Engaging Contract Labour in Enterprises

Dr. Rajen Mehrotra*----------------------------------------------------------------------------------------------------------

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 42nd 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 contractor’s 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 crèche / 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