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Legal dimensions of employer-employee relationship in the new normal

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Along with the massive shock, the COVID-19 pandemic has brought in a series of uncertainties, particularly with regards to employment. With strict limitations being enforced on people’s movement by way of a two-month-long curfew to constraint the virus from spreading, the government called on the public and private sector to work from home to keep the ball rolling.   


The pandemic has delivered a crippling blow to several industries that employ thousands of people and speculation is rife that job losses are inevitable. The country’s apparel sector has already gone on record requesting the government to amend the country’s labour laws to axe 30 percent of its workforce to stay afloat.


With restrictions now being gradually relaxed, the employers in the private sector will assess the impact from the virus on their business and would have to take some tough calls, which possibly could include layoffs and temporary suspension of employment.


Amid these uncertainties, Mirror Business met with Attorney-At-Law A. Rohan Dunuwille to gain some insights into the legal aspects of the employer and employee relationship in the new normal.  


Dunuwille, a Partner at Aequitas Legal, has over 14 years of experience in Commercial and Corporate Law, Labour Law, Constructions Law and Arbitration. He regularly advises and appears for some of the country’s leading private and public companies and banks, as well as some blue-chip companies.


Following are the excerpts from the interview.


What is your take on the way employers are handling their workforce at this time of crisis?
When COVID-19 was declared a pandemic, not very many people in Sri Lanka would have realised the impact and the chain effect it has had on the lives of its citizens and the economy. There was no playbook on how to deal with a crisis of this magnitude and all urgent and successful measures were taken in Sri Lanka to bring the spread of the disease under control. 
The realisation of the effect it had on the businesses in Sri Lanka was felt almost immediately with the businesses/companies forced to shut down and manage their employees in the short term and payment of wages until the lockdown was lifted in the medium term (without any turnover) and change in business models as companies and businesses are compelled to find mechanisms to ensure the survival of their businesses in the longer term. 

A. Rohan Dunuwille


It is an accepted fact that from the get-go, most employers had every intention of honouring their obligations towards its employees but as time progressed, it was evident that almost all employers found it extremely difficult to meet such obligations due to lack of turnover. During this period, there was no clear guidelines/advice forthcoming on how businesses/employers should address these issues. 


Whilst a vast majority paid the remuneration in full for the months of March, most found it difficult to pay for April and May. Most larger businesses in varied fields wrote to the subject minister and commissioner of labour seeking direction. In the interim, employers were forced to request employees to take pay cuts, utilise their leave, etc., which the employees accepted as they too became aware that in the longer term, it would be prudent to have a secured job with a lower income than being retrenched. 


In this context, I believe that most employers did in fact act in the best interest of the employees in seeking to safeguard their jobs and make a reduced payment, in the least, in order to ensure the survival of its employees and the survival of the business. 


It is pertinent to note that the employment law in Sri Lanka does not differentiate between large corporates and small businesses but uniform in its application. The said laws are stringent in their applicability with little or no wriggle room for employers to take any arbitrary decisions when it comes to the payment of remuneration, payment of social security benefits, closure of businesses and retrenchment, etc. 

 


An immediate response to the crisis was slashing of salaries. Was this the right approach by employers, given that contracts often do not cover such areas?
Generally, neither the law nor the contract of employment will permit an employer to make arbitrary reduction in salary. There are exceptions set out in the Shop and Office Employees’ (Regulation of Employment and Remuneration) Act No: 19 of 1954 as amended (S&O Act). 


The payment of wages and/or remuneration is set out in Part II of the said S&O Act and employers are obliged to comply with the said provisions strictly. As the law stands, an employer cannot reduce and/or deduct wages/salary of an employee, save and except under the provisions for ‘Authorised Deductions’ in terms of Section 19 of the said S&O Act and regulations made thereunder.


It is pertinent to note that even though the law provides for instances deductions could be made, the law dictates that such deductions must be with the employees’ consent and deductions cannot exceed 60 percent of the remuneration payable to an employee. However, we must be sensitive of the fact that employers were left with no alternative in the current context but to reduce salaries albeit illegal to do so, if done without the approval or sanction of the employee or commissioner of labour.


Another aspect to consider whether such reduction of salaries amounts to a breach of contract in the event same is done unilaterally, which would give a cause of action for an employee to sue for breach thereof. As such, it is the law that an employer cannot withhold and/or make any deductions and/or reductions from the salary of an employee unless under the provisions of the applicable law. 


