Industrial Law and Relations in Sri Lanka -Meeting Contemporary Challenges

Franklyn Amerasinghe

The challenge of Globalization

To whom does globalization pose a challenge? In developed countries Multi-National Enterprises (MNE’s) have been spreading their tentacles all over in search of potential investments, and moving operations to wherever they had competitive advantage, sometimes creating job losses in their own countries the business community to enter into a “Global Compact”, which could address the needs of labour standards, the environment and human rights issues.

S.R.de Silva states4, “there is inadequate recognition that reaping the benefits of globalization requires a range of policies and institutions at the national level.” De Silva also states that ” the connection between trade and poverty reduction is not always easy to establish because other factors such as investment, macro economic policies, investment in education policies etc. in countries also affect this question”5. A study entitled “import – export structure and trade expansion in South Asia” referred to the dangers of inward-looking policies which produce an inefficient industrial structure. The study advocated that the developing countries pressurize the developed countries to liberalize their import policies and secondly to promote trade among developing countries especially on a regional basis,6

The challenge to entrepreneurs

In a global economy as we live in today, there are some special considerations as far as entrepreneurs are concerned. There is the aspect of adopting new technologies to be able to compete with developed economies. This is vital in order to improve the quality, as well as increase the variety, of the products offered. There is the need to form alliances in order to access or use, brand names and franchises, to establish a foothold in the international scene. The need for market information requires ties with international agencies, associations and chambers. The global economy presents opportunities as well as threats. The opportunities are for the creative, resourceful and fleet of foot alone.

More and more attention is being focused on fair competition. Some of the issues to be examined are the following :

* The stance taken by the World Trade Organisation on unfair competition especially by the use of unfair labour standards and the suppression of human rights. The intention is to level the playing field especially in the context of jobs being at stake in countries which are receiving goods from developing ones, who may be at an unfair advantage purely by using lower standards to be cost effective. We are aware of the issue with regard to the Sialkot footballs in Pakistan, and the carpets from Bangladesh and Pakistan, where the issue was in respect of child labour.

* National Governments are making their economies as open and as flexible as possible to attract investment thereby making the competition fierce.

* The globalisation of technology which gives buyers more information and consequently more choices. Networking in relation to communications, transport etc. puts more pressure on suppliers.

The end of the Multi Fibre Agreement in 2005 which will remove the quota system for garments/textiles. In Sri Lanka as well as in many other developing countries, dependent on quotas, the prospect of serious unemployment looms large, unless

4 The Globalization Debate: setting the Record Straight, Mortlake Press, June 02, page 3. 5 Op.cit. page 21. 6 Trade Expansion In South Asia, Committee on Studies for Co-operation in Development in South Asia, Marga, 1990.

there is an ability to command markets purely on the basis of quality, efficiency, delivery and variety of products.

* The sharp and often unchecked flow of capital around the globe, which creates opportunities as well as threats.

Response of employers to the need for competitiveness

Management techniques and business strategies have undergone tremendous change in the last two decades. The rules of the “entrepreneurship game” have changed. Lester Thurow7 looks at the massive downsizings of the 1980’s and 1990’s, and says that, unlike in the 1980’s, when for every three blue collar workers only one white collar worker was retrenched, the downsizings in the 1990’s affected employees at all levels and, could not be defended only on the basis of rationalisation due to a recession. The downsizings, in most cases, as we know, involved a new way of structuring business. This includes business process re-engineering, management de-layering and outsourcing. Outsourcing to cheaper suppliers of goods and services brought about savings in costs in many forms. It involved savings from wage costs as well as infrastructure. This was also aided by the vast strides in communication technology which helped to trim numbers and improve response time to customer needs. The impact on employment has been remarkable and issues of protecting part-timers, home workers, casuals and sub-contract staff have challenged the ingenuity of the I.L.O. A convention on Part Time Work was adopted by the Conference at its sessions in June 1998. Discussions have also taken place on regulating contract work as recently as June 2003 at the International Labour Conference and will no doubt in due course result in an international instrument.

John Naisbitt says8, referring to the awesome power of machines and the possibilities of total connectedness through computers, that “the greater the power of the machine, the greater the power of the individual”. Entrepreneurship has naturally received an impetus from the scientific developments of the recent years especially in the area of communications. The impact on the way in which work is done has been so tremendous, that the ILO World Employment Report for 2001 focused on the “Information Economy”. The Report states that “using ICT lowers costs and can increase productivity economy-wide”. In Sri Lanka, the Central Bank9 reports that the use of information technology has ensured consistency in output and product quality. It has also helped to improve marketing, supply chain management, strategic decision making and greater cost efficiency in our industries.

Charles Handy refers to a “vast reconfiguration of work” not because of a recession but as a result of corporate restructuring brought on by heightened competition in the global market place. He poses the question of why people should work on a full-time basis occupying office space, when they can be hired to work only when their services are needed. Handy says, ” this great squeeze out is causing tremendous changes in the

7 The Future of Capitalism, p.26 8 Global Paradox, Wim Morrow & Co. 1994, p. 80. 9 Annual Report 2002 p. 98.

world of work, creating new patterns of opportunity and risk, and forcing us all into new ways of thinking about jobs, careers, remuneration and the whole shape of our lives,” 10

Rosabeth Moss Kanter 11says “The corporation itself is being turned inside out, like a reversible garment worn out on one side. Some executives, I know are beginning to draw their organization charts upside-down, with Managers at the bottom supporting the line managers at the top”

The role of Government

De Soto12 states that “it is essential that the state remembers that before it can redistribute the nation’s wealth, the nation must produce wealth. And that in order to produce wealth, it is necessary that the state’s action not obstruct the actions of its citizens, who after all, know better than anyone else what they want and what they have to do”. Drucker13 commenting on Adam Smith’s Wealth of Nations says, “Smith had little love for businessmen and even less for self-interest. He did not argue that Government does a poor job running the economy. He argued that the Government, by its very nature cannot run the economy, not even poorly.” The comment of Drucker is contained in a chapter which deals with the question of what the Government can do as opposed to what it should do. This approach commends itself to us in our discussions on the current role of the State, not as a producer of goods and services, but rather as a regulator and facilitator, who monitors performance and maintains the necessary balance to ensure the well being of society .

