy for the benefit of dismissed employees.
Given that the Bill is a private member bill, the chances of it being passed in both houses of the Parliament are also very minimal, as generally private member bills do not proceed beyond the stage of introduction. The Bill is also likely to be viewed as anti-industry and could run counter-productive to some of the Government’s initiatives to improve ease of doing business in India. Nonetheless, this Bill is important since it highlights some of the lacunae in the current regime vis-a-vistermination of employment in the private sector, whereby severance pay is minimal or non-existent, which makes survival of the dismissed employee and his family, a tall order.
The copy of the Bill is available at: http://164.100.47.4/BillsTexts/RSBillTexts/asintroduced/terminat-E-7%202%2020.pdf
*The authors would like to thank our Partner designate Mr. Abe Abraham for his valuable suggestions.
For further information, please contact:
Richa Mohanty Rao, Partner, Cyril Amarchand Mangaldas
richa.mohanty@cyrilshroff.com