In terms of Section 46[1] of the said S&O Act, “The commissioner of labour shall be the officer in charge of the general administration of the Act” and further has exclusive jurisdiction in resolving disputes in relation to unpaid remuneration. 


The said S&O Act imposes a liability on the employer to make payment of the salary (earnings as defined above) and the failure of an employer to make such payment to an employee and in the event of the failure to make such payment, the commissioner of labour is empowered to institute action against such errant employer for the recovery of unpaid salary. There are similar provisions in the Wages Boards Ordinance. 

 


While certain industries were massively hit, almost all employers across diverse industries resorted to this option. How accommodative is this in the legal framework?
Unfortunately, the law as it stands today is not very flexible or accommodative of the realities that we are faced with today. The majority of employment statutes have been drafted on the premise of unequal bargaining strengths between an employer and employee with the state stepping in to balance out the equities between parties and to safeguard the interests of the employees. 


A further important aspect in employment statutes is the fact that there are penal sanctions on the directors (first charge is on the company) in the event of non-payment of remuneration under the S&O Act, provident fund contributions under the Employees’ Provident Fund Act No: 15 of 1958, as amended (EPF Act), Payment of Gratuity Act, etc. All of which has been done in order to ensure that the employees are paid their dues without default. 


Observed is bulk of these actions are taken without informing the employee, leaving little room for the employee adjust to the shock. How should an employee react to this?
As stated above, both parties have to be sensitive to the difficulties faced by all parties concerned. Blame cannot be apportioned to an employer in a crisis such as we see today, as closure of business cannot be attributable to a business owner. 


The pandemic is a supervening event beyond the control of an employer. The employers ordinarily wanted to continue their businesses and employees were providing services for remuneration and as such decisions taken to ensure the survival of business cannot be frowned upon. While making arbitrary decisions in docking pay, etc. is ex facie illegal, it must be looked at in the context of the crisis. 


Notwithstanding same, if a complaint is made to the commissioner general of labour (CGL), who is the administrator of the aforementioned statutes, the CGL will have little alternative but to act in terms of the law and seek to recover any unpaid dues to an employee. 

 


Can the actions of the employers be challenged?
Yes. The decision to reduce salary, compel employees to utilise their annual leave against the days the country was in lockdown, etc. without the approval of the employee is ex facie illegal. The employee will have recourse to make a complaint to the CGL or sue the employer in contract for breach thereof. 


In the event there is a termination of employment without the consent of either the employee or the commissioner of labour, the employee can seek redress and the Termination of Employment of Workers (Special Provisions) Act or seek relief before a Labour Tribunal under the Industrial Disputes Act.

 


We recently saw employers calling for changes in labour laws but the actions thus far seem they want to protect themselves from the drastic measures being taken. What is the actual intention behind this?
The modern-day employer-employee relationship should be viewed as one of co-existence rather than one of master and servant or parties with competing interests. It is imperative that both parties realise that one cannot survive without the other and it is this common interest that balances the equities between the parties.


Our employment laws are required to change with the ever changing business requirements of the global marketplace. We are competing on the global stage, be it agricultural produce or garments or BPO/KPOs. Foreign investors looking to invest in Sri Lanka would consider inter alia the ease of doing business and the employment laws and the flexibility of the laws to investment and carry on a business.


It is important to also understand that no company or business starts a venture with the expectation or intention of shutting it down in a few years and as such, whilst safeguarding the interests of the workforce, the interests of the employers too need to adequately be safeguarded and thereby give the required confidence to invest in Sri Lanka.


Sri Lanka has over the last decade or so been losing out on investment opportunities due to the inflexible and stringent employment laws in Sri Lanka, with the beneficiaries being countries like Bangladesh, Vietnam and Ethiopia. We note that Sri Lankan companies too have moved their manufacturing plants overseas as such countries offer the flexibility and cost-effective business environment for companies to invest and prosper. 


Further, there is a requirement for a government undertaking that BOI companies will not be expropriated or nationalised to encourage and assure foreign investors to invest here. Sri Lanka also has bilateral Double Tax Avoidance Agreements (DTAA) with 42 countries. Sri Lanka is a founder member of the Multilateral Investment Guarantee Agency (MIGA), an investment guarantee agency of the World Bank. This provides a safeguard against expropriation and non-commercial risks and further strengthened by the repeal of the Revival of Underperforming enterprises or Underutilised Assets Act No: 43 of 2011 by Act No: 12 of 2019.


