SC Modifies 1978 'Triple Test' for Labour Code, May Narrow Coverage

Experts warn that the Supreme Court's decision could significantly narrow labour law coverage for workers in hospitals, educational institutions, and other service-oriented establishments. Priti Suri, founder and managing partner of law firm PSA, said the shift could affect establishments that came within the broad 1978 approach despite their non-commercial character, including hospitals, educational institutions, clubs, and similar bodies. According to Business Standard, Rishabh Gandhi, founder of Rishabh Gandhi and Advocates, noted that workers may lose access to remedies which depend upon the Industrial Relations Code, including retrenchment safeguards, industrial-dispute adjudication and collective-bargaining mechanisms. The main uncertainty will be around establishments with mixed characteristics, where a charitable institution could charge for services while operating through a large, organised workforce. Amarjeet Kaur, general secretary of All India Trade Union Congress (AITUC), said the change could weaken unionisation in these sectors, particularly affecting workers in hospitals and educational institutions. As per Crashfree India, the new formulation introduces an important qualification that the activity must possess 'discernible commercial character' analogous to trade or business, with the pursuit of profit remaining unnecessary but the economic character of the activity becoming relevant. This distinction becomes particularly visible in healthcare, where corporate hospitals, charitable hospitals, and government hospitals may all employ similar workers but require courts to examine the character and setting of the activity instead of treating organisational similarity as sufficient.

On February 21, 1978, a seven-judge bench had delivered a verdict on the definition of the term 'industry' while deciding the plea of Bangalore Water Supply and Sewerage Board. As reported by Hindustan Times, this expanded definition brought millions of employees in hospitals, educational institutions, clubs and government welfare departments under the protection of the Industrial Disputes (ID) Act, 1947. The CJI, who authored the majority verdict, made clear that the 'triple test' to ascertain what constitutes an 'industry' will remain valid, though it will be applied only in labour-related pending cases under the now-repealed 1947 ID Act. The dispute centred on the sweeping interpretation given to Section 2(j) in Bangalore Water Supply, where a three-fold test required systematic and organised activity involving cooperation between employer and employee and the production or distribution of goods or services to satisfy human wants and wishes. The triple tests for 'industry' as laid out in the judgment are: (1) There must be an organised and systematic activity, (2) by cooperation between employer and employee, and (3) for the production and/or distribution of goods and services calculated to satisfy human wants and wishes (not spiritual or religious), but inclusive of material things or services for celestial bliss. Only core sovereign functions such as the judiciary, defence and law enforcement were excluded from the definition. As per Crashfree India, the seven-judge Bench devised the familiar triple test: systematic activity, organised cooperation between employer and employee, and the production or distribution of goods or services calculated to satisfy human wants, with profit motive not being decisive and the focus shifting from institutional labels to the nature of the activity being carried on.

Justices P S Narasimha and Joymalya Bagchi penned separate verdicts, broadly agreeing with the majority judgement of the CJI. According to Hindustan Times, both judges held that the reference seeking reconsideration of the 1978 verdict on definition of term 'industry' was valid. However, Justices B V Nagarathna, Dipankar Datta and Ujjal Bhuyan dissented with the majority verdict particularly on the issue of maintainability of reference made to the nine-judge bench. Justice Narasimha held that the reference was maintainable, stating that while an authoritative interpretation of the definition of 'industry' was compelling at the time of the reference, such a determination has now become unnecessary with the repeal of the said provision with effect from November 21, 2025. He emphasized that the Industrial Relations Code, 2020 must be interpreted on its own text and in its own context alone, and it is prudent to dispose of pending cases on the basis of the ratio laid down in Bangalore Water Supply without attempting to create a third set of principles applicable only to pending cases. Justice Dipankar Datta held that the reference was not maintainable, stating that the 5-judge bench in 2005 did not properly consider various precedents while making the reference, and on merits, the tests laid down in the Bangalore Water Supply Case were correct. Justice B V Nagarathna took a sharply different view, holding that the reference against the 1978 judgment was unwarranted and favoured retaining its broad interpretation to protect workers. As per Crashfree India, Justice Nagarathna emphasises the durability of Bangalore Water Supply and the consequences of reopening a rule that has governed industrial relations for nearly 48 years, while Justice Bagchi adds that the definition should be situated within the unequal bargaining relationship between labour and capital, noting that automation, platform work and the growing mobility of capital have transformed employment without removing that inequality.

The 'triple test' evolved by Justice V.R. Krishna Iyer in the 1978 judgment broadly holds that any systematic activity involving employer-employee cooperation for production or distribution of goods and services would qualify as an 'industry', extending statutory protection to workers in a wide array of sectors. As reported by Business Standard, the majority verdict made clear that it will not apply on the 2020 Code and any fresh case under the new law will be adjudicated on the basis of their facts and context. The court emphasized that the principles laid down in the 1978 verdict 'shall not be regarded as a sheet anchor for the interpretation of the Industrial Relations Code, 2020, or any of its provisions' should such a question arise in the future. Justice Narasimha noted that the determination of 'industry' had effectively become redundant with the repeal of the old law and its replacement by the Industrial Relations Code. The bench also made it clear that challenges to the provisions of the new labour code could be independently raised and decided, leaving open legal challenges to the new regime. In a significant safeguard for workers and employers involved in existing litigation, the bench unanimously directed that all pending disputes under the 1947 Act shall be adjudicated on the basis of the 'triple test' laid down in the 1978 judgment and not the refined formulation evolved by the majority view. The reference arose out of a 2002 appeal, with the five-judge bench in 2005 referring the matter to a larger bench in State of Uttar Pradaesh v. Jai Bir Singh, and a seven-judge bench in 2017 referring it to the current nine-judge bench since the original Bangalore Water Supply case was rendered by a seven-judge bench. As per Crashfree India, the four-judge formulation does not command the support of five judges, with Justice Nagarathna, Justices Dipankar Datta and Ujjal Bhuyan, Justice Bagchi and Justice Narasimha reaching the issue through different routes but none adopting the CJI-led reformulation as the rule that should now govern pending disputes under the old Act.

Legal experts emphasize that the new framework creates significant uncertainty for establishments with mixed characteristics. Alay Razvi, managing partner of Accord Juris, said workers in establishments excluded from the Code could lose access to industrial-dispute reference, retrenchment safeguards, lay-off protection and collective bargaining mechanisms, while contractual claims, wage rights, social-security benefits, anti-discrimination protections and other statutory or civil remedies may remain available. Puneet Gupta, Partner at People Advisory Services-Tax, EY India, noted that the Code creates a 'distinct framework' for future disputes, with applicability depending on 'the real nature of an organisation's activities and employment relationships' rather than labels such as governmental, charitable or educational. The Industrial Relations Code, 2020, has its own definition and expressly excludes institutions substantially engaged in charitable, social or philanthropic services, government activities relating to sovereign functions, and domestic service. As reported by Business Standard, the ruling could particularly affect workers in hospitals and educational institutions, with the main uncertainty surrounding establishments with mixed characteristics where determining whether they are 'wholly or substantially' engaged in charitable services may become contentious. As per Crashfree India, the difficulty is that the proposed solution raises another set of questions, as 'commercial character' may sound more precise than the existing test but its application to universities, public hospitals, charities, research institutions and welfare bodies is unlikely to be self-evident. Once profit is expressly declared irrelevant, courts would still have to decide which features make a non-profit activity sufficiently analogous to trade or business, with the new expression potentially narrowing the old test without necessarily eliminating the disputes that made the old test controversial.