Reservations based on domicile has sparked constitutional debates and commanded attention from various courts. Karna- taka is the newest state to propose a domicile-based job reservation law, following Haryana, Andhra Pradesh, and Jharkhand. This move reflects a growing trend among states to prioritize local employment for resi- dents. Shardul Amarchand Mangaldas & Co. legal experts share a snapshot of the local employment reservation laws across these states, including their status as of date:
Andhra Pradesh: The Andhra Pradesh Employment of Local Candidates in the Industries/Factories Act, 2019 provides for reservation of at least 75% of jobs for local candidates in private sector. This law has been challenged in a writ petition before the Andhra Pradesh High Court on the grounds that it infringes upon fundamental rights. While the court is yet to decide on the case, it has indicated that the state law could be unconstitutional.
Haryana: The Haryana State Employment of Local Candidates Act, 2020 was passed by the Haryana government in 2021 and it provides for 75% reservation of certain vacancies for local candidates domiciled in Haryana. The Act was struck down by the Punjab and Haryana High Court in November, 2023 on grounds of being uncon- stitutional and being violative of Articles 14, 15, 16 and 19 of the Indian Constitution. The matter is currently pending before the Supreme Court.
Jharkhand: The Jharkhand State Employment of Local Can- didates in Private Sector Act, 2021 mandates a 75% reservation for local candidates. The bill was notified by the State Government in January, 2022. While the government has implemented the law, the legality of the same may be challenged in light of the Punjab and Haryana High Court judgement striking off a similar law in the State of Haryana.
Karnataka: In the most recent development, the Karnataka State Employment of Local Candidates in the Industries, Factories Shops & Commercial Establishments, Micro, Small and Medium Enterprises Joint Ventures Bill, 2019 which was cleared by the cabinet in February, 2024 could not be tabled in legislature after industries opposed it. The bill, however, requires that 75% of the employment shall be provided to the local candidates who are residents of Karnataka from 15 years and know how to write and speak Kannada language. In August, 2024, a public interest litigation was filed to challenge the legality of the proposed bill. However, a division bench of the Karnataka High Court dismissed the case on grounds that it was premature as the bill has not become a law yet.
Andhra Pradesh, Haryana and most recently Karnataka passed bills to reserve jobs in the private sector for domiciles, which were either withheld or were struck down by the courts.
OBJECTIVES & CONTRADICTIONS
“From the perspective of state governments, the objective of local job reservation laws is combat- ing the issues of unemployment amongst the local. Courts in India, on the other hand, have expressed that these legislations go against the ethos of national interests and India as one nation, and have held these provisions to be invalid on grounds of discrimination and unconstitutionality,” stated Shardul Amarchand Mangaldas & Co.
As the Supreme Court examines the validity of the Haryana law, it is expected to also address the legality of similarly placed domicile-based reservation laws in other states. The Supreme Court’s pronouncement on this matter will determine the future and legitimacy of such laws. As such, it will be interesting to observe how the situation progresses, as the ruling will bring clarity to the future of domicile-based reservation laws,” the law firm added.
As per legal experts from JSA, the intention of select Indian states such as Andhra Pradesh, Karnataka, and Haryana proposal to implement laws aimed at reserving jobs for those domiciled within the respective states has been to promote local employment and safeguard the interests of the native population. But this move raises significant concerns regarding the overall implications, particularly in relation to the right to carry on business and the broader economic environment.
“The proposed laws seek to reserve a fairly high proportion of employment for local candidates and have accordingly faced substantial criticism and legal challenges, which have hindered their implementation. Besides being termed as ‘regressive’ and ‘short-sighted’, many stakeholders argue that such regulations violate the fundamental rights guaranteed under the Indian Constitution, including the right to equality and the freedom to carry on business. By mandating job reservations, these laws infringe upon the right of companies to hire the best talent available, regardless of their geographical origin. Companies often require a diverse work-force equipped with various skills and experiences, which may not necessarily be available locally. By prioritizing local hiring, the proposed laws could lead to a dilution of talent, thereby affecting innovation and productivity. Needless to mention, it complicates the recruitment process, which has largely been an employer’s prerogative, thereby inhibiting the ability of businesses to operate efficiently,” they expressed.
The senior associates from Trilegal stated, “The legal standpoint on private job quotas for locals remains a subject of ongoing debate. “Under the Constitution of India, labour and employment matters fall under the Concurrent List, enabling both state and union governments to formulate regulations. Consequently, several states have introduced domicile-based reservations for jobs in the private sector; however, none have successfully implemented such changes. Courts have, in the past, struck down or withheld state leg- islations on private job quotas for locals, primarily citing fundamental principles of the Indian Constitution. Moreover, courts have determined that it is beyond the state's purview to legislate on this matter and restrict private employers from recruiting from the open market for relevant employee categories.”
