#11: Lower the bar, increase the earnings

Relaxed working hour limits can increase a worker’s yearly earnings by more than 60%

Source: Anthony Maneschijn on dribble

There is growing acknowledgement that India’s rigid labour laws are not working and need to be updated. In 2020, to spur economic activity after COVID-19, 6 Indian states (temporarily) relaxed their working hour limit. This year, Tamil Nadu attempted to relax working hour limits through an amendment to the Factories Act, which was unfortunately withdrawn. In contrast, Karnataka passed an amendment to the Factories Act that relaxed working hour limits, which seems to have survived the electoral cycle.

Working hours are regulated by the Factories Act 1948. This law sets multiple caps and restrictions on the number of hours a worker can earn in a factory. The caps include the maximum number of hours of regular work in a day; the maximum number of hours of regular work in a week; the maximum time a worker is allowed to be inside the factory in a 24-hour period; the maximum time after which the worker must take a break; the maximum overtime hours a worker can earn. However, these 5 restrictions conflict with each other in non-obvious ways, which results in the worker not being able to achieve even what is permitted in the law. As a result, Indian workers lose monetisable time that could have brought prosperity to their families and the country at large.

Conflict 1: Daily hours vs weekly regular hours

The conflict arises between the maximum regular hours a worker can work in a day, and the maximum regular hours a worker can work in a week, resulting in lost opportunity to earn. Under the law, workers are limited to 9 regular working hours (Section 54), this does not include hours counted as overtime. Working 9-hour days, a worker could earn wages for 54 regular hours in a 6-day work week. However, the worker is restricted by another provision (Section 51) to working only 48 regular hours in a week.

One way the worker could work for 54 hours is by using their overtime quota. However, this is improbable because the employer is required to pay double the hourly wage rate (Section 59) for any work done under overtime hours. The factory operator will likely avoid paying double wages by just hiring another worker. This worker will be entitled to just regular wages (instead of double wages) because they would not have exhausted their regular working hour limit under the law. The overtime premium doubles the wage cost of the employer and may in fact make running the factory unprofitable, ultimately resulting in the worker losing the opportunity to earn any money. An earlier article, ‘Double or Nothing’ discusses this effect in detail.

The opportunity cost to the worker of not being allowed to even work for the full 54 hours amounts to 11.11%¹ of his weekly earning potential. At the average hourly wage rate, the worker loses Rs. 374 a week, or Rs. 19,448 a year.

Conflict 2: Daily time spent at the factory vs. quarterly overtime hours

Even if an enterprise is willing to pay the overtime premium, a worker will not be able to work for the legally maximum overtime hours. This is because of the other conflict between the maximum number of hours a worker can spend in the factory (called spreadover) in a day and the maximum number of hours workers can earn as overtime wages in a quarter of a year. Under the law, a worker is prohibited from spending more than 10 and ½ hours at a factory in a day (Section 56). A worker has approximately 10 hours to work in a day, or approximately 60 hours in a 6-day week. Of these 60 hours, the worker can use 48 hours as regular working hours (Section 51). The remaining 12 hours (60 – 48) are a worker’s potential overtime hours in a week. With 12 weeks in a quarter, a worker could work 144 overtime hours. However, the worker is restricted by another provision (Section 65) to work between 75 hours (Jharkhand) and 115 hours (Uttar Pradesh).

A worker even in a progressive state with a progressive quarterly limit of 115 hours, loses the opportunity to earn from 29 overtime hours (144 – 115) every quarter. If a worker could utilise all 144 overtime hours at 2 times the average hourly rate, the worker could earn up to Rs 3,620 more a quarter or up to Rs 14,480 more a year. In states with a quarterly limit of 75 hours, these foregone hours increase to 40 hours (115 – 75). A worker forfeits Rs 4,990 a quarter, or Rs 19,970 a year.

Conflict 3: Intervals for rest vs. maximum time allowed in factory

As the example above shows, the maximum time a worker can spend in the factory (spread over under Section 56) is the constraint preventing the worker from utilising their lucrative overtime hours (if offered by their employers). However, workers will not be able to maximise their earning hours even if they are allowed to be in the factory for a longer period of time. This is because of another conflict between the nature of work in a factory and the constraints on rest intervals. Under the law, a worker has to take a break after every 5 hours of work (Section 55). This interval structure creates a discontinuity in production. Even if the maximum hours a worker can be in the factory were to increase, after the second rest interval, a short block for work is left. It is improbable that a factory will restart operations for such a short period of time.

The following hypothetical shows how the break every 5 hours disrupts the operation in a factory and hurts the ability of workers to earn more. Let us consider a scenario where the maximum time a worker can spend at the factory is increased from 10.5 hours to 12 hours (by amending Section 56) without any change in when rest must be taken. Suppose a worker clocks in at 8 a.m. which would allow the factory to operate till 8 p.m. (due to the hypothetical change). At 1:00 p.m., the worker must stop for a 30-minute break as the legal 5-hour mark is reached. At 1:30 p.m., the worker resumes work for another 5 hours. At 6:30 p.m., the worker is required to take a second 30-minute break. At 7:00 p.m., the worker can restart work but must stop at 8 p.m. as the 12-hour mark is reached. This gives the factory a last work block of only 1 hour. In effect, a product being manufactured in this last hour costs the factory the equivalent of 1.5 hours in wages.

