Engaging Contract Labour in Enterprises

Dr. Rajen Mehrotra*

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INTRODUCTION:
The International Labour Organization (ILO) a tripartite United Nations organization has
been known for its contribution towards labour by coming forward with conventions, so that
the same when ratified by a country become applicable to that country. The International
Labour Conference of the ILO held in Geneva in 1997 and in 1998 debated the issue of
Contract Labour, but there was no agreement amongst the members of the tripartite
constituents. The reason for this was that Contract Labour and Subcontracting are used
variously in different countries to refer to different kinds of arrangements between enterprises
and workers (often through intermediaries) where by one or both parties seek to give the
arrangement a different character from that of normal employment relationship. Further a
meeting of experts in May 2000 brought out the deficiencies affecting the scope of the
provisions governing such an employment relationship. Hence, finally the International
Labour Conference of the ILO in the 95th Session held in 2006 in Geneva adopted Resolution
109 on Employment Relationship. Hence, there is no ILO convention on engaging of
Contract Labour. India is the only country in the Asia Pacific region that has a specific
legislation on regulating Contract Labour in enterprises.

TYPES of CONTRACTING:
Internationally there are two types of contracting (i.e. Job Contracting and Labour
Contracting). In Job Contracting: The enterprise contracts with an established firm for the
supply of goods and services, and the later undertakes to carry out this work at its own risk
and with its own financial, material and human resources. The workers employed to provide
the services remain under the control and supervision of the second firm (called contractor or
sub-contractor) which is also responsible for paying the wages and fulfilling the other
obligations of an employer. Job contracting is a simple commercial activity governed by the

general principles of commercial contract law. Also there are two patterns (i.e. contracting in
when the work or service is on the premises of user enterprise and contracting out when the
work or service is not on the premises of user enterprise). In Labour Contracting: The
dominant objective of the contractual relationship is the supply of labour (rather than goods
or services) by the contractor or subcontractor to the user enterprise. The user enterprise may
bring the contract workers into its premises to work alongside with its own employees or it
may have the work performed elsewhere. Both Job & Labour Contracting are followed in
various countries of the world.

INDIAN LABOUR CONFERENCE:

In India engagement of Contract Labour in an enterprise is governed by the Contract Labour
(Regulation and Abolition) Act, 1970 and there have been various case laws on this
legislation. The landmark Supreme Court judgement in the case of Steel Authority of India
Limited (SAIL) v/s National Union Water Front Workers delivered on 30th August 2001 has
clarified (i) appropriate government under the Act and (ii) there is no automatic absorption of
contract labour working in the establishment of the principal employer as regular employees
under section 10 of the Act. This judgment has given relief to employers and it has also led to
increase in engagement of contract labour in many enterprises thereafter. After this Supreme
Court landmark judgment trade unions in India have continuously desired that the Contract
Labour (Regulation and Abolition) Act, 1970 be amended and hence the 42 nd Indian Labour
Conference constituted a tripartite group to suggest amendments to the act. At the 43 rd Indian
Labour Conference held on 23rd and 24th November 2010 in New Delhi there were differing
views between the employers and trade union representatives on the amendments to the Act,
so only the following resolutions in the conference were passed unanimously

All efforts should be made to ensure that the existing provisions of the Contract
Labour (Regulation & Abolition) Act, 1970 and Rules made there under are
implemented in letter and spirit;

The labour enforcement machinery in the Centre and the State should be strengthened
by providing requisite manpower and other logistic facilities so as to ensure effective
implementation of labour related legislations;

States are mandated to constitute Tripartite State Advisory Boards under the Act.

Payments should be made to the contract workers through banks. Necessary

amendments should be made in the Act/Rules.

Also the workers representatives as well as the representatives from the state governments
supported the following three proposals at the 43rd Indian Labour Conference. However, the
representatives of the Employers did not agree with the same, as these were against the
existing law.

In case where the contact labour perform the same or similar kind of work as the
workmen, directly appointed by the Principal Employer, the wage rates, holidays,
hours of work, social security and other conditions of service of contract labour shall
be the same as are available to the workmen on the rolls of the Principal Employer.
This provision exists substantially under the existing Rules. This needs to be
incorporated in the principal Act.

In the event of abolition of contract labour under section 10 (2) of the Act, the
workers should be absorbed / regularised.

The threshold limit of 20 workers for applicability of the Act should be dispensed
with.

