Employment Protection and Business Flexibility under the Industrial Relations Code, 2020

ABSTRACT

The Industrial Relations Code, 2020 represents an important step towards reforming labour laws in India by combining three major labour legislations into a single legal framework. The main objective of this study is to examine how the Code balances employment protection for workers with the need for business flexibility for employers. It analyses key provisions relating to retrenchment, fixed-term employment, standing orders, trade union recognition, strikes, lock-outs and industrial dispute resolution. The Code provides certain protections to workers, including notice and retrenchment compensation, a Worker Re-skilling Fund, grievance redresses mechanisms and equal benefits for fixed-term employees. At the same time, it gives employers greater flexibility through higher thresholds for prior government permission in cases of lay-off, retrenchment and closure, along with the recognition of fixed-term employment. This research also examines important judicial decisions, including Excel Wear v. Union of India, Workmen of Meenakshi Mills v. Meenakshi Mills Ltd. and D.K. Yadav v. J.M.A. Industries Ltd., to understand the relationship between workers’ rights and employers’ freedom to conduct business. The study adopts a doctrinal research methodology based on statutory provisions, judicial decisions, books and secondary sources. It critically evaluates whether the Code promotes industrial growth without weakening job security, collective bargaining and fair treatment of workers. The study concludes that although the Code seeks to modernise labour regulation and improve the ease of doing business, its effectiveness depends on fair implementation, strong enforcement and adequate safeguards against the misuse of employment flexibility.

1. Introduction

Every employer wants freedom to run the business smoothly. Every worker wants a secure job and fair treatment. These two wishes often pull in opposite directions, and labour law has to find a balance between them. The Industrial Relations Code, 2020 (the “IR Code”) is India’s latest attempt to do this.

The IR Code is one of the four labour codes passed by Parliament in 2019-2020. It combines three old laws into one: the Industrial Disputes Act, 1947, the Trade Unions Act, 1926, and the Industrial Employment (Standing Orders) Act, 1946. The Central Government brought the four labour codes into force on 21 November 2025. Supporters say the Code makes hiring and firing rules simpler and encourages investment. Critics say it weakens job security and makes it harder for unions to protect workers.

This assignment explains how the IR Code deals with two ideas: employment protection (keeping workers safe from unfair dismissal) and business flexibility (letting employers adjust their workforce as the market changes). It also looks at important Supreme Court cases, and gives a short critical analysis at the end.

Research question: Does the IR Code keep a fair balance between protecting workers and giving flexibility to business?

2. Background: Why Was a New Code Needed?

India had more than two dozen central labour laws, and each one had its own definitions, authorities and procedures. The Second National Commission on Labour (2002) said that these laws were scattered and confusing and recommended that they be grouped into a few broad codes.

Employers complained that there were too many compliances and that rules for closing or downsizing were so strict that many firms stayed small on purpose, to avoid the legal burden. Workers, on the other hand, complained that disputes took years to settle and that a large part of the workforce had no real protection.

The Industrial Disputes Act, 1947 (“ID Act”) was written in the period just after Independence, when the aim was to maintain industrial peace and protect workers in a weak economy. In Bangalore Water Supply v. A. Rajappa, the Supreme Court gave a very wide meaning to the word “industry”, which brought many hospitals, universities and charities under the ID Act. This showed how broad the old law had become. The IR Code tries to make the law more focused and easier to apply.

3. Constitutional and Conceptual Framework

Labour law in India rests on both fundamental rights and Directive Principles.

• Article 14 (equality) protects a worker against arbitrary or unfair action, even by a private employer when a statute is involved.
• Article 19(1)(c) gives the right to form associations or unions.
• Article 19(1)(g) gives the right to carry on any trade or business, which is the source of the employer’s claim to flexibility. It is subject to reasonable restrictions under Article 19(6).
• Article 21 includes the right to livelihood, which supports protection from arbitrary dismissal.
• Articles 41 and 43 (Directive Principles) talk about the right to work and a living wage.

So the Constitution itself contains both sides of the debate. The courts’ job is to check whether a labour law’s restrictions on business are “reasonable”. The same idea guides this whole topic: protection of workers is a valid goal, but it cannot be so heavy that it destroys the freedom of business. India has also not ratified ILO Convention 158 on Termination of Employment, which says that a worker should not be dismissed without a valid reason connected to capacity,  conduct or the needs of the business. Still, the idea behind it appears in our case law.