In this context, there is a requirement to balance the scales and adequately change the laws to ensure that companies and directors are not penalised in the event a business fails, save and except in circumstances that warrant the prosecution of directors. 


A limited liability company is entitled to wind up its affairs and (only in exceptional circumstances), there is no personal liability on directors. A majority of the employment statues imposes a personal liability on directors of a failed business and call on the directors to pay in order to make payments due to employees. 


For example, if the company has gone into liquidation, the directors may be prosecuted in the Magistrate’s Courts for non-payment of earned remuneration, Provident Fund and Gratuity, etc. and non-payment would result in a fine or jail term or both. 


The Industrial Disputes Act provides for the Labour Tribunal in its exercise of a just and equitable jurisdiction, to disregard a contract of employment in part or as a whole if the president is of the view that the contents are unfair. 


However, in the case of Singer Industries [Ceylon] Limited Vs. The Ceylon Mercantile Industrial & General Workers Union [CMU] & others., [2011 BALR 161], Chandra Ekanayake J., delivering the judgment of the Supreme Court held as follows:


“It is needless to say that as held by the arbitrator viz;- ‘In industrial relations the principles of offer and acceptance should not be strictly adhered to’- is not the correct proposition of law. For a contract to be concluded there should be an offer and acceptance- only then a consensus will exist in the minds of such contracting parties.


In this context, it is apt to quote the following observations of Weerasooriya, SPJ, in Muthukuda Vs Sumanawathie (1964) 65 NLR 205 at 208 and 209 with regard to the requirement of offer and acceptance in a contract:
“It is an elementary rule that every contract requires an offer and acceptance. An offer or promise, which is not accepted, is not actionable, for no offer or promise is binding on the person making the same unless it has been accepted.”
Her Ladyship was also of the view that:


“… “Industrial Contract” or “Contract of Employment” is not defined in the Industrial Disputes Act and/or any other Labour Law in Sri Lanka unlike in the United Kingdom, where there is a Contract of Employment Act. In the absence of such law, the general principles of law of contract apply to the creation of a contract of industrial employment. 


Thus, the ordinary principles of law of contract such as “offer” and “acceptance” and “consideration” therefore apply to the formation of a valid industrial contract. A contract of service in industrial relations therefore can be entered into by the parties having capacity do so and for a consideration.


S.R. De Silva in his work titled ‘Contract of Employment’ reiterates that the relationship between employer and employee is governed by ordinary rules of contract. On page 105 he states:
“One of the requirements of a valid contract of employment is that the contract must be between parties who in law are capable of entering into a contract and the contract itself must not be illegal or contrary to public policy.”


However, notwithstanding the aforesaid, there have been instances that the contract of employment has been disregarded in part or as a whole on the premise that the terms are arbitrary. These competing positions have to be reconciled and it is for the legislature to do so. 


Post-pandemic recovery would entail in business models and company structures undergoing drastic changes and employers would look at new methods of engaging employees in work, such as part-time work or work from home models that would by themselves require drastic modernisation of our existing laws.

 


Are there any specific loopholes in the labour laws that place employees in a vulnerable position (in the current context)?
Generally it does not. There are adequate safeguards in law to ensure that the employees are protected. The Termination of Employment of Workers (Special Provisions) Act No: 45 of 1971 as amended, is one such piece of legislation that prohibits an employer from terminating the employment of an employee without the consent of either the employee or CGL. 
As such, a company cannot decide to shut down its operations without compensating the employees for loss of employment. 

 


A tripartite agreement was reached recently on the payment of wages issue. What is the validity of this agreement and what are the implications?
We have been made aware by way of press conferences and newspaper articles regarding an ‘agreement’ that had been reached on May 4, 2020, between several trade unions and the Labour Ministry, which permits the employers to rotate its employees and pay such employees on a scheme agreed upon. 


The ‘agreement’ comes on the back of health concerns and governmental restrictions surrounding the COVID-19 pandemic that has disrupted businesses and prevented businesses from operating and employees reporting to work. Certain establishments providing essential services were permitted to operate under restrictions. 


