Not a ‘Boring’ Job for Just Lawyers
BY SHARON ARNOLDA
In last week’s article we talked about the importance of proactively managing legal risk at the boardroom, discussed at the fourth episode of the web series The AMCHAM SL Legal Review hosted by the American Chamber of Commerce in Sri Lanka (in collaboration with Royal Institute Colombo) which was held recently. The webinar focused on understanding the importance of proactively managing legal risk at the boardroom and ensuring organisations and resources are protected.
The discussion was panelled by Senior Attorney-at-Law Harsha Fernando, Attorney-at-Law Dhananjaya Jayakody, and Anoma De Silva, an experienced human resource management professional, and was moderated by Attorney-atLaw Shalinie Kulatunge. The sequel article explores the provisions laid out in labour legislation and other approaches that can and should be taken by corporates in effectively managing any and all kinds of legal risks arising out of running an organisation. How can corporate risk be managed and mitigated in the labour sector, considering the applicable laws and regulations in place for the same? The presentation made by Jayakody covered this aspect in respect to the topic of conversation. Labour legislation has been one of the first pieces of legislation to be enacted in the country, and companies have since been using the law to manage risks. Prior to understanding the role played by a general counsel or the legal department of a company in general, it’s important to understand the difference between the terms used.
Proactive risk management – can be defined as the process of carefully analysing a situation or assessing a process to determine potential or actual risks, identifying the root causes and the drivers of such risks, further assessing the probability and the impact of such risks in order to prioritise, minimise, strategize, and overall better manage any risk posed to the company.
Legal risk review – according to Jayakody the legal risks faced by a company are broadly categorised by associating them with the broader functioning of a company. Therefore, legal risks arise in the areas of compliance, risks associated with regulations, risks arising out of contractual and non-contractual obligations, and risks associated with labour disputes.
What exactly constitutes a risk?
Jayakody explained the situation faced by companies when regulatory interventions happen. Addressing the recent decision of the Government to increase the daily wage of a Plantation worker to Rs 1000 a day (a minimum wage of 900 and 100 as a budgetary allowance), he went on to state that when this change was made the companies were not ready to accept it since companies are not ready to deal with sudden regulatory interventions/changes brought on by the Government and do not have strategies in place to deal with such situations. What are the remedies available in labour law to mitigate/better manage such risks? In diving into the internal remedies that are available, Jayakody mentioned the following in discussion;
Drafting contracts – there is a lot of legal backing brought on by a welldrafted and properly-executed contract/agreement. For example, a contract of employment can be drafted to suit and better suit the nature of the relationship that is intended with the employee. There are many types of contracts besides the general contract of employment such as time specific contracts, freelance contracts, contracts with independent consultants and contractors, and so on.
Clauses of the contract
Specific clauses relating to transfer, suspension, and retirement can be drafted to better suit the needs and functioning of the organisation, by including clauses that are in line with the culture of the organisation it can be ensured that in the event of a dispute the existing contract lays down regulations that are already being followed by the company.
Restraint of trade clauses – the purpose of such a clause is to safeguard the company and its interests and in some events prevents the employee from working with and for direct competition for a stipulated period of time.
Outsourcing agreements – this arises in situations in which the human resource management of a company is outsourced to a third party who in turn will be responsible for all matters concerned with the regulation of employees within the company.
Registered labour suppliers – this arises in situations in which a company engages the services of a supplier of employees (for example daily workers, contractors, and so on). Jayakody added that it is important that a company ensures that they are using the services of suppliers that are reliable and registered with the Department of Labour and operate in compliance with the law.
Gratuity provisions – gratuity is a payment that needs to be made within a month of the employee resigning. Jayakody added that in the event that more than one employee leaves in a specific month or a large amount has to be made in such a payment, companies are not prepared or are incapable of making such payments. He further stated that companies should ideally have a, “Provision for gratuity,” in which an amount is put aside annually/monthly (however the company sees fit) to make such payments when required.
Insurance – having a strong and comprehensive health insurance policy ensures the all-round safety and health of the employees in addition to mitigating risks in the workplace.