Similar views were expressed by HSA Advocates, “The legislations in relation to ‘domicile-based reservation’ in employment, as introduced or passed by various state govern- ments has received significant push-back from stakeholders and have been challenged before multiple courts. The courts have rightfully struck-down such legislations observing that domicile-based reservations are “beyond the purview of the State to legislate on and restrict private employers from recruiting from the open market.
The Haryana State Employment of Local Candidates Act, 2020, the recently proposed Karnataka State Employment of Local Candidates in the Industries, Factories and Other Establishments Bill, 2024, and similar local reservation laws either proposed or implemented by states (such as Andhra Pradesh, Jharkhand and Uttar Pradesh) curtail an individual’s fundamental freedom to carry on occupation, trade, or business, and impair their fundamental right to equal employment, and right to move and reside freely anywhere within the territory of India.”
CONSTITUTIONAL INTENT
According to Trilegal, “Imposing mandates that require private employers to hire local candidates could result in artificial disparities and discrimination based on the place of residence, which was probably not the intention of the framers of the Indian Constitution. In essence, these mandates would also restrict employers' discretion in workforce selection, countering the principles of ease of doing business that India seeks to promote. Additionally, under the Indian Constitution, employment reservation policies are typically intended for public-sector jobs, and extending this to the private sector raises complex legal issues regarding federalism, freedom of trade, and non-discrimination.
“When the Constitution was adopted in 1950, India’s socio-economic situation was quite different, with major disparities and a real need for affirmative action to support marginalized communities. Back then, reservations in jobs and education were considered necessary for promoting social justice and equality. In today’s scenario, India has made significant strides in many areas, and the labour market is more dynamic and interconnected. Driven by such progress, having job reservations, especially, in the private sector, would not be very relevant. The focus has shifted to building a competitive environment that encourages talent and creativity, which is essential for economic growth and attracting investment to India,” they added.
As per Shardul Amarchand Mangaldas & Co., “Pending the judicial conclusion on the matter, domicile-based reservations have been opposed by industries. In response to domicile-based reservations, industry bodies have expressed collective apprehensions, that job reservations on the basis of place of residence will reduce the flow of investments, adversely affect the growth of startups, and compel industries to relocate to other states.”
Giving an example HSA Advocates shared, “Pursuant to multiple petitions introduced in the Punjab and Haryana High Court on the constitutionality of the local reservation law introduced by the state of Haryana, the court held that implementation of local reservation laws is ultra vires the basic structure doctrine and observed that “the concept of constitutional morality is openly violated by introducing a secondary status to a set of citizens who do not belong to the state and curtails their fundamental rights to earn their live-lihood.” Merely because the State’s resources are poor or limited and there is lack of adequate capacity, does not allow the State to compel employers to employ based on a reservation policy in favour of local candidates. Instead, in our view, the focus of the State should be towards establishing institutions which focus on capacity building, upskilling lo- cal candidates and implementing policies which attract domestic and foreign investments.”
As per JSA, “Although, the argument for preservation of roles on the grounds of affirmative action is for locals to leverage opportunities, it is also discriminatory to the extent that there is no reasonable rationale for the exclusion of other candidates who do not belong to a certain state. This perspective was supported by the Punjab and Haryana High Court when ruling that the Haryana State Employment of Local Candidates Act, 2020 was unconstitutional. Moreover, the imposition of such regulations can deter investment from multinational corporations (MNCs) and global capability centers, which are crucial for the economic growth of the country. These companies typically seek a flexible labour market that allows them to mobilize resources according to their operational needs. Job reservation laws can create an environment of uncertainty and complexity, thereby compelling MNCs to reconsider their expansion strategies in these states.”
LABOUR DYNAMICS & ECONOMIC GROWTH
The experts at Trilegal share the implications of job quotas, “Businesses may struggle to find skilled workers locally, and hiring under quotas may increase operational costs due to labour shortages or higher training needs. Such restrictions could reduce competitiveness and discourage investment in states with laws on job reservations for locals.
Migrant workers often occupy positions requiring specialized skills and are in high demand in the construction sector. Requiring companies to substitute them with local labour could lead to labour shortage and thereby causing delay in project timelines, escalation in costs and lower overall productivity.
In real estate sector, the demand for real estate may also decline as the absence of migrant workers could lead to unoccupied housing, significantly affecting real estate market in major urban centres that rely on workers moving from smaller cities and states to live and work in urban centres.
If states implement local hiring quotas, this will also limit MNCs and GCCs in their capacity to recruit employees with the requisite skills for specialized roles, ultimately impacting operational efficiency, innovation, and productivity. These hiring mandates would introduce additional compliance requirements, complicating human resource management and recruitment strategies as organizations navigate state-specific hiring quotas. Consequently, MNCs and GCCs may exercise caution in expanding or investing in states with restrictive hiring policies, potentially resulting in decreased demand for office spaces in those regions.”
