Supreme Court Refines ‘Industry’ Test, Separates Legacy Labour Disputes from the New Industrial Relations Code Regime:

Recent Developments and Constitutional Significance:

• On 20 August 2026, a nine-judge Constitution Bench of the Supreme Court, headed by Chief Justice of India Surya Kant, delivered a 5:4 judgment on the interpretation of “industry” under the Industrial Disputes Act, 1947 in the context of Bangalore Water Supply & Sewerage Board v. R. Rajappa (1978).
• The majority held that the essential framework of the 1978 triple test has stood the test of time, but certain elements and accompanying guidelines require refinement; therefore, the Court decided to reformulate the test prospectively rather than completely discard the 1978 framework.
• The judgment is particularly significant because the Industrial Disputes Act, 1947 has been replaced by the Industrial Relations Code, 2020, which contains its own statutory definition of “industry”.
• The Court expressly clarified that its present interpretation concerns the repealed 1947 Act and does not determine the meaning of “industry” under the Industrial Relations Code, 2020. Future disputes under the new Code will therefore have to be decided primarily from its own statutory text and scheme.

Background: Meaning of “Industry” under Labour Law:

Industrial Disputes Act, 1947:

• Section 2(j) of the Industrial Disputes Act, 1947 defined “industry” broadly in relation to business, trade, undertaking, manufacture, calling, service, employment, handicraft and industrial occupations or avocations.
• The provision became the foundation for extensive judicial interpretation because the statutory definition covered activities far beyond conventional manufacturing or commercial enterprises.
• The central legal question was whether the expression “industry” should be interpreted narrowly to cover commercial production alone or broadly to cover organised activities involving employer-worker relationships.

Bangalore Water Supply Judgment, 1978:

• In Bangalore Water Supply & Sewerage Board v. R. Rajappa, a seven-judge Bench adopted an expansive interpretation of “industry”, substantially widening the protective scope of labour legislation.
• The judgment recognised that the profit motive was not an essential requirement, meaning that an organisation could potentially fall within the definition even when its primary objective was not commercial profit.
• The decision therefore had implications for institutions such as hospitals, educational institutions, municipalities, clubs and welfare-oriented organisations, depending upon the nature of their activities and employment relationships.

The Triple Test: Core Judicial Framework:

Three Essential Components:

• Systematic Activity: The organisation must undertake a structured and organised activity rather than an isolated or purely individual activity.
• Employer-Worker Cooperation: The activity must involve organised cooperation between employers and workers.
• Production or Distribution: The activity must involve the production, supply or distribution of goods or services for the satisfaction of human wants and wishes.
• The three components were required to be examined together rather than treated as isolated conditions.
• The test shifted the focus from the profit-making character of an institution towards the nature and organisation of the activity undertaken by it.

Dominant Nature Test:

• Where an establishment performed several interconnected activities, the Court developed the Dominant Nature Test to determine whether the establishment as a whole should be treated as an industry.
• The approach required examination of the dominant character of the integrated activity instead of mechanically classifying every individual activity in isolation.
• This principle became particularly relevant for large public institutions and organisations performing both industrial and non-industrial functions.

Why the Definition of “Industry” Matters:

Impact on Workers:

• Classification as an “industry” determines whether an establishment and its workers fall within particular industrial-dispute mechanisms and statutory labour protections.
• The issue consequently affects matters such as retrenchment, dismissal, wages, working conditions, trade unions, strikes, collective bargaining and dispute resolution.
• A wider definition generally expands the number of workers and establishments that can access statutory labour-law remedies, whereas a narrower definition can reduce regulatory coverage.

Impact on Employers and Institutions:

• An expansive interpretation can increase the compliance obligations and potential litigation exposure of employers, including non-profit institutions and public bodies.
• A narrower interpretation may provide greater institutional flexibility but can simultaneously raise concerns regarding the adequacy of protection available to workers.
• The controversy therefore reflects a broader policy tension between labour protection, industrial peace, institutional autonomy and ease of doing business.

Supreme Court’s 2026 Majority Position:

Refinement Rather than Complete Rejection:

• The majority did not treat the 1978 judgment as wholly incorrect; instead, it held that its essential framework remains valuable, while certain elements of the triple test require a more precise formulation.
• Chief Justice Surya Kant observed that some constituent elements could have been articulated differently to better correspond with the statutory scope of Section 2(j).
• The Court therefore adopted a prospective approach, avoiding disruption to disputes that had already arisen under the old statutory framework.

Separation from the Industrial Relations Code, 2020:

• The Court expressly refrained from deciding the interpretation of “industry” under the Industrial Relations Code, 2020.
• This is important because the 2020 Code contains a new statutory formulation and specific exclusions, including certain sovereign functions, domestic service and other categories specified by law.
• The 2026 judgment therefore should not be understood as judicially importing the 1978 triple test into the new Code.
• Future litigation under the Industrial Relations Code will require interpretation of its own statutory language, legislative purpose and exclusions.

Pending and Future Cases: A Crucial Distinction:

Proceedings under the Industrial Disputes Act, 1947:

• Pending disputes arising under the repealed Industrial Disputes Act, 1947 continue to be governed by the applicable legal framework associated with the 1978 judgment.
• The Court specifically sought to prevent the prospective reformulation from unsettling pending proceedings and concluded matters.
• This approach promotes legal certainty and prevents workers or employers from being disadvantaged merely because a later judicial formulation changed the applicable test.