PERSPECTIVE of the TRPARTITE CONSTITUENTS on CONTRACT

LABOUR:
Employers Perspective on Contract Labour:
Most employers desire engagement of contract labour as they see the following benefits at
the same time they also see some limitations

Flexibility on utilization of workforce.

Optimize work force composition by balancing Core and Peripheral component

and between higher and lower skill.

Reducing the long term wage bill liability.

Higher productivity of this workforce and reduced administrative costs.

Labour market flexibility.

In a globalized economy, enterprises undergo restructuring, hence it is easier to

restructure with contract labour.

Skill acquisition by contract labour takes time, hence mostly engaged in unskilled and
lower skill jobs.

Line Managers under continuous pressure to train the contract workforce, hence quite
many desire permanent workforce.

Trade Unions Perspective on Contract Labour

Most trade unions are opposed to the engagement of contract labour, though they recognise
that contract labour is a reality because of the existing law

Lower wages.

Uncertainty of work.

Hardly any benefits of social protection, annual leave and fringe benefits while in
employment.

Deprived of protection provided by labour legislation.

Low employment security.

Under the garb of self employment statutory benefits are denied.

Employment status is by and large ill defined, and hence the contract labour receives
remuneration and benefits lower than regular worker.

Hours of work are frequently longer as remuneration are linked to output and task
completion.

Higher risk of occupational accidents and diseases.

Unionization rate among contract labour is low.

Government Perspective on Contract Labour

The Governments in each of the states in India have been permitting contract labour as per
the act for the following reasons.

Desire to have economic growth and also generate employment.

State Governments competing with each other to attract investment

Gujarat & Goa State Governments most flexible on engagement of contract labour in
enterprises.

Pressure from Employers that the industry needs to be competitive and survive in the
globalized environment, where outsourcing is an accepted thing and enterprises
desiring to perform only core jobs. Andhra Pradesh State Government has defined
noncore activity and contract labour can only be engaged in noncore activity.

Pressure from unions that the macroeconomic figures indicate increasing employment
of contract labour at the cost of permanent employment.

The Contract Labour (Regulation & Employment) Act 1970 has rules under which
individual state government have a provision to ensure that same or similar work gets
the same wage rate. By and large the same is not enforced by the state government
unless litigated by aggrieved workmen / trade unions.

CONTRACT LABOUR SITUATION IN INDIA:

The International Labour Organization in India carried out a study of Contract Labour in
India in 2012 covering 25 manufacturing enterprises and the study revealed that every
enterprise in the study has contract labour as per The Contract Labour (Regulation &
Abolition) Act, 1970. The minimum percentage of contract labour as a ratio of permanent
labour was 5% and the maximum in an enterprise was 222 %.The study indicates wide
variation in the number of contract workers and this was because of the type of business, as
there were businesses which had low automation, large requirement of low skill jobs and the
same facilitated engagement of Contract Labour. Hence, it is really difficult to formulate an
ideal percentage of contract labour, as a ratio of permanent labour, as a guideline for running
a manufacturing enterprise, unless bench marking studies are carried out amongst the
enterprises of each type of industry.
A large number of enterprises in India engage contract labour through contractors / service
providers under The Contract Labour (Regulation & Abolition) Act 1970, which is permitted
as per law. Engaging contract labour compared to permanent labour has been on the rise by a
large number of enterprises post economic reforms of 1991, as most employers have looked
at this approach for improving flexibility, productivity and also reducing cost. However,
engaging contract labour in enterprises has led to industrial relations issues and litigations not

only in the past, but will also continue to have implications in the future, though in the recent
past the apex court has given judgments that have favoured enterprises engaging contract
labour.
As per the Act there are two items on which enterprises need to ensure compliance as
majority of them do not strictly follow this and hence are vulnerable

Contract labour to be supervised by the contractor.

If the contract labour is performing same or similar work, like the permanent labour,
then they are eligible for same wages, as per Rule 25(v) (a) of The Contract Labour
(Regulation & Abolition) Act 1970.