CONSEQUENCES OF JOB RESERVATION
Apart from legal implications, legal experts at JSA state other consequences of the move, “Although, the argument for preservation of roles on the grounds of affirmative action is for locals to leverage opportunities, it is also discriminatory to the extent that there is no reasonable rationale for the exclusion of other candidates who do not belong to a certain state. This perspective was supported by the Punjab and Haryana High Court when ruling that the Haryana State Employment of Local Candidates Act, 2020 was unconstitutional.
Moreover, the imposition of such regulations can deter investment from multinational corporations (MNCs) and global capability centers, which are crucial for the economic growth of the country. These companies typically seek a flexible labour market that allows them to mobilize resources according to their operational needs. Job reservation laws can create an environment of uncertainty and complexity, thereby compelling MNCs to reconsider their expansion strategies in these states. The real estate sector presents another critical area affected by job reservation laws. A significant portion of the workforce in this sector comprises of migrant workers who often relocate for better employment opportunities. In regions where real estate development is booming, the influx of migrant labor is essential for sustaining growth. By imposing job reservations, state governments risk alienating this demographic, which could lead to labour shortages in construction and related industries. The effects of this could ripple through the economy, causing significant delays in projects, increased costs, and ultimately, a slowdown in urban development. Given that real estate is a significant contributor to state revenues through taxes and other means, limiting the workforce could have dire financial consequences for state economies.
Furthermore, the global economic landscape is now shifting towards integration and collaboration. As India aspires to position itself as a global business hub, state governments will need to recognize that promoting an environment conducive to business is paramount. Implementing restrictive laws will only undermine the potential for job creation and economic development, thereby placing India at a back foot with respect to its global competitors. Balancing local employment needs with the rights of businesses and the necessity for a diverse workforce is essential for sustainable economic growth. By prioritizing an inclusive and flexible business environment, states can ensure that they do not inadvertently stifle their own economic potential.”
THE PROS & CONS
Finally, as each coin has two sides, the reservation laws too have the positives and negatives share the legal team of HSA Advocates, “Compliances introduced by State Governments under these local res- ervation laws such as employers’ obligation to register their employee details, periodic reporting requirements, compliances in respect of maintenance of requisite records, and substantial penalties levied on employers for non-compliance of the provisions of the local reservation laws, will push MNCs and GCCs to move their base to other jurisdictions that favour equality, employer-friendly laws and lesser compliances.Tedious hiring procedures and training mandates will not only cause economic imbalance and impact productivity, but, in the long haul, such efforts of the State Governments to address unemployment rates will prove to be counterproductive and result in dissuading talent attracted from across the country, in turn reducing employment generation.
Local reservation policies not only hinder inter-state migration but stagnate talent exchange and increase pay imparity among States. This will result in such State becoming an unviable or unattractive option for foreign investors. We have seen the detrimental impact on the real estate and construction sectors due to reverse migration during the Covid-19 lockdown period, which resulted in shortage of skilled labour. Bottleneck in the supply of skilled labour affects the developer/builders’ ability to execute projects within the stipulated timeline. This, along with poor workmanship due to incompetence may also affect the quality of construction and ultimately take a toll on the profitability of companies and the economy of the State. Additionally, interstate migration has always been an important driver of residential and commercial property price growth, with Gurugram, Bangalore and Hyderabad being prime examples, which builds on to the State’s revenue.
Overall, while the objective of the State Government to address its unemployment issues is commendable, it is important to design policies in public interest which can withstand the test of constitutional scrutiny and attract talent and investment in the state. States should carefully strike a balance between interests of domicile indi- viduals, economic viability and the fundamental principles of equality, freedom of trade, and the idea of a common Indian identity.”
Andhra Pradesh, Haryana and most recently Karnataka passed bills to reserve jobs in the private sector for domiciles, which were either withheld or were struck down by the courts.
While the objective of the State Governments is to address its unemployment issues, it is important to design policies which can withstand constitutional scrutiny & attract talent and investment in the states.
Implementing restrictive laws will only undermine the potential for job creation and economic development, thereby placing India at a back foot with respect to its global competitors.
The courts have rightfully struck- down or withheld job reservation legislations observing that domicile- based reservations are “beyond the purview
of the State to legislate on and restrict private employers from recruiting from the open market.
Migrant workers often occupy positions that demand specialized skills in the construction sector. Requiring companies to substitute them with local workers could lead to skilled workers shortage & project delays.
Contributors: Pooja Ramchandani, Partner, Suryansh Gupta, Principal Associate, Shardul Amarchand Mangaldas & Co.
Preetha S, Partner, Aishwarya Manjooran, Associate, Rebecca Thomas, Associate, JSA.
Soumya De Mallik, Partner; Prithviraj Chauhan, Principal Associate; Meghana R, Associate, HSA Advocates
Archita Mohapatra, Senior Associate, Vinduja Menon, Senior Associate,Trilegal