It is in this background that all employers and employees alike had legitimate concerns on how salaries were to be paid. With the lockdown continuing from about March 20, 2020, until the restrictions were relaxed on or about May 11, 2020, a majority of businesses did not have any revenue whatsoever in order to pay its employees. 


In this background, whilst being sensitive to and acknowledging the need for the timely intervention by the government to allow for relief to businesses by permitting a lawful reduction of salaries, the legality of this agreement must be analysed, especially as many employers have already placed reliance on same and have acted as suggested in the said agreement. 


The Skills Development, Employment and Labour Relations Ministry with the concurrence of the Cabinet of Ministers and approval of the National Labour Advisory Council by their letter dated May 21, 2020, has in consideration of the said agreement decided as follows:


1. Retaining the jobs of employees where work was suspended due to COVI-19 corona pandemic. 
2. Employ workers in such a manner so as to offer them work proportionately using roster system or any other suitable method in the workplaces, where employers are unable to employ all workers owing to the need to maintain social distancing in accordance with healthcare instructions. 
3. Paying 50 percent of the last paid basic salary or sum of Rs.14,500.00, whichever is more favourable to the employees, who have been asked to stay at home in the months of May and June 2020, due to lack of work and the employers to make contributions to the EPF and ETF. If there arises any problems in adopting these proposals, the employer should submit them in writing to the CGL. 
4. Reviewing this procedure at the end of the month of June 2020. 
(Verbatim reproduction of the contents of the document referred to above)


With this document now being made available, it adds credence to the said ‘agreement’, which prior to the said writing dated May 21, 2020, very definitively lacked legal validity. However, the employers ought to be cautious in giving effect to the temporary relief measures referred to above as the said writing states that “This proposal was agreed by both employers and trade unions at the tripartite Task Force meeting in the spirit of sustaining businesses while ensuring job security of employees and continuity of businesses within the existing legal framework”. 


As such, the question arises whether the parties at the said Tripartite Task Force were representative of all employers and employees across all sectors/businesses. Further, ex facie there appears to be no intention to amend the laws either by way of a regulation approved by Parliament to cover the said period or a subsequent amendment to the substantive law. 


It further raises the question whether such decision by an employer to act outside the purview of the agreement and writing referred to above would be prosecuted by operation of law or whether the commissioner of labour would refuse to prosecute an employer based on a complaint made by an employee for non-payment of remuneration or the payment of reduced salary. It is therefore in my view that the said decision must be regularised in law for same to have legal effect and binding on parties that chose to act in terms thereof. 


The absence of such formalisation would mean that it would later be difficult, if not impossible, to place any reliance on such agreement or determination to hold any party thereto accountable for the said measures or to plead one’s case before the commissioner of labour or a court of law in seeking to defend the decision to act on the said ‘agreement’, as it lacks legal sanction, more particularly as remuneration or salaries afforded to employees is governed by contract law and the legal protections afforded to employees under different statutes, such as inter alia the Shop and Office Employees (Regulation of Employment and Remuneration) Act No: 19 of 1954 (as amended), Wages Board Ordinance No: 24 of 1941, as amended and the National Minimum Wage of Workers Act No: 3 of 2016. 


In the absence of any clear determination as to the applicability of the said decision what would the position of an employer be, who is completely incapable of paying any wages due to the complete shutdown of its business and has no turnover? The writing of May 21, 2020, is silent on this aspect and offers no relief to such employers. Would this mean that these employers will be outside the determination and be prosecuted in terms of the existing law? 
It is further important to bear in mind that the basic principles of administrative law prevent ministers and administrators from arbitrary decision-making. Therefore, while in certain instances ministers do have discretionary power over their subject matter, that discretion must be exercised within the confines of the law and within the ambit of discretion given to them.
The Shop and Office Act empowers the minister with wide discretion to make regulations to give effect to the scheme and provisions of the Act. However, there is no record of the minister having utilised the provisions of the Act to have made a formal regulation, giving effect to the substantive remedies set out in the ‘agreement’ or determination, the acceptance of which would have to be published in the Gazette after having been duly passed by Parliament.


In the present context, where Parliament is not in session, had such a regulation been made, the Cabinet of Ministers may approve/authorise the said regulation on the basis that the same would subsequently be ratified by Parliament and this process would be legally valid. It is to be noted that the retrospective approval by the new parliament would be in exceptional circumstances demanded by the current crisis. 