In practice, the worker will likely lose this 1 hour entirely. It is unlikely that a factory would restart the production line after 6:30 p.m. for just 1 extra hour of work. Note that factories will be further disincentivised from running operations after 6:30 p.m. since workers will be compensated for the mandated break, that too at the premium overtime rate of 2x the wage rate (if the enterprise was willing to offer it). Thus, workers lose 1 hour of overtime wage of Rs 124.82 every day or Rs 38,944 every year.

Karnataka—An attempt to resolve these conflicts

One Indian state has changed the rigidity of their labour laws by relaxing working hours and allowing workers to earn partly better. To achieve this, Karnataka changed three provisions at the same time which governed the maximum time a worker can spend at the factory, the interval at which a break is mandated, and the maximum overtime a worker can do in a quarter. For exempted factories, the daily time at the factory increases to 12 hours and a 30-minute break is required after every 6 hours of work instead of every 5 hours. This would allow the worker to earn for up to 72 hours a week.

At face value, Karnataka’s change should increase worker income significantly. However, the net benefit to workers may be much lower. This is because Karnataka keeps the weekly limit for regular hours at 48 hours. The increased hours (24 in a week) all fall in overtime. The employer will have to pay the worker twice the regular wage rate for these 24 hours. This would increase the total wage cost of the employer by 33% for the same hours of production. Instead, an employer would rather employ workers in 12-hour shifts for 4 days a week. This allows a factory to run with two alternate sets of workers every 4 days. Each set of workers loses earnings for 2 days or Rs. 1,123 a week.

International experience

Compared to India, many countries allow greater freedom to workers and factories to organise the working hours. For instance, China, Denmark, Indonesia, Norway, South Korea, Sweden, and Switzerland do not limit the maximum period for which a worker can be employed in a factory. Bangladesh allows its workers to spend 11 hours in the factory daily, while Vietnam has a higher limit of 12 hours.

Other countries may specify a lower limit for time spent in the factory but do not include overtime work within this limit. For example, Malaysia specifies a limit of 10 hours for a regular work day but workers can continue beyond this limit if they are compensated at premium rates. In contrast, India sets this limit at 10.5 hours inclusive of overtime. As a result, an Indian worker cannot work beyond 10.5 hours in a day even if the employer and the worker would mutually benefit from such work.

Similarly, countries also allow workers to work for more overtime hours as compared to India. Indian states currently allow a worker to work at most 144 hours of overtime in a quarter, with a large proportion of states allowing only 75 hours of overtime work in a quarter. Other countries have much higher limits.²

Countries allow for more number of overtime hours in a quarter than India.

As discussed in Double or Nothing, workers in other countries are more likely to get overtime work because employers are not required to pay twice the normal rate.

The new Labour Code promises flexibility. However, some of the conflicts in the present Factories Act carry over to the new law. Therefore, the change to the new law will not solve the problems identified here.

Conclusion 

The working hour restrictions may have been motivated by a concern for protecting workers’ health by preventing workers from being overworked. However, as shown above, the multiple restrictions act against each other and reduce the earning potential of workers. This, in turn, may be harming workers by keeping Indian workers poorer than they have to be.

Poverty is the cause of many health problems and other negative outcomes. The life expectancy difference between the poorest quartile and the richest quartile in India is about 3 years (Asaria et al., 2019). The income reduction faced by workers due to the multiple restrictions may be shortening their lives.

A simpler solution may be to have a single limit like Vietnam’s 12-hour daily maximum with a 25% premium (ILO recommendation) for every overtime hour after an 8-hour regular workday. Under this scenario, an Indian worker could make 62.5% more than the current system, if all the overtime hours are used.

Researchers at Prosperiti are creating a calculator to facilitate and visualise the possible combinations of relaxed working hour limits and their impact on a worker’s hours, earnings, and day-to-day shifts. This will be hosted on our website and GitHub.

References

Asaria, M., Mazumdar, S., Chowdhury, S., Mazumdar, P., Mukhopadhyay, A., & Gupta, I. “Socioeconomic inequality in life expectancy in India”. BMJ Global Health, 4(3). 2019.

International Labour Organisation. “Conditions of Work and Employment Programme.” 2004. 

Suyog Dandekar and Shubho Roy. “Double or Nothing”. Prosperiti Insights. (2023).

Travail Legal Database. “Conditions of Work and Employment Programme”. International Labour Organisation.

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Bhuvana Anand, Shubho Roy, and Prisha Saxena are researchers at Prosperiti. The authors thank Eknoor Kaur and Abhishek Singh for their contribution.

1. An earlier version of this post stated that a worker loses out on 12.5% of his weekly earning potential. This was an error, and has been fixed.

2. An earlier version of this post stated that Malaysia allows workers to opt for 192 hours of overtime in a quarter. This was an error, and has been fixed.