We need to start with the reality that the Government is no longer the power it was before globalisation, and the emergence of international communications which brought the world to your doorstep to critically evaluate what you were doing, what earlier you could do behind closed doors. The World Development Report 1995, entitled ‘Workers in an integrating World’ states thus: “These are revolutionary times in the global economy. The embrace of market-based development by many developing and former centrally planned economies, the opening of international markets and great advances in the ease with which goods, capital and ideas flow around the World are bringing new opportunities, as well as risks, to billions of people”14.

Therefore the intervention of the Government also seems to be vital. Societies are seen to intervene when the labour markets fail to satisfy their aspirations through their inefficiency. When market power is uneven, it is postulated, that it is the workers who are at risk. The intervention of society, it has been pointed out, could come in the form of informal labour markets such as through contract arrangements. The World Development Report shows that the informal arrangement is the most popular solution to labour market problems in the low and middle income countries. In such situation the workers are non-unionised and beyond government inspection. A second response to

10 Beyond Certainty, Hutchinson 1995, See The Coming Work Culture’. 11 When Giants Learn to Dance, Touchstone 1989, p. 351 12 The Other Path, Perennial Library, 1990. p. xix. 13 Vide Limits of Government – The New Realities, p.55. 14 Vide pg.l, World Development Report, World Bank 1995.

unequal market power is collective bargaining through trade unions. Unfortunately Trade Unions are on the decline. Stephen Deery15, comments that few labour movements command the same degree of industrial and political influence that they wielded in the 1970’s and 1980’s. The third possibility is for Government intervention through legislation. The same World Development Report states that in some countries Unions behave as monopolists, protecting a minority group of relatively well-off “unionised workers” at the expense of the unemployed and those in the informal sectors.16 However, the Report also underlines the importance of Trade Unions by stating that “free trade unions are a cornerstone of any effective system of industrial relations that seeks to balance the need for enterprises to remain competitive with the aspirations of workers for higher wages and better working conditions.”17

‘The Declaration of Fundamental Principles and Rights at Work and its follow up’ adopted by the I.L.O. in June 1998, in its quest to ensure that core labour standards are respected by all constituent nations, states:

“although globalisation is a factor of economic growth, and economic growth is a pre-requisite for social progress, the fact remains that it is not in itself enough to guarantee progress. It must be accompanied by a certain number of social ground rules founded on common values to enable all those involved to claim their fair share of the wealth they have helped to generate”.

It is interesting to take account of the fact that the culture of a people could have a bearing on how much State intervention would be tolerated. John Naisbitt18 predicts that in China democracy will take a form different to that which exists in the West. He points to Singapore and says that the democracy there may not satisfy the puritan in the West, but to the Chinese it is the ideal form. They are used to a hierarchical rule and they take their direction from a Chinese proverb that ‘once rules are relaxed, chaos will follow’. An authoritarian style is therefore culturally more acceptable to them.

In Sri Lanka, our experience with labour laws points to a culture of looking at them as a burden to be circumvented whenever it is feasible to do so, and which has been reciprocated by workers through poor productivity and an indifferent work ethic.19 A fair strategy for development using a free enterprise model must be given direction by the State, which sets all the ground rules for ensuring a social balance.

Obligations attached to membership in the I.L.O.

At the World Summit in Copenhagen in March 1995 it was decided that the I.L.O. would continue to enjoy its primacy as the institution for implementing labour standards. It was stated categorically that the I.L.O. should safeguard and promote respect for basic workers’ rights as set out in the eight core standards. It was emphasised that where states

15 British Journal of Industrial Relations, Dec 1995. 16 World Development Report, p. 81. 17 Seep. 79. 18 Global Paradox, p. 213. 19 E.F.G. Amerasinghe, Employee Relations & Industrial Law in Sri Lanka, p. 54.

have ratified them, the I.L.O. should ensure that the conventions are fully applied, and in the case of others, that the principles are observed.

The Declaration of Fundamental Principles and Rights at Work adopted in 1998, contains a set of principles and rights derived from the Constitution . All members are obliged to respect and promote these principles irrespective of whether they have ratified the relevant Conventions or not. These principles are:

1. Freedom of Association and the effective recognition of the right to Collective Bargaining. 2. The elimination of discrimination in respect of employment and occupation. 3. The elimination of all forms of forced or compulsory labour. 4. The effective elimination of child labour.

The relevant I.L.O. Conventions which cover these issues are:

* Freedom of Association – Convention no. 87

* Collective Bargaining – no. 98

* Forced Labour – no. 29

Abolition of Forced Labour – no. 105

Minimum Age – no.138

* Worst Forms of child labour – no.182

* Equal Remuneration – no.100

* Discrimination in Employment – no. 111

The member States of the I.L.O. are expected to enact legislation in relation to only the Conventions ratified by them. However, irrespective of actual ratification, some obligations are implicit in the act of membership and these have now been incorporated in the Declaration.