4. Employment Protection under the IR Code

4.1 Retrenchment: notice and compensation

Under the ID Act, “retrenchment” means ending the service of a worker for any reason other than punishment. The Supreme Court has read this definition widely. In State Bank of India v. N. Sundara Money, it held that even termination by simply ending the job can be retrenchment. The Constitution Bench in Punjab Land Development and Reclamation Corporation v. Presiding Officer, Labour Court confirmed this broad reading. The IR Code keeps the same basic protection. Before retrenching a worke who has worked for at least one year, the employer must:

• give one month’s written notice, or pay wages in lieu of notice;
• pay retrenchment compensation of 15 days’ average pay for every completed year of service (or part of a year over six months); and
• give notice to the appropriate Government.

This is similar to the old Section 25F of the ID Act, so the core financial protection continues. The Code also lists the situations that are not treated as retrenchment, such as voluntary retirement, retirement at the age of superannuation, and, importantly, non-renewal of a fixed-term contract on its expiry. Section numbers for these provisions should be checked in the Act while writing the final version.

4.2 Worker Re-skilling Fund

The Code introduces something new. When a worker is retrenched, the employer must also pay an amount equal to 15 days’ last drawn wages into a Worker Re-skilling Fund, from which it is credited to the worker’s account within a fixed time. The idea is to help the worker find a new job and not just receive a one-time payment. Employment protection is therefore changing from “keeping the same job” to “supporting the worker to move to another job”.

4.3 Standing Orders and fair treatment

Standing orders are written rules about the conditions of service such as working hours, leave, misconduct and disciplinary action. The IR Code applies the standing orders chapter to industrial establishments with 300 or more workers (the old limit was 100). Such establishments must have standing orders, and the Government will issue model standing orders that apply when the employer has none.

Even where standing orders do not apply, courts insist on fair process. In D.K. Yadav v. J.M.A. Industries, the Supreme Court held that a termination without a hearing violates natural justice, and that the right to livelihood under Article 21 is part of the worker’s

• In Uptron India Ltd. v. Shammi Bhan, the Court struck down a rule under which a worker’s service ended automatically if he overstayed leave, because no
• opportunity of being heard was given. In Delhi Transport Corporation v. DTC Mazdoor Congress, a rule allowing termination on notice without any reason was held arbitrary and

• violative of Article 14.

4.4 Grievance redressal and dispute resolution

The Code sets up several forums to settle problems early:

• A Grievance Redressal Committee in every establishment with 20 or more workers, which looks at individual complaints.
• A Works Committee in establishments with 100 or more workers, to promote good relations between employer and workers.
• Conciliation officers and Industrial Tribunals. The Tribunal has two members (one judicial and one administrative). A worker whose dispute was not solved in conciliation can approach the Tribunal directly, within the time limit given in the Code.
• A limitation of two years for raising certain disputes, such as individual dismissal disputes, to avoid very old claims.

When a dismissal is found unfair, the Tribunal can order reinstatement or compensation. The Supreme Court has said that reinstatement is not automatic in every case and that the

• facts, such as the length of service and the delay, matter. In Gujarat Steel Tubes Ltd. v. Mazdoor Sabha, Justice Krishna Iyer stressed that labour adjudication should aim at real

• industrial justice and not hide behind technical rules.

4.5 Trade union protection

The Code keeps the right to form unions. A union needs at least 10% of the workers or 100 workers, whichever is less (with a minimum of seven members) to apply for registration. It also introduces a system of recognition of a sole negotiating union (one with at least 51% of the workers as members) and, where no union has this support, a negotiating council made up of the representatives of unions having at least 20% support. This is meant to bring clarity to collective bargaining, but critics say it may reduce the voice of smaller unions.

5. Business Flexibility under the IR Code

5.1 Recognition of fixed-term employment

This is the most talked-about change. Earlier, employers in many industries could not hire workers directly for a fixed period, so they used contract labour through agencies. The IR Code recognises fixed-term employment by contract in every sector. A fixed-term employee is hired directly for a specific period and:

• gets the same wages, working hours, allowances and social security as a permanent worker doing similar work;
• gets gratuity on a pro-rata basis after one year of service (under the Code on Social 15 Security, 2020); and

• has no right to notice or retrenchment compensation when the contract simply ends.

