European Law Raising Wage Standards And Indian Businesses May Pay The Price

The Corporate Sustainability Due Diligence Directive, which aims to hold businesses operating in the European Union accountable for their human rights and environmental impact in supply chains, has been adopted and published in the European Union Official Journal on July 5, 2024. It will be implemented gradually in a phased manner from July 2, 2027, onwards.The CSDDD imposes stringent obligations on companies operating within, or in business relationships with, entities in the EU, ensuring that their supply chains adhere to sustainability and human rights standards. A core component of these obligations is the mandate to ensure the payment of 'living wages' or 'living income'.This concept differs significantly from the minimum wage framework currently followed in India. For Indian employers engaged in business with European companies, this regulatory shift introduces serious compliance challenges and financial risks, necessitating immediate strategic and legal considerations.The CSDDD extends due diligence obligations beyond European borders, requiring multinational corporations to assess, prevent, and mitigate adverse human rights and environmental impacts in their supply chains. However, these obligations do not directly regulate the supply chains of non-EU companies. Instead, the responsibility falls entirely on EU companies to ensure that their supply chains comply with sustainability and human rights standards.Since CSDDD obligations only apply to EU companies, they do not have direct legal authority over their suppliers. The only way for EU companies to enforce these standards within their supply chains is through contractual agreements with suppliers. In fact, the CSDDD mandates that EU buyers must enter into such contracts with their suppliers, making contractual enforcement a legal requirement under the law. This means that while non-EU suppliers are not directly bound by CSDDD itself, they must comply with its standards if they wish to continue doing business with EU buyers.The European Model Clauses, which are currently in a draft stage and will be finalised soon basis the comments and inputs received during the consultation process, will serve as one of the most effective contractual mechanisms for ensuring compliance with the CSDDD. These clauses are designed to help EU companies structure agreements with their suppliers—including those in India—to uphold human rights standards, which encompass the payment of living wages.However, EMCs are not mandatory (as ultimately, they are contractual clauses), nor are buyers and suppliers strictly required to adopt them in their entirety. Instead, they provide a well-drafted framework that places companies in the strongest compliance position. Businesses have the discretion to modify these clauses or incorporate selected provisions into their contracts, tailoring them to their specific supply chain needs.The scope of the CSDDD remains broad, covering large EU-based companies as well as non-EU companies with significant business in the EU, meeting the prescribed threshold thereunder. Indian entities supplying goods or services to such companies must ensure compliance with these obligations or risk contract terminations, penalties, and potential exclusion from EU markets..A 'living wage' is defined as a wage sufficient to ensure a decent standard of living for a worker and their family, covering basic needs such as food, water, housing, healthcare, education, transportation, clothing, and other essential needs, including provision for unexpected events. This differs from the minimum wage framework in India, where wages, though periodically revised, often remain at subsistence levels without ensuring a dignified standard of living. The CSDDDs require companies to take steps to ensure that workers in their supply chains are paid living wages, pushing businesses to revise compensation structures significantly.In India, minimum wages are regulated by the Minimum Wages Act, 1948 and set by state governments (in some cases by the Central Government) based on industry, skill level, and region. While these wages are periodically revised, they often remain below the threshold of a true 'living wage'.The Supreme Court of India, in Standard Vacuum Refining Co. of India v. Its Workmen and Ors., classified wages into three categories: minimum wages (basic subsistence), fair wages (a level between minimum and living wages), and living wages (a standard ensuring a decent livelihood). The court acknowledged that while the concept of a living wage is evolving, it remains an aspirational standard in the Indian context, with the existing legal framework mainly focusing on minimum wages.Indian employers, so far, have only been required to pay minimum wages, which, though legally compliant, do not necessarily meet the definition of living wages under the CSDDD or the EMCs..Death By Thousand Cuts: How India's Insolvency Regime Fails MSMEs.While it may seem that the burden of paying living wages falls solely on suppliers, this is not entirely the case. In reality, the CSDDD impose responsibilities on both buyers and suppliers. The underlying reason for this shared obligation is that unfair purchasing practices—where buyers negotiate pricing agreements that exert downward pressure on wages—have long contributed to labour exploitation.Recognising this imbalance, CSDDD requires buyers to collaborate with suppliers in a way that ensures living wages are incorporated into pricing structures. This collaboration is not just about monitoring compliance—it also means that buyers must contribute financially to living wages through fair pricing agreements, ensuring that the burden does not fall entirely on suppliers. The intent behind these directives is to address wage suppression at its root and create a more equitable supply chain. However, while the objective is well-intentioned, the implementation presents significant challenges, particularly in terms of financial sustainability and market dynamics.Pricing agreements between EU buyers and suppliers have traditionally factored in only the wages of direct production workers. However, the introduction of living wage mandates disrupts this approach.Once wages for certain employees increase, other workers performing similar roles—though not necessarily working on the same production line or directly involved in the same contract—may demand wage adjustments. This is particularly relevant when employees in similar positions contribute to different buyers' supply chains, creating disparities within the same workforce.Internal wage pressures arise because maintaining different pay scales for employees performing nearly identical tasks can lead to dissatisfaction, grievances or even legal challenges under labour laws that prohibit arbitrary wage differentiation. In response, suppliers often feel compelled to extend higher wages across the board, significantly inflating labour costs.For example, in a factory with 1,000 workers, if only 100 are directly involved in production under an EU contract, CSDDDs would require living wages for them. However, employees in the remaining 900, many of whom perform nearly identical roles but for non-EU buyers, may demand wage parity, creating a cascading effect that inflates overall costs.Compounding potential cost escalations is the