The law and its social role

Some broad understanding of the development of the law itself will perhaps help us to appreciate the linkage between society, its aspirations and the manner in which law contributes to social cohesiveness. The natural law schools and the positivists were greatly influenced by an individualist approach to human society. The focus was on the individual and his position in the social milieu. The natural law basically depended on the social contract theory, namely, that the individuals had formed societies by contract. On the other hand, positivism as enunciated by Austin, depended on the psychological influence of punishment directed towards the miscreant and inducing a state of compliance with the law. But does this really work? De Soto20 describing the Peruvian situation at the date of his thesis says: “People have gradually grown used to living outside the law. Theft, illegal seizure, and factory takeovers have become everyday occurrences and do not greatly disturb people’s consciences. Thanks to constant whitewashing some criminals have become public figures.”

Henry Maine argued that man moved from status to society. From this theory emerged the argument that there should be laissez-faire in employment contracts and

20 Hernando de Soto, The Other Path, The Perennial Library 1990.

that it was immoral for laws to regulate working conditions and terms of employment. The employee was to have the individual freedom to regulate his own terms by contract. This of course implied a bargaining capacity which was equal to that of the employer, which perhaps was absent until the age of specialisation when market forces had their impact. The imbalance led to workers organising themselves into Unions and using the strike weapon, leading eventually to Collective Bargaining as a means of determining terms and conditions of employment.

Jeremy Bentham’s philosophy was based on a principle that utility must prevail and that any law which was socially irrelevant must be changed. He also advocated that the greatest happiness of the greatest number was the primary goal to be achieved.

Hegel appears to have had a conviction that liberty meant the freedom to obey the law, on the assumption that the law could not be in error and had morality attached to it merely because it had been ordained by the State. This, as we have seen, was a dangerous doctrine and has been relied on as justification by totalitarian regimes.

Jhering and later Roscoe Pound, on the other hand, saw the law not as a system of formal rules which inhibited but, on the contrary, as a method of producing an orderly society. It was seen as a means of avoiding clashes on the basis of conflicting interests. The underlying social implications of legal rules was therefore assumed as a basis for understanding and interpreting the law. Pound explained the legal process as one of “social engineering”. Since this also led to uncertainty in the interpretation of law, the Americans, thanks to persons such as the great Oliver Wendell Holmes, developed “realism” as a theory of law. This involved techniques for predicting decision making, i.e., developing methods of predicting more effectively the course of decision making by the Courts, and secondly, making the legal system a more effective tool for social control whilst recognizing that social aims fluctuate and the law must be kept in symmetry with these changes in goals. As Holmes said “the prophecies of what the Courts will do in fact and nothing more pretentious are what I mean by the law”. The thinking was that what finally mattered was the personality of the judge and his peculiarities and biases which would influence the decision. Judge Learned Hand was not therefore unduly cynical in saying: “I must say as a litigant I should dread a lawsuit beyond almost anything else short of sickness and death”. As we know in the same way that there is a reluctance and sometimes dread of the legal institutions, there are also some among us who revel in the use of the systems and some even consider legal proceedings as a game of chance and an opportunity to speculate to their benefit.

The attitude of Courts change with social development and it was seen that it was necessary for Courts to be the conscience and protector of society. We have made tremendous strides in relation to social sensitivity since the time of the decision in Turner vs. Mason (1845) where a maid, who wanted to go to her dying mother and left against the employer’s order, was held by the Courts to have committed misconduct serious enough to warrant summary dismissal.

The preamble to the I.L.O. Constitution states thus:

“And whereas conditions of labour exist involving such injustice, hardship and privation to large numbers of people as to produce unrest so great that the peace and

harmony of the world are imperilled

The International Labour Organisation was formed in 1919 and, examining the list of Conventions which were ratified at the First Session that year, reveals the basic concerns of the Organisation and society at that time. The six Conventions adopted refer to the following:

1. Hours of Work 2. Unemployment 3. Maternity Protection 4. Night Work for Women 5. Minimum Age 6. Night Work for Young Persons

Entrepreneurs and their expectations of the law

Do entrepreneurs fall into the classical theory of the “positivist school”, i.e., do they conform to laws for fear of penal consequences? The Labour Department perhaps believes that this is so. The reality, as conceded by the Department itself is that the rate of non-compliance is phenomenal. It is also strenuously argued, by the Labour Officials, that with more inspection the rate of compliance would improve. It is difficult to subscribe to this view. The employers who are influenced by the penalties which attach to the law, are the very persons who find ways of circumventing the law by various devices. Employers who willingly follow the law, do so mostly because they are concerned about their image and the need to do the right thing by their employees, being also conscious of the dangers of having a discontented workforce. Moreover, those organizations which have dealings with multi-national enterprises, or market their products to developed countries, are compelled to comply with the law as well as with international standards. Some multi-national enterprises have their own codes of conduct while others adopt standards such as SA 800021. The defaulters are mostly small-timers and new entrants to industry, who philosophise that they will minimize costs for the moment, and cross the bridges when they come to them. They are prepared to risk prosecution and could perhaps work out the economics of paying up-front as against delayed payment, the latter having its attraction in relation to cash flows.