Future Proceedings under the Industrial Relations Code:

• The Industrial Relations Code, 2020 must be interpreted independently because it is a separate statutory framework.
• The Supreme Court has not, through this judgment, supplied a final judicial definition of “industry” for the new Code.
• Consequently, future disputes will depend on the text of Section 2(p), statutory exclusions, subordinate legislation and subsequent judicial interpretation of the Code.

Dissenting Views: Justice Nagarathna and Others:

Justice B.V. Nagarathna:

• Justice B.V. Nagarathna, joined by Justices Dipankar Datta and Ujjal Bhuyan, opposed the reconsideration of the 1978 framework.
• She argued that the broad interpretation remains relevant because India’s economy has undergone substantial liberalisation, privatisation and globalisation, shifting several activities from the public sector to private entities.
• In her view, weakening the broad definition could reduce labour protection precisely when workers are increasingly employed in private and mixed institutional settings.
• She also emphasised that an activity does not become a sovereign function merely because the State performs it.
• Government welfare schemes and social services should therefore be examined according to the nature of the activity, rather than excluded solely on the basis of the identity of the entity performing them.

Justice Joymalya Bagchi:

• Justice Joymalya Bagchi adopted a nuanced position by accepting that the reference could be considered but disagreeing with the majority’s reformulation of the triple test.
• He considered the original triple test sufficiently capable of determining the scope of “industry” under the 1947 Act.

Institutional Finality:

• The dissent also raises an important jurisprudential question concerning precedent, finality and judicial stability.
• Reconsidering a long-standing precedent can correct doctrinal weaknesses, but excessive reconsideration may create uncertainty for workers, employers and institutions that have structured their conduct around settled law.

Legislative Background: Evolution of Labour Codes:

The 1982 Amendment Attempt:

• Parliament enacted the Industrial Disputes (Amendment) Act, 1982, which attempted to narrow and clarify the statutory concept of “industry”.
• The relevant amendment, however, was not brought into force, allowing the judicial interpretation under the 1978 judgment to remain highly influential for decades.

Four Labour Codes:

• Between 2019 and 2020, Parliament consolidated 29 central labour laws into four major Labour Codes:
• Code on Wages, 2019, covering wage-related regulation.
• Industrial Relations Code, 2020, consolidating laws relating to trade unions, standing orders and industrial disputes.
• Occupational Safety, Health and Working Conditions Code, 2020, consolidating workplace safety and working-condition provisions.
• Code on Social Security, 2020, consolidating social-security-related legislation.
• The Labour Codes seek to simplify the fragmented labour-law framework while balancing worker protection with regulatory efficiency and labour-market flexibility.

Way Forward: Balancing Protection and Flexibility:

For Labour Policy:

• The government should ensure that the new labour framework provides clear statutory definitions and exclusions so that workers and employers can determine their legal obligations without prolonged litigation.
• Rules should prevent genuine sovereign functions from being treated as ordinary industrial activities while ensuring that welfare and economic activities are not automatically excluded merely because the State performs them.

For Workers:

• Labour-law reform should preserve effective mechanisms for collective bargaining, dispute resolution, protection against arbitrary termination and decent working conditions.
• The expansion of the service economy makes worker protection increasingly important beyond conventional manufacturing establishments.

For Employers:

• Regulatory simplification should be accompanied by predictable compliance standards, reducing unnecessary litigation while maintaining minimum labour protections.
• Clear distinctions between industrial establishments, public services, charitable institutions and sovereign functions can improve both ease of doing business and legal certainty.

For the Judiciary and Legislature:

• Courts should interpret the Industrial Relations Code according to its own statutory text and legislative context, rather than automatically transplanting precedents developed under the repealed Industrial Disputes Act.
• Parliament and the executive should periodically evaluate the implementation of the Labour Codes through evidence-based policy review, stakeholder consultation and transparent rule-making.

Value Addition for UPSC:

Constitutional and Governance Linkages:

• Fundamental Rights: Labour protection intersects with Article 14, Article 19(1)(c) relating to associations and Article 21 through dignity and humane working conditions.
• Directive Principles: The issue connects with Articles 38, 39, 41, 42 and 43, which emphasise social justice, adequate livelihood, the right to work, humane working conditions and living wages.
• Industrial Peace: Effective labour dispute resolution supports economic stability and reduces disruptive industrial conflict.
• Inclusive Growth: Labour-market flexibility must be accompanied by adequate social protection to ensure that economic growth does not translate into precarious employment.
• Ease of Doing Business: Simplified labour regulation can reduce compliance burdens, but deregulation without adequate safeguards can weaken worker security.
• Cooperative Federalism: Labour is placed in the Concurrent List, making coordination between the Union and States important for effective implementation of labour legislation.
• Judicial Review: The case illustrates how constitutional courts reconcile precedent, statutory change, legal certainty and evolving socio-economic conditions.

UPSC Mains Takeaway:

• The Supreme Court’s 2026 ruling represents refinement rather than outright rejection of the landmark Bangalore Water Supply framework. Its principal significance lies in separating the interpretation of the repealed Industrial Disputes Act, 1947 from the new Industrial Relations Code, 2020, while preserving legal certainty for existing disputes. The long-term challenge is to create a labour regime that simultaneously protects worker dignity and bargaining power, promotes industrial peace, enables enterprise flexibility, and provides sufficient legal certainty for investment and employment generation.