rigidity of Indian labour laws, which make it difficult for employers to reduce wages once an increment has been granted. If a supplier shifts from serving an EU buyer to a non-EU buyer, it cannot easily roll back wage increases, even if the new market does not require compliance with the CSDDD.This is particularly problematic because non-EU buyers are not bound by living wage obligations and therefore, they will not contribute to the increased wage costs. As a result, the full financial burden of maintaining elevated wages falls on the supplier, making it significantly harder to operate competitively in non-EU markets.This creates a situation where suppliers are financially locked into a higher wage structure, making it difficult to switch between different markets. As a result, suppliers must either remain exclusive to EU buyers (where compliance is mandatory) or restructure their workforce to adapt to non-EU markets, leading to market fragmentation.Furthermore, CSDDD broadly defines "stakeholders", and the EMCs refine this approach by emphasising the importance of identifying risk areas involving all workers who contribute to producing goods or services under an EU contract. According to the EMCs, stakeholders include workers, trade unions, relevant worker representatives, communities, and other entities that could be affected by the company’s operations.This expansive definition requires a careful process of stakeholder identification. The EMCs recommend steady engagement with management and worker representatives to converge on a living wage level. The distinction between core production employees and support staff is often unclear, further complicating compliance.In cases where workers frequently rotate between different production lines, it becomes even more difficult to track. Therefore, in industries with multiple production lines, worker rotations, and mixed job functions, frequent consultations are critical for deciding which workers should be covered under the living wage requirement at any given point in time—and for addressing labour grievances promptly.Faced with these constraints, suppliers have to contemplate two choices: Commit entirely to EU buyers, ensuring that their entire workforce is covered under CSDDD-mandated wages—thus eliminating wage disparity concerns but effectively segmenting suppliers into exclusive EU-compliant businesses.Maintain separate operational structures, where one segment serves EU buyers under compliance obligations while another operates independently to serve non-EU markets with different wage policies. In the latter scenario, some suppliers may establish separate facilities or workforce divisions, which can further entrench market fragmentation.However, the EMCs specifically recommend that buyers and suppliers engage in ongoing dialogue to address the fair financing of wage increases across the organisation, thereby reducing the likelihood of creating siloed workforce segments. The EMCs encourage shared cost allocations, transparent processes, and joint problem-solving to minimise operational disruption and foster a holistic approach to wage reform..Musk And Tech Bros Are Facing The End Of The ‘Technipolar Moment’.With the CSDDD becoming a reality, companies need to rethink their approach to compliance if they want to maintain business relationships with EU buyers. The big challenge is the huge gap between minimum wages and living wages in India.The Indian government is unlikely to strictly enforce living wage standards anytime soon, but we can expect gradual increases in minimum wages as a response. Even without direct enforcement, businesses will still feel the pressure—whether through legal claims from workers (as workers will seek to leverage this situation to demand better wages) or increased scrutiny from international buyers demanding compliance with higher wage standards.Recognising that an immediate shift to living wages may not always be feasible, CSDDDs allow buyers and suppliers to enter into progressive pricing agreements, where wages are increased gradually over a fixed period.The EMCs provide further details on this mechanism, describing how those agreements can be structured to include:Transparent negotiation of cost structures, ensuring both parties have visibility into the true financial impact of wage increases.Responsible handling of order modifications, preventing sudden changes in order volume or specifications from undermining wage agreements.Positive incentives for suppliers, such as price premiums or guarantees of long-term cooperation, to encourage and reward compliance with progressive wage schedules..India’s Car Economy Leaves The Middle Class Fuming.While this flexibility acknowledges financial constraints, it does not entirely solve the problem. A phased approach still requires suppliers to have a clear roadmap to eventually meet the living wage threshold, which assumes that the necessary cost adjustments will be feasible over time.However, given the unpredictable nature of wage dynamics—fluctuating production costs, labour market pressures, and external economic factors—there is no guarantee that a supplier will be in a position to meet these obligations within the specified timeline. Moreover, uncertainty around who bears the financial burden during this transition can create further disputes, as buyers and suppliers may struggle to align on cost‑sharing arrangements.By clearly outlining each party's responsibilities throughout the contract's life cycle, the buyer could mitigate the risk of sudden supplier insolvencies or abrupt workforce downsizing. Nonetheless, the uncertainty cannot be resolved completely, as market conditions can fluctuate, and some suppliers may struggle to meet implementation dates if the economic climate deteriorates.Beyond legal and financial concerns, companies also need to be ready to address adverse impacts promptly. Under the EMCs, if violations of human rights—including living wage commitments—occur, both buyers and suppliers are expected to engage in remediation and corrective action.The EMCs include provisions for suppliers to prepare corrective action plans in consultation with worker representatives and, where necessary, for buyers to contribute resources or expertise to remedy the situation. These collaborative remediation measures underline the spirit of shared responsibility, preventing buyers from simply offloading blame onto suppliers.In this manner, thorough preparation, robust dialogue, and proactive contract review become crucial. As highlighted in the EMCs, this shift towards a model of shared responsibility requires both parties to carry out human rights and environmental due diligence in good faith and cooperate in addressing adverse impacts.By planning ahead and adapting early, Indian and EU businesses can avoid last-minute disruptions and remain competitive in the global market. .Abe Abraham is a partner; Abhilash Tyagi and Jay Bhaskar Sharma are associates at Cyril Amarchand Mangaldas.Disclaimer: The views expressed here are those of the authors and do not necessarily represent the views of NDTV Profit or its editorial team. .Who 'Paints' A Better Picture? | Open Interest

European Law Raising Wage Standards And Indian Businesses May Pay The Price

The big challenge is the huge gap between minimum wages and living wages in India.

NDTV Profit

NDTV Profit

Follow Us

DOWNLOAD THE APP