The road to hell is paved with good intentions – Employment contracts and labour law

Akshita Manocha Uncategorized 1 Comment

The classical contract theory required the parties to decide the terms of contract themselves without any government intervention. It also required a perfect competition and free markets where rule of law ensures sanctity of contracts. Another presumption was that the parties will be equal i.e, they will have equal bargaining power. However, we don’t live in a perfect competition or free market, rule of law is scarce, sanctity of contract is not protected and parties are rarely presumed to be equal in terms of bargaining power. Does this mean that the parties should not be allowed to decide the terms of their contract? Do we compromise the freedom of contract?

Freedom of contract is a simple concept. You and I can enter into a contract if you and I choose each other to enter into a contract. Since, we decided to enter into a contract, we decide the terms of contract. There is no third party which dictates terms of contract to us. However, it is opposed on the grounds that the parties to contract may not be equal and in such a scenario there is no real freedom of contract. To prevent exploitation of the weaker party at the hands of the stronger party, the government should intervene and decide certain terms of contract. The inequality of parties is specially pointed out in employment contracts especially those related to factory workers or unskilled labour where the bargaining power of the worker is assumed to be much lower than the owner of the factory or any other type of employer. The assumption is based on the difference of status of both parties and that the worker will not refuse the employment, howsoever arbitrary the clauses in the contract may be as he does not have another option. Assuming that the entrepreneur is always exploitive and the labour cannot defend himself or herself, legislations are formulated in the name of labour reforms.  These laws put certain restrictions on the behavior of the employer to protect the employee. However, these laws have proven to be inconsequential for labour. As a matter of fact, it has been proven that such labour reforms increase the hardship of labour instead of protecting them from exploitation. An example of such restriction is minimum wage which has to be given to the worker by the employer. The government decides the amount of minimum wage to include the bare minimal costs required for sustenance. An employer cannot provide a wage below minimum wage and therefore to avoid going into a loss, he will reduce the number of workers. The most unskilled labour will be removed as the law requires a minimum wage for a worker even if the worker is willing to work below that wage. That leads to unemployment.

Not only do such legislations show government’s distrust in the entrepreneur but also showcases its distrust in the economic choices of the labour. For example, why do we need a law that mandates social insurance? It is the choice of the employee to save or spend. The government, in its paternalistic wisdom always takes away that choice from the workman.

The legal side of the liberty to contract is worse. Though initially upheld as a part of Constitution, it has been constantly downgraded through judicial interpretation. The US constitution protects freedom of contract in Article 1 Section 10. However, the scope of the clause has been reduced and expanded over the years by judicial interpretation. Starting with the Slaughter House Cases of 1873, the Supreme Court started recognizing the right to enter into contract without unreasonable government restrictions. However, in a 1898 cases titled Holden v. Hardy the Supreme Court upheld the law prescribing maximum hours for workers on the grounds of ensuring health and safety. But in the 1905 case titled Lochner v. New York, the court held that since there was no evidence to show the need of maximum hour laws for baking industry. It rejected the legislation as unreasonable and against the liberty of contract. The court continued to reject laws which threatened liberty to contract but by 1920 the doctrine was not appreciated as a consequence of the economic crises and the general view against laissez-faire system. Thereafter, the freedom of contract has slowly diminished in the name of public interest and restrictive legislations especially those related to labour reforms, have been upheld to protect against injurious practices in business.

The scenario in India has not been promising as well. The 97th Law Commission Report (March, 1984) did not give a favourable opinion to freedom of contract when discussing a clause under the Indian Contract Act, 1872 which gave the right of prescription to parties in a contract. Welfare legislations and labour laws are vociferously protected in India. Our socialist bent ensured stringent labour laws. Unfortunately, those laws haven’t changed with changing times. Factories Act, 1948 still requires factories to have spittoons and space for drying clothes which are not required in today’s time.  But the most distressing feature of Indian labour laws is the condition to hire and fire. Industrial Disputes Act, 1947 sets a threshold limit beyond which the company has to take the permission of the State to fire its workers.

It is said that the road to hell is paved with good intentions. India’s labour law story is an example of such good intentions gone wrong. There are 51 Central legislations in India governing not only industrial disputes but beedi workers, dock workers, cine workers and much more. In addition to these, there are central and state rules for these legislations. They regulate everything, from which type of worker will undertake which kind of work to the salary that the worker can get and the rules to hire and fire workers. To add to the confusing mix are the trade unions for each industry which monopolize the bargaining power. The attitude of trade unions has been clearly showcased in many a strife between management and trade union, from the time of the 1982 cotton mill workers strike and the murder of Dutta Samant to the July 2012 attack of the worker on the manager of the Manesar plant of Maruti.

A report by Goldman Sachs showed that states in India with liberal labour laws had higher employment rates than those with stringent labour laws. With the new government, there is a hope for changing labour laws with minimalist government intervention and the labours being given the right to choose their employer, work, salary and what they wish to do with the salary. It is understandable that abuse and exploitation of people will bring out emotions to reform the system but our system should not take away the freedom and opportunity from those who it intends to protect.

-Akshita Manocha
Research Associate, Centre for Justice @India Institute

The opinion statistics are based on the results of our poll – Weekly Your View- posted on our social media on 3rd July,2014.