In keeping with compliance of the act, enterprises need to ensure that the contract workforce
is primarily supervised by the contractors supervisors and the secondary supervision be
carried out by the supervisor of the principle employer. In quite many cases this is violated by
the enterprise and hence the principle employer becomes vulnerable when there are
litigations. Also the principle employer needs to ensure that the contract labour is not
performing same or similar work as performed by permanent labour, otherwise they are
eligible to be paid the same wages. In certain cases this provision is also violated by
enterprises. At times there are cases , where work performed by the contract labour and
permanent labour is same or similar , but the designation given to each of them is different
based on knowledge, skill and experience , in such a case the principle employer does
becomes vulnerable when there are litigations.
In small size enterprises, even though the number of workers is less than 100, still these
enterprises engage a large number of workers through contractors / service providers along
with few skilled permanent company workers. When I discussed with some of the
entrepreneurs on this practice, their response was that there is a lot of uncertainty of demand
for the products produced and services offered; hence they did not desire to increase their
long term liability by engaging permanent workers. Also the entrepreneurs mentioned that the
contract workers are locals that are brought in by the local contractor, who in many cases is a
powerful local political heavyweight and if they are not engaged then there are problems in
running the small size enterprise. They further mentioned that if they do not give work to the
local contractor then there are problems / trouble, which the local community creates on the

functioning of the small size enterprise in the locality. Entrepreneurs mentioned that the local
contractors are politically very resourceful and

it becomes increasingly tough to get any

support from the relevant government department and the local police if the entrepreneur
decides to deny engaging the local contractors.
Engagement of Contract Labour is prevalent both in private sector and public sector
manufacturing enterprises and in many cases these workers are engaged on regular and
perennial jobs where permanent workers are also working. Most enterprises engage these
persons by issuing annual maintenance contracts and / or on contracts dealing with cleaning,
loading, unloading, and material handling and also work which are claimed to be peripheral
to the core manufacturing activity.

Also the contract labour in quite many cases in

enterprises is paid minimum wages which are much lower than the wages paid to the
permanent workers of the enterprise. This does create problems, as the contract workers
desire permanency in employment and also do not expect to receive a much lower wage
while doing identical work compared to the permanent workmen. There are also enterprises
who engage contract labour to take care of the high absenteeism prevalent amongst the
unionized permanent workers of the enterprise.
There are large enterprises in India that have addressed the concerns of the contract workers
and some of them have taken steps which are given below and facilitated having a positive
industrial relations climate while engaging contract labour.

Contract Labour wages revised, when wages of permanent workers revised because of
the Long Term Settlement.

An agreement with the Trade Union that certain job in the enterprise will be carried
out by contract labour.

An agreement with the Trade Union on engaging contract labour and the contract
labour to be given preference when permanent vacancies arise.

Individual contract worker interviewed and background check undertaken by the

contractor along with the principal employer before the contract worker is placed by
the contractor in the plant / facility of the principal employer.

Paying contract workers a higher wage than the minimum wages through innovative
methods of attendance bonus, output linked incentive, certain medical benefits and in
some cases also leave travel benefits.

Facilitating contract labour to acquire higher skills, so that their employability

improves.

Welfare amenities for contract workmen, but lesser than those provided to permanent
workers.

Contract workers included in participation of annual get together; can avail of

company daily bus facility; can eat food in canteen at the same time and at the same
tariff as permanent workers.

Positioning of a dedicated Social Worker / Welfare Officer to look after the interest of
the contract workers.

Provision of a mobile crche / school for children of contract construction workers at

the construction site.

CONCLUSION:
Enterprises in India can engage Contract Labour provided they obtain the necessary
permission from the appropriate Government labour department and the work practices of the
contract labour is as per The Contract Labour (Regulation & Abolition) Act 1970.
Engagement of contract labour in many enterprises is by and large labour contracting as
defined earlier. However, the contract labour in enterprises is quite often engaged through
contracts that try to project these engagements as job contracting. The engagement of
contract labour does leads to problems of industrial relations at the enterprise level, because
of the high disparity in wages and benefits between the permanent workers and the contract
workers. Each enterprise will have to find its own solution on engaging contract labour and
maintaining industrial peace, as contract labour also desires to have job security and get a
decent wage rather than just a statutory minimum wage. It is worthwhile for the management
of enterprises to negotiate with the trade unions and have settlements on engaging contract
labour in the enterprise, so as to ensure industrial peace. Presently quite a few enterprises
have been getting their process and practice on engagement of Contract Labour audited, so as
to ensure that they are complying with the law of the land.
-----------------------------------------------------------------------------------------------------------* President, Industrial Relations Institute of India (IRII), Former Senior Specialist on Employers Activities for South Asia

with International Labour Organization (ILO) and Former Corporate Head of HR and Manufacturing of Novartis India Ltd.
and ACC Ltd. E-mail: rajenmehrotra@gmail.com
Published in Current Labour Reports and Industrial Relations Institute of India (IRII) Journal Arbiter July 2013 issue