Do we go with a utilitarian view of the law? Can we assume that the greatest good of the greatest number should determine the norm? How does one interpret the greatest good? For example, does the State have to enlarge the competitive base by providing equal opportunities to the greatest number, which then could mean the presence of a large number of unproductive businesses which would result in the waste of valuable resources? On the other hand, should not the State encourage efficient and dynamic businesses allocating resources to them and giving them all the required encouragement, which would then mean that the wealth created by these select few could be ploughed back for the benefit of a larger number? This argument is very relevant to the discussion on the uneconomic, but politically correct, attitude towards security of employment

21 Social Accountability 8000 is an international voluntary standard to ensure ethical sourcing of goods and services.

adopted by Sri Lanka. These are tough questions for a Government to answer whether it be in a developed or developing country.

Do we think that rigid legislation will help society? Will we follow Hegel and uphold the supremacy of the law at all cost whether it is archaic or totally impractical? Certainly, in a fast moving world where success in business requires constant change and space for adaptability, unless laws are swiftly changed to accommodate the needs of economic activity, there will always be a tendency to operate outside the law in order to survive in business. This then presents a serious threat to the primacy of the law. It spawns evasion and contempt for the law as well. Laws need to be flexible enough to provide for discretionary powers in contingencies and special situations. The balance struck by “social engineering”, as identified by Roscoe Pound, no doubt should be the final goal. It is clear that we do not want a totally “free for all”- “laissez faire”- situation. In such a situation, even entrepreneurs will find that might is right and unbridled throat cutting would be the order of the day. We would be in state of anarchy, which will be fatal in terms of attracting investment especially in labour intensive industries. What we need is a balance that permits entrepreneur ship within parameters set by national plans. If the Government wishes to make the private sector the engine of growth, then the laws must be part and parcel of a strategy to achieve this objective. The action plan for implementation must have a research component and information should be dispassionately analysed to see what the drawbacks and inefficiencies are. Checks and balances must focus on threats, both in terms of business interests as well as social interests. We should not forget that poverty could threaten the policy objectives of the Government.

Sri Lanka and globalisation

According to studies done South Asia too has attracted a reasonable amount of foreign direct investment in the wake of globalisation. Thilan Wijesinghe states22 that between 1979 and 1982 the average net inflow of FDI was approximately 1.2% of GDP. Between 1960 and 1976, however, the corresponding figure was negative. What influenced this change? Among 5 principal reasons, he mentions the following, which are relevant to us:

1) Implementation of policies to promote export oriented industrialisation within a liberalised trade regime. 2) The setting up of the GCEC and the EPZ’s under them. 3) Ratification of Art.157 of the new Constitution protecting investments from nationalisation and expropriation.

It must be borne in mind, that it was not only foreign investment which we needed, we also needed local investors and existing businesses to make their contributions to solving socio-economic problems. Our strategies at the time of liberalisation also incorporated the need to industrialise in order to address the serious threat caused to

22 Impact of FDI on Industrialization in Sri Lanka- Seminar 50 years of Independence – Cantral Bank 23/24th March 1998.

society by unemployment and under employment which had already caused a holocaust in 1971. According to R.B.M. Korale23 unemployment in 1977 had risen to 23%. Unemployment in the 3rd quarter of 2002 is given as 8.6%.24

According to the Central Bank Report for 2002, the BOI Companies provided 416,756 jobs (in 1996 it was only 241,970 jobs). Of these Textiles, Weaving, Apparel and Leather Products account for 280,234 jobs.

Has the Government a strategy for tackling these issues of creating employment and attracting investment? The Government elected in 1994, in its Agenda for Action, stated thus:

“Change labour laws to balance legitimate concerns of both enterprise and labour, but keeping in mind the need to create employment”.

The Agenda for Action focuses clearly on productivity and opines that rising productivity will provide the basis for increases in real wages and living standards.25 In the most recent strategy of the present government entitled “Regaining Sri Lanka” 26 it is said that 2 million new jobs must be created. It recognizes the fact that, excluding the North and the East, the open unemployment is 528,000 and the under-employed cohort is about 1.2 million. The employed persons also include 673,000 unpaid family workers. In the next few years about 500,000 more are expected to be entering the labour market. Among the priority actions required are the need to find “accommodation on the problems associated with existing labour regulations” and “for better labour relations”. It is said, that ” perceptions of the climate for investment will be influenced positively by a comprehensive settlement” of this contentious issue. It also speaks of the review of labour laws and mentions a few steps being taken.

In 1999, the Employers Federation prevailed on U.S.A.I.D. to carry out a survey in the United States to ascertain what the reputed MNE’s there thought about our laws and industrial relations climate. The reason for choosing the U.S.A. for this study was that this country had brought pressure on us to ensure proper labour standards and specifically shown concern about a perceived lack of freedom of association here. The study incorporated the views of well known multi-nationals as well as Academics and Industrial Relations practitioners. Some of the most important findings were:

* That it was a matter of concern that the right to terminate an employee was dependent on the decision of a public official. The concern here was both with the rights given to the Commissioner of Labour to decide whether an employment should be terminated or not, as well as the right of reinstatement given to an Arbitrator and Labour Tribunal.

