The current macro-economic situation has forced employers around the world to resort to labour rationalization measures. The interconnected nature of the global economy has meant that such measures are an inescapable reality even for Indian establishments. Given such a context, the volatility in the demand for goods and services presents an ideal opportunity for firms to contract employees on a temporary basis, as and when the need arises. However, India’s archaic laws, together with self-serving trade unions which fail to see the bigger picture, have ensured that employers are unable to take advantage of the opportunity which has presented itself. This article seeks to examine the legal framework in relation to engaging contract workers, and the immediate need to amend the framework in order to keep sync with the changing market realities.
Contract Labour – Context and Regulatory Framework
Companies in India often outsource their “non-core” (i.e. peripheral) functions to contractors and vendors. Hence, it is common to find that the people manning company canteens, providing security, clerical and secretarial services, tending to the gardens etc. are employees of a contractor or vendor who, in turn, has entered into a service contract with the company. The advantage behind such a structure is that vendor employees are kept off the company books and the company (who is known as the principal employer) has only to deal with the vendor under the terms of the service agreement. In the absence of such an arrangement, a company would have no option but to employ all of the personnel itself. In addition to all the ongoing employee-related obligations which are applicable (benefits, working hours, leave etc.), such a company will also be constrained by the provisions relating to lay-off and retrenchment of full-time employees.
Where an Indian company “employs” 20 or more workmen on its premises via one or more vendors the provisions of the Contract Labour (Regulation and Abolition) Act, 1970 (CLA) are to be complied with. The CLA requires such a company to get registered under the Act as well as to comply with certain ongoing obligations that have been prescribed for the welfare of the contract labour. As far as the vendor is concerned, the provisions of the CLA (i.e. the requirement of a license and compliance with certain ongoing obligations) apply only if the vendor itself employs 20 or more workmen.
The CLA however, does not apply to those establishments in which work is of intermittent or casual in nature. Whilst the decision regarding whether the work is of a casual / intermittent nature or not rests with the appropriate government, work performed for more than 120 days in a year cannot be considered as “casual” or “intermittent”.
As regards the responsibility in relation to payment of wages and provision of facilities, whilst the primary responsibility rests with the relevant contractor, in the event of the contractor either not paying the wages on the due date, or not providing adequate facilities to the contract workers, the responsibility shifts to the principal employer, who will then be required to pay the wages or provide the facilities itself, and then recover such wages or the cost of the facilities from the contractor.
Failure to comply with the CLA is a criminal offence punishable by means of imprisonment and/or a nominal fine. In the case of companies, it is the directors and senior officers who are liable to be so punished unless they can prove that the breach was committed without their knowledge or that they exercised all due diligence to prevent the breach. In addition, a practical consequence of a company breaching the CLA by not obtaining the licenses and registrations that are required, is that such non-compliance will play an important role in coloring the courts’ approach towards ruling that the vendor’s employees are, in fact, the employees of the principal employer.
Contracting out “Core” Functions – Express and Unwritten Prohibitions
The regulatory position gets murky when companies seek to outsource their core functions. There are varying definitions of what constitutes a “core” activity, but in essence the term is used to denote any activity for which an establishment is set up, and also includes any activity, which is essential or necessary to such core activity. Typically, such core activities are derived from the list of activities submitted by an establishment at the time of its registration under either the Factories Act, 1948 (i.e. in the case of manufacturing concerns) or the relevant shops and establishments legislation (i.e. in the case of other establishments).
Certain states (e.g. Andhra Pradesh) have express legislations prohibiting the outsourcing of core functions and other states (e.g. Karnataka) often bring about the same result by means of an unwritten rule. The rationale for such a prohibition appears to the state’s preference to have employees being entitled to full-time status (together with all the associated benefits) in the event of their being engaged in an activity which is integral to the business of the company. As a result of such prohibitions (express or otherwise), companies and vendors seeking to obtain registrations and licenses to carry out such outsourcing could be faced with their applications being turned down by the labour authorities.
“Core” and “Non-Core” Activities – Artificiality of Distinction
Whilst the distinction between core and non-core activities in an establishment was probably appropriate in the early seventies when the CLA was originally enacted, the segregation appears to have lost much of its relevance over time. The notion that companies should only use people or process outsourcing for non-core or episodic work is totally subjective. For example, in the present day context, judging by Bharti’s outsourcing deal with IBM, one could legitimately argue that Bharti does not consider operating its telecom network as a core activity. Similarly, the outsourcing of pension administration by the Pension Fund Regulatory and Development Authority in favor of National Securities Depository Limited suggests that the pension authority does not consider pension administration as a function which merits the involvement of its own employees.
Companies have increasingly come to realize that outsourcing, as a strategy, is purely a function of competitive advantage. In other words, if a contractor is able to provide a set of services more efficiently, it makes economic sense for a company to outsource such services to the contractor, rather than performing the services itself. Barring certain critical functions (e.g. customer facing roles) which need to be housed within an organization at all times, other functions are analyzed from the litmus test of competitive advantage. In short, the recent trend of outsourcing of people and processes has made previously static definitions of organizations irrelevant.
Conclusion – Immediate Need for Change
As stated above, the CLA’s insistence on certain functions having to be performed by full-time employees of an organization appears to be completely out of sync with the market realities. Further, the distinction between “core” and “non-core” activities created under the CLA is increasingly being used as a self-serving weapon by organized trade unions. Trade union leaders are prone to using this distinction to keep labour market outsiders (less skilled, less educated, people from small towns, women, etc) out of organized employment.
The prevailing macro-economic situation presents a perfect opportunity for the government to do away with the artificial distinction under the CLA, and make a push for organizations to engage temporary labour, depending on their requirements. Most contract workers are labour market outsiders for whom temporary jobs have a powerful “apprenticeship effect”. Further, temporary jobs reduce frictional unemployment by providing labour market liquidity and acting as a non-fiscal market substitute for social security and unemployment insurance. The government should acknowledge this reality, and enable the inclusion of the large unorganized work force into the mainstream.