Employment Law-Newsletter: The Code on Social Security, 2020-May-2021

As per the International Labour Organisation, “social security”i is the protection which is provided to the employees through a series of measures to counter against the economic and social distress resulting from sickness, maternity, employment injury, old age, and death. The Code on Social Security, 2020 (“SS Code”), subsumes 9 such prevalent labour laws in India relating to social security for employee/workmen, namely:

(i) The Employees Compensation Act, 1923

(ii) The Employees State Insurance Act, 1948

(iii) The Employees Provident Fund and Miscellaneous Provisions Act, 1952

(iv) The Employees Exchange (Compulsory Notification of Vacancies) Act, 1959

(v) The Maternity Benefit Act, 1961

(vi) The Payment of Gratuity Act, 1972 (vii) The Cine Workers Welfare Fund Act, 1981

(viii) The Building and Other Construction Workers Cess Act, 1996 and

(ix) The Unorganized Workers’ Social Security Act, 2008

The SS Code consolidates the abovementioned existing labour laws with a goal to extend social security benefits to all employees or workmen whether in the organized, unorganized or any other sectors in Indian labour market, including the matters connected and incidental thereto. Further, the SS Code envisages incorporating predominantly the provisions in the existing set of laws relating to the employee state insurance, provident fund, maternity benefit, and gratuity. However, it is observed that the SS Code varies from such existing set of laws in the following manner:

1. Payment of Gratuity for Fixed Term Employment: The SS Code identifies ‘fixed term employment’ as a form of employment where an employee is engaged for a fixed term or duration. As per the Payment of Gratuity Act, 1972, the gratuity is payable upon completion of continuous service of 5 years (“Continuous Service”) with an exemption for completion of Continuous Service made in case the termination of employment happens on account of death or disablement of the employee.ii The SS Code additionally provides exemption which enables the payment of gratuity to the employee who has been employed for a fixed term, in the light of which, the completion of Continuous Service shall not be necessary. iii

2. Clarity on Applicability of Definition of “Factory”: In a ruling by Hon’ble Bombay High Court “The Assistant Director Employees’ State Insurance Corporation Marol vs. M/s. Western Outdoor Interactive Private Limited” (First Appeal No. 143 of 2012)iv , it was held that under the Employees’ State Insurance Act, 1948 (“ESI Act”), IT and software development companies are considered “factory”. Further, it was also held that development/creation of software was held to be a manufacturing process and the premises where computers were involved for such manufacturing process was held to be the manufacturing unit. Now, the definition of “factory” under the SS Code clarifies that an ‘Electronic Data Processing Unit or a Computer Unit’ installed in any premises or part thereof shall not be construed as factory if no manufacturing process is being carried on in such premises or part thereof.v

3. Notice for Claim of Benefit: Under the existing Maternity Benefit Act, 1961, the written notice for payment of the maternity benefit and the period for which the woman employee will be absent from work, was to be given by the woman on such date not being a date earlier than 6 (six) weeks from the date of her expected delivery. The SS Code has revised the timeline to 8 (eight) weeks.

4. Compliance with the Application of Aadhaar: Under the SS Code, an employee or unorganised worker or any other person shall mandatorily establish his/her identity via Aadhaar Number for seeking any social security benefit under the SS Code such as medical sickness benefit, pension, gratuity, maternity benefit or any other benefit or for withdrawal of fund. Interestingly, this mandate is also applicable to the foreigner employees who eventually become citizens of India.vi Such compliance has been made mandatory in consonance with the provisions under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016. In contrast to this provision, there is no such requirement under the existing labour laws related to social security benefits in India.

5. Definition of “Employer” Widened: The existing labour laws do not cover the context of employees employed through third party contractor. This led to a point of debate that whether the liability to make payment towards social securities is of the principal employer or not. The SS Code widens the definition of the “Employer” by adding the context of “the employees employed through a third-party contractor”. Further, the SS Code has also made a provision that the amount of contribution and/or any incidental charges thereto paid or payable by an employer in respect of an employee employed by or through a contractor may be recovered by such employer from the contractor, either by deduction from any amount payable to the contractor under any contract or as a debt payable by the contractor.

6. Applicability of ESI: The SS Code captures that the establishment which carry on hazardous/ life threatening occupation shall be required to comply with provisions relating to employee state insurance, even if such establishment employs only one (1) employee.

7. Appeal to Tribunal: As per the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, aggrieved employer is required to deposit 75% of the amount due while making an appeal to the Tribunal. However, as per the SS Code, to make an appeal to the Tribunal, an employer is required to deposit 25% of the amount due from such employer in the concerned Social Security Organisation. Such amount shall be calculated by the Authorized Officer under the SS Code.

Did You Know?

Retention Bonus:

Retention Bonus is a financial incentive offered to the deserving, promising and talented employees of an organization to keep them engaged with the organization for a longer period (“Retention Bonus”). By remittance of Retention Bonus, an organization may benefit in following ways: • Organization can retain high-performance and talented individuals; • The cost of training other people is saved; • Motivates the employee to work hard and hence, the productivity increases; • Helps an organization to save its key employees from corporate poaching i.e. saves the employee from joining a competitor; • Helps retain high performing and key employees during crucial times; and • The organization may get some tax benefits as Retention Bonus is treated as a business expenditure under the Indian Income Tax, 1961.

It is observed that an organization generally offers Retention Bonus to employees who have worked with it for a considerable amount of time and, where the organization has also invested time, money and efforts in training and development of the employee. Hence, the organization seeks to retain such an employee to bear fruits from his/her high performance. Thus, by offering such a pecuniary incentive, the organization reaps benefits of continued, effective and efficient performance of such key employee.

Legality and Validity:

Retention Bonus is a widely accepted industry practice, and it is within the legal framework to offer such an incentive. In contrast to statutory bonus payable by an organization by virtue of the mandate under the Payment of Bonus Act, 1965, payment of Retention Bonus is discretionary in nature and its validity is covered and enforceable under Indian Contract Act, 1872.