* That where Trade Unions existed in work-places, that the preference would be to have collective agreements, on the basis that such agreements could give certainty to terms and conditions of employment. The reality in Sri Lanka is that, even with the benefit of “No Trade Union Action” clauses, there are many

23 Depi. of Census and Statistics, Employment and labour Statistics, p. 14.. 24 Central Bank Report 2002 p. 164. 25 Joint Sri Lanka Govt.-World Bank Study, 1996, p.38. 26 Vision and Strategy for Accelerated Development, May 2003.

infringements, which we have now got accustomed to accept. A law which states that a violation of a Collective Agreement is a punishable offence but requires that action be initiated by the Commissioner of Labour alone, has proved to be valueless, because the Commissioner does not use his prerogative.

* That stable industrial relations were a sine qua non for the promotion of investment. Many countries are competing with each other to woo investors by assuring them of tight controls over labour. Some Free Trade Zones of the world are touted as “Strike Free”.

State intervention in Sri Lanka [Historical perspective]

In 1846 the first piece of legislation on labour in Ceylon was promulgated. It referred to immigrant labour from South India. This was followed by Ordinance 15 of 1858 which also had similar concerns. The State intervened in these instances, and also in legislation to follow in the next few years, as a regulator of imported labour, to ensure that labour was subject to stringent controls, so that the work on the plantations could be maintained to the benefit of the owners of the Plantations. For example, jail terms were possible for workers who broke their contracts with their employers. The emphasis in the early years was to protect employers and ensure that they had the use of labour imported by them and to prevent others luring the labour by better offers.

Legislation in Sri Lanka [Present situation]

Worker-friendly legislation perhaps commenced with the Minimum Wages Ordinance of 1927 which prescribed changes to the laws governing Indian labour. The Trade Unions Ordinance in 1935 provided protection to registered unions and made bargaining by any other unregistered group illegal. (It is interesting that the latest publication of the Board of Investment (BOI), on Industrial Relations permits collective bargaining by unregistered Employee Councils27). The Wages Boards Ordinance of 1941 and a series of legislation in the 1950’s saw the rights of workers being accorded the highest consideration.

As far as current legislation relevant to private enterprise is concerned, the paper focuses on labour-related legislation. However, in passing, mention may be made of the role of the Supreme Court in taking cognizance of Human Rights violations. The 1978 Constitution gave jurisdiction explicitly to the Supreme Court to deal with these complaints under Art. 126. Although the Constitution creates specific fundamental rights such as the Freedom of Association and the right to join a Trade Union, which are relevant to our discussion, the rights cannot be enforced unless, in terms of Article 17, the violation is by “Executive or Administrative Action”. Private sector employees cannot vindicate their rights against their employers.28 However, amendments in 1999 to the Industrial Disputes Act make it illegal for an employer to discriminate against a

27 Board of Investment Publication, Octo.2002 – Labour Standards & Employment Relations. 28 Wijenayake v. Air Lanka Ltd. & others, [1990] 1 Sri L.R. 293, where it was held that an employee of a company, albeit a Government agency, should seek a private law remedy, such as by an application to a Labour Tribunal.

worker on the grounds of union membership or other reason connected with union activities.

Mention may also be made that the Evidence Ordinance has been recently amended to make admissible in Court proceedings, electronic evidence. This is essential in the light of the transformation of business through the emergence of E.Commerce and other electronic innovations now used in transactions. What is disheartening is that such progressive measures have not been seen in the realm of labour relations. For example, it is common for electronic record keeping in relation to attendance, wages etc. The law however, still does not permit such records, making it legally necessary to maintain written records in terms of legislation.

The Wages Boards Ordinance (No. 27 of 1941)

The Wages Boards Ordinance sets the framework for the Wages Boards set up for various trades and industries for the determination of minimum terms and conditions of employment. Whilst conceding that a State should have a floor level for terms of employment, an entrepreneur would naturally look for flexibility in deciding on terms and conditions of employment which are suitable to him depending on his level of profitability and the competition he is faced with. For example a production unit is obliged to observe Saturday and Sunday as the weekly holidays and there is no liberty to rotate workers in the most efficient manner, ensuring that the workers get their weekly rest, as is available to employers of staff in Shops and Offices.

Most Wages Boards fix rates of pay based on time at work and not on performance. This has led to lethargy as workers can expect the same amount of pay as the better performers, and in turn the better performers begin to be de-motivated because there is no recognition of their superior performance. Employers are now adopting incentive payments to reward the better performers, but it has been shown that the productivity of workers in competing countries is much higher and consequently unit labour costs are more competitive.

The Wages Boards Ordinance also has restrictive provisions regarding subcontracting which are not conducive to entrepreneurial activities. Sees. 45A and 59A create direct liability for defaults committed by a sub-contractor. Whilst agreeing that a principal should also be responsible for seeing that the minimum standards are adhered to, it is grossly unfair to bind the principal beyond compelling him to pay the subcontractor a fee which enables the latter to pay his employees wages and other legal benefits in keeping with the law. The law as it stands makes him also an offender so that if the sub-contractor, unknown to the principal, defaults, he would be liable up to four years later, which is the period during which records have to be retained. This is indeed a deterrent on enterprises accepting orders, which they cannot process within their own production capacities, and the excess of which they may have otherwise out-sourced. This also means at times that orders which could be processed in Sri Lanka are moved to other countries where there is more flexibility in sub-contracting.