For business, this allows quick hiring for seasonal or project-based work. For workers, the benefit is equal treatment, but the risk is that employers may keep renewing short contracts, so that permanent jobs are replaced by temporary ones. The Code does not clearly limit how many times a contract can be renewed. This is a gap that the rules or the courts may have to deal with.

5.2 Higher thresholds for lay-off, retrenchment and closure

Under the ID Act, a factory, mine or plantation with 100 or more workers needed the Government’s prior permission for lay-off, retrenchment or closure. Under the IR Code, this limit is raised to 300 workers, and the appropriate Government can increase it further by notification. That means many mid-sized units can now adjust their workforce without waiting for permission. The Code still requires a 60-day notice before closure in establishments with 50 or more workers, and compensation of 15 days’ average pay for every completed year of service.

5.3 Rules on strikes and lock-outs

The old law required strike notice only in public utility services. Under the IR Code, all industrial establishments must follow the rules: a worker cannot go on strike without giving 60 days’ notice, and the strike cannot start within 14 days of giving the notice. Strikes are also banned while conciliation or Tribunal proceedings are pending and for a period after they end. Concerted casual leave by 50% or more of the workers on one day is treated as a strike. For employers, this means more predictability and less sudden disruption. The Supreme Court has already held that the right to strike is not a fundamental right. In T.K. Rangarajan v. Government of Tamil Nadu, it said employees have no legal or moral right to strike and that it is only a weapon in industrial disputes subject to law. So the new restrictions are likely to be upheld if challenged, as long as they are reasonable.

5.4 Contract labour and outsourcing

The employer’s flexibility also includes using contractors. The courts have tried to prevent abuse. In Steel Authority of India v. National Union Waterfront Workers, the Supreme Court held that contract workers are not automatically absorbed as permanent employees

• when the Government prohibits contract labour in a process. But in Workmen of Nilgiri Cooperative Marketing Society v. State of Tamil Nadu and Hari Nandan Prasad v. Food Corporation of India, the Court said that if the contractor arrangement is a sham or camouflage, and the principal employer in reality controls the workers, then the workers
• can be treated as employees of the principal employer. These tests continue to be important under the new Code.

6. Important Case Law on the Balance between Protection and Flexibility

1. Hotel Imperial v. Hotel Workers’ Union (1959). The Court accepted that an employer has the right to reorganise the business and to reduce staff if it is done in good faith for efficiency. Retrenchment of surplus workers is allowed if there is no unfair motive.

2. Excel Wear v. Union of India (1978). The Supreme Court struck down the provision requiring Government permission for closure (Section 25-O of the ID Act) because it took away the employer’s right to close a business, and so violated Article 19(1)(g). The Court said that the right to carry on business also includes the right to close it. This case is very important for the employer’s side.

3. Workmen of Meenakshi Mills v. Meenakshi Mills Ltd. (1992). The Court upheld the requirement of prior permission for retrenchment (Section 25-N) as a reasonable restriction, since workers’ livelihood is at stake and the Government’s power was subject to guidelines and review. This is the workers’ side of the story and shows that the two ideas can coexist.

4. K. Yadav v. J.M.A. Industries (1993). The Court read natural justice and Article 21 into dismissal under standing orders. Protection from arbitrary action is part of fair procedure.

5. K. Rangarajan v. Government of Tamil Nadu (2003). No fundamental right to 16 strike. This supports the new strike-notice rules.
6. Hari Nandan Prasad v. Food Corporation of India (2014). The Court looked at the real nature of the relationship, not the label used in the contract. This protects workers from sham contracting.

Together, these cases show a clear pattern: the courts accept that businesses need flexibility, but they do not allow arbitrary or unfair action against workers. The IR Code has to be read in the same spirit.

Summary Table of Cases

7. Comparison: ID Act, 1947 and IR Code, 2020

8. Critical Analysis

8.1 Arguments in favour of the Code

• Simplicity: One code and fewer definitions mean easier compliance, especially for small employers.
• Encouraging growth: The higher threshold of 300 workers allows companies to grow without fear of strict closure rules. Earlier, many firms stayed small deliberately, which is sometimes called the “dwarfism” problem.
• Recognition of reality: Fixed-term employment is already common. Giving it legal recognition and equal benefits is better than hiding it behind contractors.
• Faster justice: Direct approach to the Tribunal and the conciliation process may reduce delay.
• Re-skilling: The Re-skilling Fund shows a modern approach, focusing on employability and not just compensation.

