Subject: Labour Reform

Why in the News

A nine-judge Bench of the Supreme Court held on 20 August 2026, by a 5:4 margin, that the expansive 1978 interpretation of the term industry will not govern the Industrial Relations Code, 2020. The ruling preserves that interpretation for disputes already pending under the Industrial Disputes Act, 1947 and withdraws it from every case that follows.

What is the ‘triple test’ laid down in Bangalore Water Supply (1978)?

1. Origin: A seven-judge Constitution Bench in Bangalore Water Supply and Sewerage Board v. A. Rajappa (1978), authored by Justice V.R. Krishna Iyer, read Section 2(j) of the Industrial Disputes Act, 1947 expansively.
2. The three conditions: An undertaking qualifies as an industry where there is systematic activity, organised by cooperation between employer and employee, for the production or distribution of goods or services calculated to satisfy human wants and wishes.
3. What the test ignores: Profit motive is irrelevant to the classification. Purely spiritual or religious activity stays outside the definition.
4. Reach: The test brought hospitals, educational institutions and municipalities within the fold of industry, exempting only core sovereign activities such as the judiciary, law and order and defence, in order to protect the state’s functional autonomy.

What is the Industrial Relations Code, 2020?

1. About: The Industrial Relations Code, 2020 consolidates the law on trade unions, standing orders and the settlement of industrial disputes into a single statute, and came into force in November 2025.
2. The operative provision: Section 2(p) of the Code carries its own definition of industry, taking over the function that Section 2(j) of the 1947 Act performed for 48 years.

What did the Supreme Court actually hold on the reach of the 1978 definition?

1. A clean slate for the new Code: The majority held that industry under Section 2(p) of the Industrial Relations Code, 2020 would not be burdened by the 1978 interpretation of Section 2(j) of the 1947 Act.
2. No sheet anchor: The Chief Justice of India stated that the 1978 judgment and its conclusion would not act as the sheet anchor or the foundation for any future interpretation of Section 2(p).
3. A refinement, not a reversal: The majority found that the essential framework of the 1978 interpretation had withstood the test of time, and that some of its constituent elements could have been articulated differently to better reflect the scope and contours of Section 2(j).
4. Prospective operation: The refined triple test evolved in the opinion of the Chief Justice of India will operate prospectively, and the modified definition will not apply to pending cases.
5. Pending disputes protected: All matters presently pending before courts, tribunals and labour authorities under the Industrial Disputes Act, 1947 are to be adjudicated in accordance with the triple test as laid down in Bangalore Water Supply.
6. Maintainability settled: The majority held that the reference questioning the correctness of the 1978 ruling was maintainable.
7. Text still awaited: The fine print of the ruling prescribing the new formulation of the definition has not yet been released.

Why was the 1978 definition sent to a nine-judge Bench at all?

1. Docket explosion: Later Benches found that the 1978 definition produced what they called a docket explosion, bringing far more cases to the labour courts.
2. A failed legislative narrowing: Parliament attempted to narrow the definition through the Industrial Disputes (Amendment) Act, 1982, excluding several organisations from its scope.
3. The 2005 admission: The Centre told the Court in 2005 that no alternative dispute resolution mechanism existed for employees who would fall outside the amended definition, so the 1978 position continued to hold.
4. Divergent readings: Subsequent rulings interpreted the 1978 judgment differently, and the case was referred to a nine-judge Bench for reconsideration.

What three questions did the reference place before the Bench?

1. Correctness of the test: Whether the test laid down in Bangalore Water Supply remains the correct interpretation of industry, and whether later legislative developments have any bearing on it.
2. Welfare schemes: Whether welfare schemes run by the government count as an industrial activity.
3. Sovereign function: What constitutes a sovereign function of the state, and whether such functions fall outside the ambit of labour law altogether.
4. When framed: The Court identified these three broad questions for consideration in February 2026.

Why does preserving the 1978 test only for pending cases divide the workforce in two?

1. Two regimes running side by side: A dispute already filed under the 1947 Act is decided on the wide 1978 definition. An identical dispute arising under the Code is decided on a definition that has not yet been written out.
2. The Court’s own reason: The majority stated that it did not intend to displace the governing legal position on pending proceedings, since doing so would create artificial discrimination.
3. What the wide net secured: The 1978 definition enabled workers across a wide range of jobs to obtain legal recourse on wages, working hours, strikes, collective bargaining and protection against arbitrary dismissal.
4. What the clean slate removes: Workers whose disputes arise after the Code’s commencement lose the settled presumption that their workplace is an industry, and must establish it afresh under Section 2(p).

What does the dissent argue about the State as an employer?

1. Reference itself questioned: Justice B.V. Nagarathna found the reference against the 1978 verdict unwarranted and not maintainable, and held that the ruling required no interference or modification.
2. Identity of the employer is irrelevant: The dissent held that merely because a function is performed by the State, it cannot be exempted from the definition of industry, so the test of who carries out the activity is not relevant.
3. Nature of the activity governs: Social welfare activities and schemes undertaken by government departments or their instrumentalities can be construed as industrial activities for the purpose of Section 2(j), depending on the nature of the activity and all other relevant factors.
4. Why it matters now: The dissent held that it was important, now more than ever, to retain the inclusive definition of industry to safeguard workers’ rights.
5. Split within the majority side: Justice Joymalya Bagchi recorded disagreement with the majority on the reformulation of the triple test, and Justices Dipankar Dutta and Ujjal Bhuyan wrote dissenting opinions.

What challenges follow from redefining ‘industry’ under the new Code?

1. Coverage uncertainty until the operative text arrives: The modified formulation was pronounced without the wording that prescribes it being available, so adjudicating authorities have no text to apply. Eg. The hour-long pronouncement on 20 August 2026 ended with the fine print of the new formulation still awaited.
2. Identical workplaces treated differently by filing date: The cut-off is the date of the proceeding, not the nature of the work, so two workers in the same undertaking can face different definitions. Eg. A dispute in a municipal water supply undertaking filed under the 1947 Act is decided on the triple test, and one arising afterwards is not.
3. No fallback forum for excluded categories: Narrowing the definition removes workers from the industrial adjudication machinery without putting anything in its place. Eg. The Centre itself told the Court in 2005 that no alternative dispute resolution mechanism existed for employees who would fall outside a narrowed definition.
4. Threshold effects that discourage firms from growing: The Code applies its stricter obligations only above stated headcounts, which gives firms a reason to stop hiring below the line. Eg. Standing orders now apply at 300 employees and prior approval for layoff, retrenchment and closure applies at 300 workers, both raised from far lower thresholds.
5. The sovereign function boundary left to case-by-case litigation: The Court has framed the question of what a sovereign function is without settling a workable test for it. Eg. Whether a government-run welfare scheme is an industrial activity was one of the three questions placed before the Bench in February 2026.
6. A definition built for a standard employment relation: The triple test turns on cooperation between employer and employee, which platform-mediated work does not fit. Eg. Gig and platform workers are addressed through the Code on Social Security, 2020 rather than through the industrial dispute machinery.

Conclusion

The Court has separated the past from the future of a single statutory term, keeping Justice Krishna Iyer’s wide definition alive for disputes already in the system and denying it any authority over the Code that now governs Indian industrial relations. The substantive contest has therefore moved from the judiciary to the text of Section 2(p) and to whoever interprets it first. The Industrial Relations Code, 2020 has been in force since November 2025, and the next milestone is the release of the full text of the judgment carrying the refined formulation of the triple test.

“[2024, GS3, 15] Discuss the merits and demerits of the four ‘Labour Codes’ in the context of labour market reforms in India. What has been the progress so far in this regard?”