The Termination of Employment [Special Provisions Act] No. 45 of 1971

This is the Act most often cited by entrepreneurs as inimical to the development of industry in Sri Lanka. The Act makes it necessary for an employer in a scheduled employment to obtain permission from the Commissioner of Labour in order to terminate an employee who has served for more than one year, if the cause of termination is non-disciplinary. The history of this legislation is relevant to our discussion. It was introduced as an urgent measure by Emergency Regulations and thereafter passed by Parliament, in a situation where many establishments were closing down due to the lack of raw materials. We do not need to go into the justification for State intervention at that time, and perhaps can assume that there was a social need for controls to be introduced. However, Sri Lanka changed its strategy for industrialisation in 1977 with its adoption of a free enterprise system. Since then more than two decades have passed and the World has changed almost into an unrecognizable form. Deregulation has been accepted across the globe so as to make economies attractive to investment. Does the Act inhibit and restrain entrepreneur ship?

What has the resulting position been?

* Employers have been sub-contracting work. This has led to spurious contracts and workers have been employed without the protection of the law by people who have no regular business of their own but are only agents for supplying

labour. Among the smaller establishments tracking down such cases is almost impossible.

* Employers have been taking ‘casuals’ when necessary and laying them off from time to time to avoid the consequences of the Act, which gives them coverage after 12 months immediately preceding termination, if they have performed 180 days work.

* Some have set up additional companies for operations which are likely to be risky or which may need to be closed quickly.

* Employers have been entering into voluntary separation schemes at enormous cost merely in order to prevent long inquiries before the Commissioner and the possibility that he may still refuse permission after inquiry. This usually happens when a company needs to down-size to meet competition or a particular division or service is becoming uneconomical.

Employers realize that this Act cannot be repealed without considerable difficulty, although that would be the best option. To repeal the Act – which should be the final goal – it would be necessary to first put in place a satisfactory safety net.

The government has brought in some amendments to the law which were meant to mitigate the adverse effects on investment. The recent amendments29 ensure that inquiries will be concluded in two months and that a schedule of compensation will be announced by the Commissioner-General of Labour. It is expected that the new schedule will be in place by January 2004. However, it will be seen that the very idea of having to receive prior authorisation for the purpose of retrenchment or other form of

29 Amendment No. 12 of 2003.

termination of services was considered repugnant by those leading employers in the US who were surveyed. The Convention of the ILO30 in this regard, recommends notice and dialogue, but fails to impose any prior approval of any official.

In view of the political nature of the issue, employers hope that the needs of business to have more labour market flexibility will be fully addressed as soon as conditions are appropriate, but the following are areas which could be addressed immediately and are also important enough to warrant attention:

* To provide for retirement of any employee at 60 years without the need for the Commissioner’s approval. At the moment unless the age of retirement is specified in a letter of appointment or Collective Agreement, the permission of the Commissioner of Labour is required even if the employee is 80 years old. This will not preclude the employment of an efficient employee beyond 60 years but will give flexibility to evaluate performance and retain only those capable of continuing to make a contribution to the organization.

* Permit termination without the need for approval of all management staff earning salaries over a specified limit. At the moment even expatriate staff have the protection of the T.E. Act. Even for incompetence of a Chief Executive Officer, one requires the Commissioner’s permission for termination resulting in huge payments to avoid having to undertake the near impossible task of proving incompetence, without exposing the organization itself to the danger of losing its credibility and, consequently, its business.

* Exclude all employees who are above the cadre requirements of an organization, i.e., ‘casuals’ and contract workers taken for irregular work, seasonal requirements, to meet absenteeism or any other temporary need. It is wise to delete provisions relating to coverage resulting from 180 days work. Unions are now agreeing to settle disputes where employees have worked more than 180 days because it is not practical to make them permanent. Devices of breaking service will then not be necessary. Where an employer is being unfair the matter can still be taken cognizance of under the Industrial Disputes Act.

* Introduce a schedule which sets out compensation payable on retrenchment as envisaged by the recent amendment, but with the right of the employer to retrench without seeking permission from the Commissioner of Labour by paying the specified amount. If an employee cannot pay, the matter could be inquired into by the Commissioner to determine what compensation is fair.

* Permit temporary lay-offs, without the need to seek permission of the Commissioner, on half pay for up to three months where no business is available or where the workplace has suffered an act of God or other disaster. The employer could be obliged to inform the Commissioner before commencing lay-off to enable him to decide whether the act is bona fide or not. If it is not bona fide he could order payment of the full salary giving reasons for his finding.

30 Convention 158.

The Industrial Disputes Act

The retrenchment procedure in it, is not only fair, but promotes good industrial relations by providing for notice of redundancy and the possibility of discussion, conciliation and even arbitration, but working within specified time frames. These provisions were supplanted by the Termination of Employment (Special provisions) Act, which more or less, covers the bulk of the formal private sector, and is therefore of no value now.

The implementation of the conciliation procedure under the Act and the unsatisfactory nature of the arbitration process are worthy of comment. An employer would necessarily demand an early resolution of any dispute. He would expect conciliators to be well-trained, unbiased and capable of understanding the realities of business. The need for speed in decision making and the maintenance of an environment conducive to good industrial relations cannot be over-emphasised. Workers and their unions also are obviously not satisfied with the service and usually take industrial action without seeking conciliation in order to make their bargaining power stronger. Conciliation in Sri Lanka, means having a third party making an effort to find a compromise without really satisfying the needs of the parties and establishing a relationship which will be conducive to better performance and a fair sharing of gains,

Arbitrators are generally lawyers and many of the parties feel that they need to be represented by lawyers. Each reference is dealt with as a Court case, ignoring the fact that the mandate of the arbitrator as set out in the Act is to “settle” the dispute31. Hearings before arbitrators may take a few years and the purpose of the workers raising the dispute becomes insignificant and leads to the danger of the bad blood between the parties becoming aggravated. Leave alone becoming uncompetitive, the organization is likely to die in the meantime. The measures taken by employers in order to mitigate such danger to its business may result in placing workers in a vulnerable position. We have seen instances of workers whose disputes were pending before arbitrators giving vent to their frustrations by resorting to trade union action. This is despite the fact that the law makes such action illegal.