8.2 Arguments against the Code

• Weaker job security: Raising the threshold to 300 means that a large number of workers lose the protection of prior permission. In India, most establishments are small, so a large part of the workforce is affected.
• Risk of misuse of fixed-term contracts: With no cap on renewals, permanent jobs can be quietly replaced with a chain of short contracts.
• Strike restrictions: A 60-day notice and long bans on strikes during proceedings can make a strike almost impossible, which weakens workers’ bargaining power. Since the right to strike is not fundamental, courts may not step in.
• Union concerns: The 51% rule for a sole negotiating union may leave minority unions with little say.
• Too much delegation: Many details, such as thresholds and exemptions, are left to the Government through rules and notifications. These can change quickly and may differ between States.
• Enforcement problem: The best law is useless if the labour department cannot monitor compliance, especially in the unorganised sector, where most workers are employed.

8.3 Is the balance fair?

In my view, the Code leans towards business flexibility, but it does not remove employment protection. Retrenchment compensation, notice and the right to approach the Tribunal remain. The Re-skilling Fund and equal benefits for fixed-term workers are real gains for workers. At the same time, the higher thresholds, wider strike restrictions and open-ended fixed-term contracts shift power towards the employer. The final balance will depend on how the Government frames the rules and how the courts interpret the Code, particularly using Articles 14 and 21 as seen in D.K. Yadav and Meenakshi Mills.

9. Suggestions

• Limit the renewal of fixed-term contracts, for example by allowing a maximum number of renewals or a maximum total period, after which the worker becomes permanent.
• Strengthen enforcement through inspections, online compliance systems and simple complaint channels for workers.
• Keep thresholds under review. The Government should use evidence before changing the 300-worker limit, and explain its reasons publicly.
• Protect small-sector workers through at least minimum notice and a fair hearing for those who fall outside the Chapter on prior permission.
• Make the Re-skilling Fund effective by ensuring that it is used properly and that workers actually receive training and support.
• Encourage social dialogue by involving unions and employers in framing the rules.

10. Conclusion

The Industrial Relations Code, 2020 tries to modernise India’s labour law by combining old statutes, making rules simpler and giving employers more freedom to adjust their workforce. At the same time, it keeps important protections such as notice, retrenchment compensation, grievance redressal and access to Tribunals, and it adds new support such as the Re-skilling Fund and equal benefits for fixed-term workers.

The Supreme Court’s decisions in Excel Wear, Meenakshi Mills, D.K. Yadav and others show that the Constitution wants both: freedom for business under Article 19(1)(g) and dignity and livelihood for workers under Articles 14 and 21. Whether the Code succeeds will depend on fair rule-making, strong enforcement and careful judicial review. If these are present, it can bring a sensible balance; if not, flexibility may grow at the cost of security.

In simple words, the IR Code is neither fully pro-employer nor fully pro-worker. For employers, it brings clarity, fewer laws to follow, and more freedom to hire for a fixed period and to restructure the business. For workers, it keeps notice and compensation, gives equal benefits to fixed-term employees, and offers a Re-skilling Fund to help them after losing a job. The weak points are the open-ended use of fixed-term contracts, the higher thresholds that leave many workers outside the rule of prior permission, and the tight conditions on strikes.

It is also important to remember that a law is only as good as its implementation. The Code leaves many details to rules and Government notifications, so the real effect on workers and employers will become clear only in the coming years. Courts will continue to play a key role, because they can read the Code in the light of Articles 14, 19(1)(g) and 21 and prevent any unfair or arbitrary use of the new freedoms. Workers, unions and employers should also become more aware of their rights and duties under the Code.

To conclude, employment protection and business flexibility are not enemies. A healthy economy needs businesses that can grow and adapt, and it also needs workers who feel secure and respected. The IR Code takes a step in this direction, but it must be applied with fairness, with proper safeguards for fixed-term and small-sector workers, and with regular review. If this is done, India can move towards a labour system that is both competitive and humane.