March 06, 2018
While advising clients in recent times, I have had the opportunity to examine an interesting issue:
“Can statutory payments owed by an employer to an employee under a beneficial labour legislation be waived, i.e. given up, by way of a private contract?”
For instance, can an employee give up his gratuity payments that is due under the provisions of the Payment of Gratuity Act, 1972 by way of a contractual agreement? Or can an employee waive his right to receive payment of retrenchment compensation under the Industrial Disputes Act, 1947 by way of a contract? This blog post examines why Indian law prohibits employees from contractually waiving their statutory benefits.
Underlying Principles of Labour Legislations
Before delving into the specific provisions of various labour legislations, it is important to understand the underlying principle and philosophy of such legislations. The protection of rights and interests of workers/ employees has always been the underlying philosophy in interpreting labour statutes. The Indian Judiciary, while interpreting these labour statutes, has played a significant role in promoting labour legislations as a social security measure while keeping in mind the larger objectives, principles and framework enshrined in the Indian Constitution.
For instance, the Payment of Gratuity Act, 1972 is a social welfare legislation which deals with the payment of gratuity by an employer to its employees/workers. Gratuity is a retirement benefit like pension, provident fund etc., that an employee is entitled to receive from his/her employer. It accepts, in principle, compulsory payment of gratuity as a social security measure to wage earning population in industries, factories and establishments. This interpretation of ‘gratuity’ has been ratified under Section 4 and Section 14 of the Payment of Gratuity Act, 1972 as well as in the below-mentioned Supreme Court judgment.
The Supreme Court in Ahmedabad Pvt. Primary Teachers’ Assn v. Administrative Officer And Ors has stated: “Gratuity in its etymological sense is a gift, for services rendered, or a return for favours received. For the wage-earning population, security of income, when the employee/worker becomes old or infirm, is of consequential importance. The provisions contained in the Payment of Gratuity Act, 1972 are in the nature of social security measures similar to that of employment insurance, provident fund and pension as stipulated under various other labour welfare legislations.”
Nexus between Indian Contract Act and Labour Welfare Legislations
It is important to draw a nexus between the provisions of the Indian Contract Act, 1872 (“Contract Act”) and the labour welfare legislations that are in force in India to answer the primary question that this post poses.
The Contract Act governs the rights and obligations agreed between the parties through contractual agreements in India. This also includes agreements entered between an employer and an employee.
While there are no specific provisions under the Contract Act on releases/waivers of statutory obligations in India, an employer and employee entering into an employment agreement are not entitled to waive any statutory rights by way of a contractual arrangement. This is explicitly provided for in certain labour welfare legislations such as the Contract Labour (Regulation and Abolition) Act, 1970, the Maternity Benefit Act, 1961, Payment of Gratuity Act, 1972 (as mentioned above) and the Payment of Bonus Act, 1965, which have specific provisions which state that the provisions of such legislations shall supersede anything contained in any agreement or contract of service which is inconsistent with the provisions of the specific enactment. Hence, no establishment can deny the statutory entitlements to an employee through contract as the provisions enacted by the Parliament cannot be defeated by introduction of any contract or instrument to the contrary.
Public Policy- Key Determining Factor
Also, it is important to note that the principle of ‘public policy’ is a key factor in determining the legal validity of a contract which provides for a waiver of statutory benefits that an employee is entitled to receive from his/her employer. Section 23 of the Contract Act stipulates that a consideration or object of an agreement is lawful unless the court regards it as immoral or opposed to public policy. While the term ‘public policy’ has not been defined under any legislation, the concept of ‘public policy’ has been discussed in various judicial precedents wherein the courts have held that, public policy is intended to protect a weaker section of the community with a view to ultimately protect the interest of the community in general by creating equality of bargaining power. An employment agreement which explicitly waives the statutory rights of an employee can be voidable on the grounds that the consent of the employee was obtained by way of coercion due to the difference in bargaining power.
The non-enforceability of a contract against public policy/public interest has been examined and highlighted by the Supreme Court in various cases.
In the case of Pramod Jha and Ors. v. State of Bihar and Ors. the Supreme Court stated that “non-compliance with the mandatory provision which has a beneficial purpose and a public policy behind would result in nullifying the objective (i.e. retrenchment).”
The Allahabad High Court in the case of Srivastava (S.P.) And Anr. v. Banaras Electric Light And Power, held that “the intention of the legislature in providing for statutory standing orders was necessarily to prohibit terms of contract which clash with any of the standing orders… any terms of a contract which contravene a standing order would be struck by Section 23 of the Contract Act. This provision invalidates an agreement, the object of which is inter alia, ‘of such a nature that, if permitted, it would defeat the provisions of any law.”
It can be inferred that the monetary remuneration/compensation as prescribed under various labour welfare legislations is a right granted to employees, not just as a statutory benefit of employment but is also in public interest to the entire class of employees, and a waiver of this right even by an employee would be considered as a violation of public policy rendering it unenforceable by law.
With a view to strengthen the bargaining position of workers/ employees, Courts in India have time and again interpreted labour legislations through the lens of larger public interest and social security principles. Provisions in labour welfare legislations specifically provide for statutory provisions to override contract. Further, Section 23 of the Contract Act states that contracts opposed to public policy are void. In light of the various decisions cited above and analyzing the intention of various labour welfare legislations, it can be concluded that an employee cannot waive or give up his/her right to receive any statutory benefits by way of a contract.