Employment LawImplementation of Labour Laws in Special Economic Zones

INTRODUCTION

India’s rapid industrialization and export-led growth model have leaned heavily on Special Economic Zones (hereinafter referred to as “SEZs”), designed as hubs of business efficiency and global trade. While they provide attractive incentives for investors, questions have steadily emerged about their impact on labour rights. Though these zones are marketed as engines of development, the price is often paid by the workers. Within SEZs, the implementation of labour laws often takes a back seat, with regulatory oversight diluted under the guise of flexibility. This raises serious concerns over whether India’s development is truly inclusive.

Strengthening the rule of law in these zones is not just a legal necessity, but a moral and economic imperative. Despite being governed by central labour legislation, SEZs have increasingly operated in a grey area where inspections are fewer, increasing reliance on contract workers rather than permanent employees are apparent, and workers’ grievances go unheard. This article takes a closer look on SEZs and the condition of workers, and how labour law’s motive is implemented within SEZs.

SPECIAL ECONOMIC ZONES

SEZs are designated areas within a country that are governed by more liberal economic laws than the rest of the nation. In India, SEZs were introduced to increase exports, foreign investment, and generate employment. They are administered by the SEZ Act, 2005 along with SEZ Rules, 2006. These zones offer tax incentives, simplified customs procedures, and relaxed regulations to encourage industrial growth. Units operating in SEZs enjoy exemptions from various direct and indirect taxes, including income tax, GST, and import duties. Development Commissioners manages SEZs under the Ministry of Commerce and Industry. While they have significantly contributed to export growth, concerns remain around their impact on labour rights, land acquisition, and whether the economic benefits are equitably distributed across the local population.

The SEZ framework in India is designed to encourage labour-intensive, export-oriented production. In this model, labour is often viewed primarily as a cost-reduction mechanism. While labour laws technically apply within SEZs, the institutional design and legal structure of the SEZ Act, 2005, often result in the selective implementation of welfare measures. Instead of amending core labour laws, the current practice tends to minimize their practical enforcement within SEZs. In effect, the SEZ Act frequently overrides certain labour protections, creating a parallel regime where standard labour welfare measures are either diluted or inconsistently applied.

EMPLOYMENT LEGAL FRAMEWORK THAT GOVERNS SEZs IN INDIA

SEZs in India operate under a distinct legal framework established by the SEZ Act, 2005 and the accompanying SEZ Rules, 2006. These laws govern the creation, development, and management of SEZs, including the constitution of SEZ authorities and the regulation of units operating within them. The SEZ Rules specify criteria for setting up zones, define eligible sectors, and lay out the tax and regulatory incentives that make SEZs attractive to businesses.

These incentives include exemptions from customs and excise duties, service tax, and state levies. SEZ units also gets income tax exemption upto100% on export income for the first five years, and a 50% deduction for the next five years, and a further 50% exemption on reinvested profits for another five years. A Minimum Alternate Tax was also waived for the first decade, although this benefit has seen partial rollbacks in last years.

While SEZs are subject to general labour laws, including the Industrial Disputes Act, 1947, Factories Act, 1948 and Minimum Wages Act, 1948, the SEZ Act allows for their flexible application under certain conditions. Enforcement powers are often transferred to Development Commissioners, reducing the role of regular labour departments. This shift in oversight, combined with relaxed inspection norms, often leads to a self-certification regime where compliance relies heavily on employers’ declarations. As a result, while SEZ units are expected to offer better than minimum standards in working conditions and grievance redressal mechanisms, in practice, enforcement remains weak.

CHALLENGES IN LABOUR LAW ENFORCEMENT WITHIN SEZs

The working conditions within SEZs in India reflect a complex mix of economic ambition and regulatory challenges. While SEZs have been successful in generating employment and attracting investment, the treatment and welfare of workers within these zones remain contentious. Certain labour legislations such as the Industrial Disputes Act, 1947, the Contract Labour (Regulation and Abolition) Act, 1970, and the Factories Act, 1948 are applied in SEZs with some modifications. These changes are permitted only if SEZ units ensure better-than-minimum working conditions and set up functional grievance redressal systems.

However, in practice, enforcement is weak. Labour department’s often delegate oversight responsibilities to Development Commissioners, resulting in a self-regulatory environment with limited accountability.

One major concern for workers in SEZs is the widespread use of contract labour. SEZ units are not obligated to provide permanent jobs, which allows them to rely on temporary or contract-based workers. These workers are often underpaid, lack access to essential benefits like provident fund, paid leave, or health insurance, and may not even receive the minimum wage guaranteed under law. Implementation of the Minimum Wages Act, 1948 in these zones is irregular as well.

Occupational health and safety standards are also a point of concern. Despite the Factories Act mandating safe working conditions, many units fail to provide proper safety gear or adequate training. This has resulted in several workplace accidents, especially in sectors like manufacturing, garments, and electronics. There are examples of responsible SEZ units, mainly larger MNCs offering modern facilities, transportation, and welfare schemes. These units prove that economic efficiency and worker welfare can coexist. Yet, such cases are not the norm. For SEZs to be truly inclusive and ethical growth hubs, stronger enforcement, transparency, and worker representation are essential.

DEVELOPMENT OF LABOR LAWS IN SEZs

While the SEZ Act is primarily investment- and trade-focused, it also incorporates limited but crucial labour-related provisions, which are supplemented by general Indian labour laws that apply to SEZs unless explicitly exempted.