Administrative relaxations – in some instances organisations can communicate corporate concerns to the commissioner of labour and arrive at a concession. Jayakody further stated that overtime payment for executives was such a concern raised by corporate entities and a concession was given to them regarding the same.
Limiting the number of Employees – most employers are aware that not directly employing more than 15 employees exempts the companies from falling within the gambit of legislation such as Termination of Employment of Workmen Act and The Gratuity Act.
Non-disclosure agreements – this enables companies to work closely with entities while having a legal guarantee that the confidential information that will be communicated during the course of the transaction/partnership and so on, remains the property of the company.
Dealing with trade unions
The right to join and form a trade union is a constitutional right and so is the right to strike (the biggest problem for any employer!). According to Jayakody the situation can ideally be managed by entering into either a check off or collective agreement with the union and ensuring that such agreement has a clearly laid out dispute resolution mechanism set forth in such agreement. He also added that when such a mechanism is in place, the union and the company is able to negotiate, failing which there is provision for further negotiation with the Labour Tribunal. He further added that when employees or unions go through such a process the immediate anger that would cause a strike is lost, enabling the situation to be better managed on all ends.
How can labour matters be handled externally?
The concerns can be raised at the Labour Tribunal, or there is always the option of litigation, which is time consuming in comparison to the mechanisms that are available internally. Handling labour matters externally means bringing everything to the legal system. Even though it is more time consuming, both parties have the option of litigation. Other sectors also can take an example of how Labour Law has evolved in managing and mitigating risks that arise in the labour sphere.
What is the most overlooked legal risk relating to labour matters?
According to Jayakody the most overlooked legal risk is the, “Stopping of work due to the involvement of trade unions,” he further went on to add that companies should look into entering into agreements with these unions in order to face such a situation better. According to Fernando, it is the fact that the legal contract entered into with the employee doesn’t reflect the legal framework in place for the functioning of the company. He further added that as the legal framework of a company keeps changing such changes should ideally be reflected in the contract that has been initially entered into with the employee.
Agreeing with the previous statement made by Fernando, De Silva added on that, most employers tend to think that the initial contract of employment that isn’t signed with an employee when such a person is hired is enough. She added that the employer’s approach should shift to an approach where if the business/legal strategy of the company changes such changes should be reflected in the legal contract between the company and its employee. She further added that in addition to which disciplinary and any and all other codes adhered to by a company should also ideally be reflected in the contract with the employee. She also added that a reactive approach seems to be taken in such instances, with companies turning to their lawyers in order to get them, “Out of a mess they are already in.” It is important to note that risk management is a collective responsibility.
She also stated that the lawyer is seen as the ‘Police’ sitting between the board of directors and the employees and that such an approach should ideally be changed to a situation where the board is aware of the legal framework and risks associated with it and that such knowledge should ideally cascade down to all levels of employees starting from the top.
To what extent can dayto-day business decisions alter legal risks?
In answering Fernando pointed out that there are two main facts that need to be considered;
1. Legal management of risks - law to deal with risks, for example agreement with an unknown customer – a legal contract laying out agreed terms and conditions to deal with that risk.
2. Management of legal risks - risks that arise due to changes in the legal framework, for example the plantation workers example given above. He further added that since all structuring of a company is based on a legal creation, instead of waiting to consult a lawyer when a situation has arisen, it is better to incorporate the legal provisions and mainstream them, making them part of the company strategy and structure. De Silva in elaborating added that, as of recently, everything is done based on a standard, with more people leaning towards very clear ethical products and produce. In taking her statement as an example, she explained if the company is based on an ethical product, then all the thinking and functioning connected to the business needs to be based on the ethics that are being upheld throughout the company, and everyone needs to ensure that they stand by it and adhere to such standards which in turn, will result in the entire company thinking in a broader sense and creating a product and service based on the collective thinking of everyone.
She further added that the labour practises and procedures in place are not satisfactory, and that the system needs to take a more wholesome approach covering a wide range of concerns including but not limited to labour regulations, health and safety regulations, community standards, legal education, and education in legal and general ethics. The closing sentiments of the panellists remained the same; There needs to be broader education on the legal framework across all levels of a company. In order to effectively assess and manage risks, it is of utmost importance that all levels – starting from the board – are comprehensively educated in the legal principles the company is based on