Article: The journey from regulation to governance

Compensation & Benefits

The journey from regulation to governance

Reforms required in Contract Labor (Regulation and Abolition) Act, 1970
The journey from regulation to governance

Contract workers: Indian context

India has had historically about 30% of its workforce engaged as contract staff. And this continues to grow. As per the Economic Survey of 2015-2016, the percentage of contract workers has increased from 12 per cent of all registered manufacturing workers in 1999 to over 25 per cent in 2010. There is an increasing - even if grudging - acceptance of the fact that contract workforce is here to stay and therefore we should focus on recognizing contract labour as a key segment of our work force. Globally about 5-15% of the workforce is engaged in temporary or contract jobs, In India this number are as high as 29%. However, while globally 100% of the contract workforce is engaged in the formal sector, In India this number is just about 10%. 

Therein lays the problem. Majority of the enterprises that thrive in an informal economy evade taxes and exploit workers. Of India’s 6.3 crore enterprises, 2.4 crore do not have an office or address, only 85 lac have any form of tax registration, only 11 lac pay the Mandatory Provident Fund. Workers in these informal enterprises, who get paid by cash, are often short changed in terms of their statutory benefits like minimum wages, Provident Fund and ESIC. 

The employment of contract manpower in India is largely governed through the Contract Labour Regulation and Abolition Act (1970).  This Act lays down the governance framework for any organisation to engage contract workforce and also for a contract workforce provider to provide contract employees. It further determines the rights of the contract employees  Since contract workforce was historically viewed as vulnerable to exploitation, having virtually no bargaining power and social security; the original intent of this law was to restrict the use of contract labour and move toward eventual abolition of contract labour. However economic and business environment in India has significantly evolved over the two and a half decades of liberalization. With rapid advancement in technology; skills and jobs associated with those skills have a lesser shelf life then was the case earlier and the concept of employment for life just does not exist anymore. To add to that there are economic and business fluctuations which require any business organization to demonstrate flexibility in terms of its manpower strategy, to remain sustainable. Therefore, what we need today is not an outdated regulation but a governance framework that is more relevant in today's context.

Current challenges

Not only was the CLRA or Contract Labour Regulation and Abolition Act written for a different economic age altogether, it is also a Central Act with State Rules. Both these aspects throw up multiple challenges in in terms of administrative implementation, multiple and varying rules that any organization has to adhere to across different states and manifold increase in compliance burden for companies. Some of the key challenges are that exist as on date are:  

  • As a guiding principal, the act is seen as discouraging or even prohibiting engagement of contract labor in areas which are integral to an organization's core area of business or require long term manpower

  • The act also makes it obligatory for an organization employing contract labor beyond a certain threshold number to take a registration as also any organization providing contract labor to take a license for the same. These procedures have to be adhered to for each establishment (office premise) separately and the threshold numbers and the process vary from state to state, leading to duplication of effort for most organizations with the scale of operations and multiple offices. Further, more often than not this process is a long drawn process,   requires a plethora of documentation and is offline in many states thereby leading to wastage of precious man hours 

  • Not only does the threshold for applying for a licence varies from state to state,  It is also too low generally resulting in contractors having to apply for licenses for deploying contract employees numbering as low as 5.  The varying levels of the threshold of contract labor as regulated by the States currently range from 5 to 50 depending on the State.

  • Every contract workforce provider employing contract labor in connection with the work of an establishment, to which this Act applies, has to provide and maintain facilities like canteen, rest room, and first aid etc. Given that the contract workers work on the premise of the principal employer, this is practically not feasible.

  • Every principal employer – user organisation for contract employees has to nominate a representative duly authorized by him to be present at the time of disbursement of wages by the contractor. It is the duty of the contractor or ensure the disbursement of wages in the presence of the authorized representative of the principal employer. Again this is a provision with little relevance today where all efforts are being directed towards building an inclusive financial ecosystem that is cashless and digital.

Reforms required 

The CLRA Act needs to be revisited at all level - intent, policy, and procedures. It is clear that majority of the above provisions in this Act that was written almost 50 years ago have no relevance let alone usefulness in today’s vastly different business environment.

  • The original Contract Labour Regulation and Abolition Act should be renamed   as Contract Labour Act. Abolition of Contract Labour in an increasingly On Demand economy is no longer a realistic or even a desired goal.  Removal of the word “Abolition” in from the nomenclature is key to removing the ambiguity around the intent of the Act itself and making it more effective in bringing in more and more contract workers under the ambit of formal sector employment. 

  • The minimum threshold to be covered under the Contract Labour Act should also be increased from the current threshold levels to 100 or more  to allow smaller organizations greater flexibility 

  • The Contract Labour (Regulation and Abolition) Act, 1970 was originally intended to cover individual contract workers. It does not include contracting firms. In reality, a number of large companies are providing the service of providing contract workforce staff to an organization who need flexi-staff, we need to extend the definition of “contractors” to include such service providers.   

  • The act requires that establishments utilizing contract labour have a valid registration certificate to start employing contract labour. It also requires service providers providing contract workforce to hold licenses to start working However, there is no time limit for the processing of the registration or granting of the license. It should be mandatory for the concerned approving authority to approve or reject the same with sufficient reasons within 15 days from the date of submission of application.  

  • A firm or company fulfilling all the criteria as set by the Central Government should be issued a National License for deployment of contract staff to any establishment.

  • Contract staffing companies should be forbidden from charging directly or indirectly, in whole or in part, any fees or costs to jobseekers and workers, for the services directly related to temporary assignment or permanent placement.

  • Contract workers employed by contract staffing companies should be provided with written contracts of employment specifying their terms and conditions of employment.

  • Facilities dealing with Welfare and Health of Contract Labour (i.e. Canteens, Rest Rooms, First Aid and other facilities) should be obligatory for the Principal Employer on whose premises the contract employees are working Employer.

  • Making it mandatory for the Contractor- Individual or Firm to pay wages only by way of Bank transfer or cheque. 

The regulatory cholesterol created by our current labor laws regime ensures that 90 percent of our labor force works informally and especially those employed as contract workforce. Since workers in the informal or casual sector are much more vulnerable to exploitation, quite clearly the current state of over regulation but poor governance under the CLRA act has not benefited the contract workers. While CLRA reforms alone may not rewrite the story of the millions of contract workers in India but they are a much-needed catalyst in an overall reform process that will make India a lot more fertile habitat for formal job creation, larger employers and higher wages with an increase in the share of formal employment.

Read full story

Topics: Compensation & Benefits, Talent Acquisition, C-Suite, #Hiring, #Jobs

Did you find this story helpful?



How do you envision AI transforming your work?

People Matters Big Questions on Appraisals 2024: Serving or Sinking Employee Morale?

LinkedIn Live: 25th April, 4pm