Another point worth noting is that a reference to compulsory arbitration is that it is at the discretion of the Minister and the Commissioner of Labour can only make recommendations.

The Industrial Disputes Act was amended in 1957 for the purpose of creating Labour Tribunals to give an opportunity to dismissed employees to seek relief in a cheap and uncomplicated manner. However, the delays in the Labour Tribunals are only marginally less than in normal Courts of Law and are due to many reasons including the lack of staff and the use of procedures which are very similar to those of Courts.

The tribunals have magisterial powers for certain purposes and also have the flexibility to disregard contracts of employment and order equitable relief. They are also entitled to decide their own procedures. One Tribunal President in days gone had a rule of thumb that he would permit only one witness on each side, however complex the case was. This was his technique for expediting hearings. 31 See Sec.3 &4 of the Industrial Disputes Act 43 of 1950.

We have already noted that the survey done by the Employers Federation of Ceylon revealed that investors were unhappy with the right of reinstatement given to Tribunals. However, this is common enough in other countries, at least where the termination from services has been arbitrary or an act of discrimination for trade union activities. What might, however, be commented on adversely is, that where compensation or alternatively reinstatement is ordered by a Tribunal, the choice is that of the employee to decide which he prefers. This poses a difficulty where an employee may have been under grave suspicion of being dishonest and has to be reinstated because he chooses to return to employment. It would be more acceptable to limit the powers of reinstatement to situations where the employer has acted in bad faith, where the misconduct did not involve allegations of dishonesty or the use of force against superior officers. The Employers Federation had one case where a woman worker assaulted a Personnel Officer when they were alone in his office. The Labour Tribunal chose to believe the employee and reinstated her resulting in the Personnel Officer resigning from employment. In such instances, should not the possibility of paying compensation in lieu of reinstatement be given to the employer?

The right that a Tribunal has to disregard a contract of employment and grant just and equitable relief, removes the certainty that employers look for in their business dealings. An illegal clause in a contract would in any event not bind the parties. However, this right is usually exercised to enable a Tribunal to overlook a fixed-term-contract which has been used by an employer as a device to have flexibility to terminate. This has however, to be approached with caution in an era when employees, especially skilled persons and management staff, have to upgrade themselves to remain employable and annual appraisals are the only means of determining whether an employee’s contract should be renewed or not. For example not long ago, an international school, which placed all teachers on fixed-term contracts, was able to satisfy a tribunal that it was fair to refuse a new contract to a person who was unable to meet the requirements of a new syllabus.

It is worth noting that the Workers Charter32 states that ” fixed-term contracts for regular and continuing employment shall be prohibited other than in respect of employees in a managerial capacity”. This document could be regarded as a statement of policy although it cannot be enforced as a legal provision. According to the Charter, other levels of employees could be on contracts for specific periods if the work is not of a regular nature.

Charles Handy states that in the modern world organizations are like a “shamrock leaf, with three parts, the regular employees, the direct part-time and temporary employees and the employees under contractors who supply goods and services to the organization (out-sourced work)33. Should we permit flexibility of such a nature in Sri Lanka? A close examination of current practices, shows that many organizations are resorting to such arrangements in order to achieve business efficiency despite the law being restrictive. One may perhaps say, then what is the need for change? Many MNE’s of repute will not invest in a country where they cannot observe all the labour laws and

32 September 1995 Part 3 (e). 33 Inside Organizations, Penguin, 1990, p. 204.

any one who deals with them has also to agree to do so. We have not had many labour-intensive industries being set up and those, which were set up have down-sized considerably on the basis that the cost of manufacture here is prohibitive. The cost of manufacture is pushed up by costs of direct labour who have to be carried even when work is not available.

With regard to collective bargaining, which has existed in the country from 1929 when the first agreement was signed between the Employers Federation of Ceylon (EFC) and the All Ceylon Trade Union Congress34, led by Mr. A. E. Goonesinha, there has been very little interest in the process outside the EFC. Recently, as a follow up to the Workers Charter and in order to appease developed countries to whom we consign our goods, the Industrial Disputes Act was amended to compel employers to bargain with Unions which had a minimum of 40% representation.35

Some of the issues which should be highlighted are:

* Collective Bargaining in terms of the I.L.O. conventions must be a voluntary process and the Government’s obligation is to facilitate it, not to compel parties to enter into Agreements. The current amendments attempt to compel even unwilling parties to bargain.

* Employers and Unions agreed on mutually acceptable lists of unfair labour practices but the amendments failed to incorporate the unfair labour practices of workers and Unions, making the list one-sided and creating the impression that workers could be undisciplined but employers would still need to deal with them. The right of an employer to de-recognize a Union if it fails to observe its obligations under an Agreement or commits and unfair labour practice should be there in the law, if there is mandatory recognition of Unions.

* The amendments leave it to the Union to decide for whom they wish to bargain. This allows them to unionise each group of workers independently and seek bargaining irrespective of the Employer’s wishes to treat them as one group or could also mean that different groups join different unions so that there need to be several agreements in the same work place. The problem of multiplicity of Unions, which is the bane of our society, could be further aggravated.