However, the provisions of the law are clear in that no legally enforceable regulation can be passed in an ad hoc manner by the minister. 
Additionally, decisions with regard to remuneration may also be considered under the provisions of Part III of the Shop and Office Act. Therefore, there are adequate legal provisions that could have and ought to have been used to make the provisions of the ‘agreement’ legal and enforceable. 


There is also a school of thought that the determination made is subsequently challenged before the Labour Department or a court of law, the argument could be forwarded that the commissioner as the administrator or competent authority of the said employment statutes and which department is under the auspices of the labour minister can give effect to the ‘agreement’ or grant “administrative relaxation” or in effect not comply with the law as it stands today and thereby safeguard employer interests vis-à-vis the determination. In my view, such position is untenable in law. 


An essential element to the lawful exercise of discretionary power is that it should be exercised by the authority on whom it is conferred (i.e. the labour minister) and thus can be exercised by no one else. Court will as a normal practice be strict in requiring that the power be exercised by the “precise person or body stated in the statute” and will hold decisions taken by agents, sub committees or delegates to have been ultra vires (i.e. beyond one’s legal power and authority) no matter the extent to which the said delegation has been expressly authorised by the individual vested with the authority. 


Therefore, in an instance where the minister has discretionary power, that power is inalienable and must be exercised by the minister himself. Therefore, even a formalised decision by the Task Force appointed by the minister or the acts of the commissioner of labour, would have to be specifically ‘signed off’ or expressly approved by the minister himself. For example, a reference to Industrial Arbitration or to an Industrial Court can only be made under the hand of the labour minister in terms of the Industrial Disputes Act albeit all acts leading up to the reference, including any inquiry before the Labour Department is carried out by the commissioner of labour. 


It is also the commissioner that would crystalise the question to be determined by Arbitration. Any independent reference to Arbitration by the commissioner of labour outside the said provisions of the Industrial Disputes Act or in violation thereof would be held to be ultra vires the powers vested in the commissioner.


In light of the above, it is prudent that all employers/businesses exercise extreme caution in availing themselves of the schemes set out in the determination as they could find themselves having no legal basis if a disgruntled employee subsequently claims that his wages be paid in full or that the employer did not offer work when such work was available. These views articulated above are based on the available information and material as at the time of this interview. 

 


Is the government responding/reacting appropriately to the labour issues arising from the COVID-19 crisis?
There was no playbook for any government on how to respond to a pandemic of this magnitude and the primary concern was to stop the spread of the virus and save lives. The obvious fall out was the short and long-term economic effects. Most developed nations set aside hundreds of millions of dollars for the payment of wages, unemployment benefits and other social security benefits. Most third world countries did not have that luxury. 


Having said that, businesses large and small looked to the subject minister and the commissioner of labour for some direction, guidelines and relief measures. In the absence of any clear communication from the government, employers had to resort to securing their own businesses within their own financial constraints, which included measures such as pay cuts/salary reductions and even in the extreme instance layoffs and closure of businesses. 


The ‘agreement’ referred to above came two months into the lockdown and that too with no legal sanction, thereby putting the scheme in doubt. As such, it is advisable to consider the legality of this said agreement before placing reliance on same and acting thereon. 


However, it must also be stated that over the long term, employment laws need to be able to cater to the demands of the modern business world instead of seeking to use it as a whip on errant employers. Laws will have to cater to new business models and strategies, where employers are afforded the flexibility in managing their workforce without serious penal sanction while safeguarding the interests of the workers. This is a good time as any to analyse and amend the existing laws. 

 


Lastly, what are the rights of an employee in the current context?
The rights of the employees are very secure in terms of the existing laws. In the absence of any changes to the existing laws, the employees are entitled to exercise those rights before the administrator of the relevant employment statute. 


For example, there is no provision to default on the EPF contributions. Section 16 of the EPF Act states that an errant employer is entitled to show cause that the delay or non-payment was due to circumstances beyond the control of the employer and if the commissioner of labour is satisfied of such reasons, the surcharge that would be imposed by the operation of law can be waived. 


However, there are no provisions in law to default completely and the employer is obliged in law to make payment even on a later date. Failure to pay would empower the CGL to prosecute the employer in the Magistrate’s Courts, for the recovery of all outstanding payments.

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