1. Labour Commissioner in SEZs: In SEZs, the Development Commissioner plays a dual role not only as the administrative head of the zone but often also as the Labour Commissioner. This designation places them in charge of overseeing labour welfare, compliance, and grievance redressal within their respective zones. The Government of India made all central and state labour laws continue to apply to SEZs, ensuring that worker rights remain protected under the SEZ Act, 2005. The Labour Commissioner is responsible for ensuring that employers comply with key labour regulations, such as the Contract Labour (Regulation and Abolition) Act, 1970, the Minimum Wages Act, 1948, the ESI Act, 1948, and others. When hiring either contract or permanent workers, SEZ units are required to file documents including proof of labour registration, CLRA licenses (for contract labour), and other registrations with the appropriate authorities. Despite these legal safeguards, ground-level enforcement is often inconsistent. Increasingly flexible hiring and firing policies in SEZs have raised concerns about job security and employee welfare. As SEZs continue to grow as economic hubs, the role of the Labour Commissioner usually remains critical in maintaining a balance between investor ease and workers’ rights.

2. Health Insurance and Medical Facilities: Under the SEZ legal regime, every SEZ unit is required to provide health insurance coverage for all workers, including their family members. Units are also expected to offer or facilitate access to medical services. However, in practice, these responsibilities are often outsourced to authorised private agencies, which reduces the enforceability of core labour protections and has led to weakened monitoring of health and safety obligations.
3. ESI and Factory Law Compliance: While SEZ units are technically subject to the Employees’ State Insurance (ESI) Act, 1948, many of them avoid direct compliance by routing their obligations through authorised agencies. These agencies are not strictly bound by the Factories Act or ESI Act, resulting in diluted benefits like maternity leave, illness compensation, and accident coverage that are otherwise mandated under labour laws for industrial workers in non-SEZ areas.
4. Trade Union Rights: Initially, trade union activities were heavily restricted in SEZs, with limited or no rights to collective bargaining. However, an important reform came with the 2010 amendment to the Trade Union Act, 1926, which allowed for the formal registration and functioning of trade unions within SEZs. These unions now operate under the same legal framework as elsewhere in the country, but practical limitations on worker organisation still persist due to management resistance and lack of awareness.
5. Restrictions on Strikes and Lockouts: To maintain an uninterrupted business environment, the SEZ Act designates SEZ operations as “public utility services.” As a result, strikes and lockouts are prohibited for the first three years from the date an SEZ unit begins operations. Even after this period, workers must give six weeks’ notice before initiating a strike, and no strike can take place during conciliation proceedings or within 14 days of serving a strike notice, as per Section 22 of the Industrial Disputes Act, 1947.
6. Minimum Wage and Worker Conditions: Although the SEZ Act does not explicitly mention the Minimum Wages Act, a 2017 policy directive mandates SEZs to follow state minimum wage standards. However, implementation is inconsistent. Many SEZ units pay workers, especially women, less than the mandated wages and deny benefits like maternity leave, toilet access, or secure transport for night shifts. These conditions persist partly due to regulatory loopholes and the lack of strong worker representation.

WAY AHEAD: IMPROVING LABOUR CONDITIONS IN SEZs

To ensure that SEZs support both economic growth and worker well-being, India needs to take a more balanced approach to labour regulation. While SEZs are crucial for boosting exports and investments, this must not come at the cost of workers’ rights. A strong focus on improving labour protections and enforcement mechanisms is essential.

Several measures can be taken to move in this direction.

1. Stronger Enforcement of Labour Laws: Though SEZs are exempt from certain labour regulations, the Government should establish clear guidelines to ensure minimum wage, working hours, and health and safety compliance. Appointing labour welfare officers within each SEZ can ensure regular inspections and immediate redressal of complaints.
2. Mandatory Third-Party Audits: Independent audits should assess working conditions, especially for contract labour and women employees. These reports should be publicly accessible to enhance transparency and accountability.
3. Encouraging Trade Unions and Worker Representation: Workers in SEZs often lack the right to unionize. The Government must ensure the effective implementation of the amended Trade Unions Act, 1926 in SEZs to protect collective bargaining rights.
4. Focused Measures for Women Workers: Introduce mandatory facilities like transport for night shifts, secure restrooms, maternity benefits, and anti-harassment policies. These steps would enhance safety and retention of women workers.
5. Social Security Coverage: All SEZ workers should be brought under the coverage of Employees’ Provident Fund and Employees’ State Insurance Corporation. This would ensure access to health insurance, disability benefits, and retirement savings.

If these steps are implemented seriously, SEZs can become models of inclusive growth balancing business interests with labour dignity and welfare.

AMLEGALS REMARKS

The implementation of labour laws in India’s SEZs reveals a troubling gap between policy intent and ground realities. While the SEZ framework is designed to attract investment and boost exports through business-friendly regulations, it often does so at the cost of workers’ rights and welfare. Despite central labour laws being technically applicable, enforcement remains weak due to diluted oversight, self-certification practices, and over-reliance on contract labour. Workers frequently lack social security, healthcare, safety measures, and bargaining rights.

For SEZs to truly serve as engines of inclusive growth, there must be a shift from regulatory leniency to rights-based enforcement. A strong legal and institutional framework that balances economic efficiency with social justice is not just desirable, it is essential. Policymakers, employers, and regulatory bodies must work together to ensure that labour protections are not sacrificed in the name of development. SEZs must become models of ethical, equitable, and sustainable industrial growth.

Team AMLEGALS assisted by Khushi Jain (Intern) 

For any query or feedback, please feel free to get in touch with mridusha.guha@amlegals.com or laksha.bhavnani@amlegals.com