Article: Make In India – Contracting labor pains

Employee Engagement

Make In India – Contracting labor pains

Is contract labor the main bottleneck when it comes to ­making India a global manufacturing hub? We find out
Make In India – Contracting labor pains

A simple way to have an effective contract labor system is to understand the condition that lead to their abolition and ensure that we don’t touch those live wires


The Make in India campaign is a powerful agenda to transform India into a global manufacturing hub. However, we assume that labor issues will be the bottleneck to its success. Without making any judgment call, let me present a holistic view of the contract labor system so that we can take the good and learn from the bad.

An article in Hindustan Times in March 2014 mentioned that contract workers make up 46 per cent of workforce of India’s largest industrial companies. Why do companies rely on contract labor? Businesses need flexibility in dealing with input costs like labor to maintain operational ­efficiency. Hence, they would like to keep it variable to remain competitive. However, in order to understand the business need for contract labor, one must understand its legal, social and capability aspects thoroughly before coming to a conclusion. Laws relating to contract labor is codified in Contract Labour (Abolition and regulation) Act 1970 and their disputes resolution machinery is defined in Industrial Disputes Act 1947. While the Contract Labour Act does not define where they can be engaged, it defines the conditions for their abolition. It also defines conditions to regulate their employment in an establishment. Contract labor can also raise disputes and claim to be regular workman of the Principal employer. This is a win-win mode for the contract labor system. A simple way to have an effective contract labor system is to understand the condition that lead to their abolition and ensure that we don’t touch those live wires.

It is clear that abolishing the contract labor system has to be based on facts at the ground level. They include conditions of work and benefit provided to contract labor; whether the process or operation is incidental to or necessary for the industry; whether the work is of perennial nature; whether the work is done ordinarily through regular workmen; whether it is sufficient to employ considerable number of whole time workmen.

A quick analysis on the established practice and court judgments will provide framework for self-audit:

I. Conditions of work and benefit provided: The Principal employer should ensure compliance to all statutory requirements. They should also ensure provisions of drinking water, wash rooms, canteen, first aid.

II. Whether the process is incidental to or necessary for industry:

Contract labor should not be engaged in core processes or operations. Many organizations engage contract labor in core processes as there is no prevailing abolition notification of that process. This is a self-defeating game because this practice can trigger assessment for abolition notification. The first two conditions are minimum mandate as there are neither precedents nor court cases to suggest that any subjective interpretation has been made on these.

III. Whether the work is of perennial nature: In 2008 case of NTPC vrs Badri Singh Thakur, contract laborers had raised the issue that they were working as electricians for maintenance work of Korba STPS Colony. They argued that the work is of perennial nature and hence the contract should be declared as sham. The court held that master-servant relationship was not established and there was no abolition notification and hence the issue raised by labor could not prevail.

IV. Whether the work is done ordinarily through regular workmen:

The practices lend room to engage contract labor. Most states have rules of similar pay for similar work to contract labor, if regular workmen also do similar work. This gives them scope to engage contract labor for work done by regular workmen. Courts have moved further and allowed differentiation while deciding similar work. In UP Rajya Vidyut Utpadan Board Case of 2009, the matter for discussion before the Supreme Court was whether contract labor who were operating temporary filtration plant should be paid similar wages as those of permanent workmen who operate the main filtration plant. Court held that the selection method, training, skill level of regular workmen was different from contract labor running the temporary plant and hence similar pay for similar work can’t be said to follow automatically.

V. Whether it is sufficient to employ considerable number of whole time workmen: There seems to be no Court case or practice, which deals with this condition exclusively, other than the assessments done by State/Central Boards for abolition notification.

The practices and Court cases suggest that the last three conditions, individually, have not led to abolition notification. However, contract laborers have right to raise dispute under Industrial Disputes Act for abolition of contract labor and declaring the contract sham so that they become regular workmen of the Principal employer. Although they may not want to raise dispute for abolition as SAIL judgement of 2001 has clearly mentioned abolition does not mean automatic absorption, demand for sham contract means a straight route to become regular workmen.  In ONGC Case of 2008, Supreme Court held that conduct of ONGC as well as material on record proved that contract labors were direct workmen of ONGC. On the contrary, in International Airport Authority Case of 2009, inspite of workers of Airfreight working directly under AAI, Court held that there was no case for declaring the workers as regular workmen of AAI.

So, what is the mantra to ring-fence against the attack of “sham contract”. The tests recommended in Gujarat Electricity Board Case are:

• who pays the salary

• who has the power to remove/dismiss from service or initiate disciplinary action

• who can tell the employee the way in which the work should be done

In short who has direction and control over the employee. If it is the Principal employer, then contract is sham and laborers will have right to absorption as direct workmen.

Rule of law will prevail in a utopian world, but this is an imperfect world. It makes sense to remember that contract labor is mostly on low skill level and their prospect of growth and development is limited. Hence, they resort to means of collective demand, which in most cases is win-lose or lose-lose. Besides, there is a social reality of income disparity between contract and regular workmen and “Equity theory of motivation” works to build perception of Principal Employer being unfair.

We need to have new ways of engaging with contract labor, without building the master-servant relationship but giving “touch and feel” of a caring organization. There are organizations that invest  in upskilling of contract labor and involve them in participative systems like TPM. These initiatives improve the employability of labors and takes off pressure for collective demand upon the Principal employer.

Dave Ulrich says that HR would be the differentiator to build sustainable organizations and we are in right time and right place be script this success.





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Topics: Employee Engagement, #HRInsights

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