Freedom of association and the right to organize:

This is an area in which Sri Lanka has been under attack from time to time. Freedom of Association is protected by the Constitution itself, but private sector employees have no redress before a Court if there is a violation of their rights as we have already noted. Of course, Unions which suffered at the hands of employers have the right to take trade union action, and in Sri Lanka, unless there is a Collective Agreement or a declaration of essential services, or the purpose of the strike is one which is prohibited by the Industrial Disputes Act, all strikes are lawful. In fact, a strike does not need the support of a Trade Union.

34 E.RG. Amerasinghe, Vie Employers Federation of Ceylon 1929-1994,1994, p. 49. 35 Act No-56 of 1999. See also Acts 11 and 13 of 2003.

A problem arose in Sri Lanka when for long periods there were Emergency Regulations which forbade strikes and some employers used these provisions to destroy Unions. A second area of concern as far as the I.L.O. and the developed countries doing business in Sri Lanka were concerned was the apparent resistance to Trade Unions in the Free Trade Zones. Unlike in some countries all the laws of the country are applicable in the Zones as well. However, Unions complain that they their right to unionise the workers is restricted. The employers in the Zones, by and large, are not totally opposed to Unions, but seem to fear politicised Unions, which have little interest in the welfare of the enterprise. Another issue which is often ignored is that the garment manufacturers who form the mainstay of the Zones, not to mention the manufacturing industry in Sri Lanka, survive on meagre margins for their survival, and the expectation on the side of Unions to bargain on wages without productivity increases is totally unfair. At the moment the BOI sets guidelines for wages ensuring that the rates are always higher than the minimum wages, and forward-orders are taken on computations made on this basis.

Justice Mark Fernando, who was on the International Administrative Tribunal of the I.L.O., in his contribution entitled ‘Towards International Social Justice”,36 says, that the harsh reality is that the main competitive advantage for many third world producers is that which long continuing poverty confers on them, namely, cheap labour. He says, by contrast, producers in developed countries have many competitive advantages, such as superior technology, economies of size and scale, access to finance and marketing gained through decades of prosperity.

So the debate goes on. But, what we need to do is to face up to reality. The threat is no longer from the W.T.O. The Multi National Enterprises are introducing their own codes of conduct and demanding compliance therewith, if we wish to do business with them. We are no longer in a position to gang up together as developing countries and hold the developed countries at bay. The developing countries are no longer competing as States but as a collection of individual suppliers who are prepared to do the bidding of these giant corporations not merely for survival, but indeed for making mega-profits which are available to those who are prepared to shed their old ways and look for a good corporate image. The advantage producers had of attracting investors through low wages appears to have eroded and it is quality, reliability and speed in delivery, which hold sway in determining who gets a deal. All these factors depend on motivated, competent employees and employers seem happy to incentivize those who are prepared to contribute to enhancing corporate performance. Collective bargaining needs to move from a confrontational, positional mode to a participative, gain and problem-sharing mode, to enable employers to be comfortable with the process.

The investors whom we should attempt to attract are those who would honour their obligations under the Code of Multinationals of the ILO (Tripartite Declaration of Principles concerning MNE’s and Social Policy). This Code states:

“With a view to stimulating economic growth and development, raising living standards, meeting manpower requirements and overcoming unemployment and underemployment, governments should declare and pursue, as a major goal, an active policy designed to promote full, productive and freely chosen employment.

36 Visions of the Future of Social Justice, Essays on the occasion of the ILO’s 75th Anniversary, ILO, 1994. 1 1 8

Multinational enterprises, particularly when operating in developing countries, should endeavour to increase employment opportunities and standards, taking into account the employment policies and objectives of the governments as well as security of employment and the long-term development of the enterprise. Arbitrary dismissal procedures should be avoided.

Workers employed by multinational enterprises as well as those employed by national enterprises should, without distinction whatsoever, have the right to establish and, subject only to the rules of the organisation concerned, to join organisations of their own choosing without previous authorisation. They should also enjoy adequate protection against acts of anti-union discrimination in respect of their employment.”

This would be the ideal situation, and we in Sri Lanka can attracts MNEs to invest here based on our adhering to accepted international standards.

With regard to expectations from laws, officials of the Labour Ministry and Department are concerned

1) We should have regulation by the State, but only to the extent that the State itself can enforce such regulations. If we have laws which are observed more in the breach (e.g., EPF and ETF contributions) or ones which can with a little ingenuity be evaded (e.g., The Termination Act by the device of ‘casuattzation’ and fixed-term contracts) they are of no relevance and the system itself gets devalued and laws are treated with amusement and derision.

2) Proper facilitation of industrial relations is necessary. The facilitation must be by officers who change their image as inspectors or enforcers, to one of educators for the sake of establishing a society living in harmony and with respect for human dignity and personal property.

3) Officers need to be proactive and to prevent disputes and encourage good management and worker response. This, however, posits the need for officers who are well-informed, knowledgeable and dedicated to their roles. The need for quality in recruitment, good conditions of service and recognition of merit are immediately thrown up as issues to be addressed urgently.

4) A fourth essential requirement is the need for a cohesive State approach to socio-economic development. There should be a master plan with each facet of activity being dealt with as part of one mosaic instead of haphazard initiatives and divisive forces dissipating the resources of the country, which need to be focused on a clear national goal. Inter-Ministry and interdepartmental synergy is absolutely a must, if we are to move forward and enjoy the fruits of globalization.