Engagement of contract labour by employers through agencies has always been an issue of great interest if not controversy. Contract Labour employed in the industry generally are not on the rolls of the company. In the Indian environment the issues pertaining to the engagement of Contract Labour have been a topic of great concern.

A Commission called the Gokhale Commission was set up in the year 1967, by the Government of India by its notification of July 4, 1967. It was mandated to study the question of job security in Private Oil Companies like Burmah Shell Oil Storage and Distribution Company of India, Burmah Shell Refineries Ltd., Bombay, Esso Standard Eastern Ltd. Esso Standard Refining Company of India Ltd., Bombay, Caltex (India) Ltd and Caltex Oil Refining (India) Ltd., Vishakhapatnam and also the study the question of Job Security.

The terms of reference of the Commission interalia were:

1. The number of surplus workmen if any on the rolls of companies like Burmah Shell, Esso and Caltex
2. The reasons and justification for the said workmen becoming or being rendered surplus and in particular, the extent to which they became surplus because of:

• The introduction and extension of contract or agency system in the said companies;
• The recruitment of casual labour by the company
• The changeover to bulk filling of oil products and the discontinuance of distribution of kerosene and

other products in tins and barrels and closing down of the tin plants by the said companies;

• The rationalization and re-organ isation of business and the working methods of the said companies;
• The introduction of automatic devices including accounting machines and computers by the said

companies,

• Other measures

3. The methods, plans and schemes (including early voluntary retirement schemes and voluntary separation schemes, if any) adopted by the said companies to deal with the surplus workmen.
4. The manner in which the said the methods plans and schemes were formulated and implemented.
5. The extent to which the said methods, plans and schemes and their implementation was just, proper or in accordance with the law
6. If any of the methods plans and schemes adopted to determine and deal with the surplus workmen or

the implementation thereof was not just, proper or in accordance with the law, the action in the

opinion of the Commission, should be taken by the Government to ensure security of jobs and other

relief to the workers concerned.

The terms of reference of the Commission and the issues led to the Contract Labour (Regulation and Abolition) Act, 1970 being enacted by Parliament to prevent exploitation of contract Labour. The Act empowered the Government to not only regulate the employment of contract labour, but also abolish it in certain circumstances. The Act envisaged the right to prohibit the employment of contract labour in industry. Wherever this was not possible, it tried to improve the conditions of work of the contract labour through the regulatory mechanism that was available under the Act for licensing of contractors and registration of the Principal Employers. The globalization and liberalization polices pursued by the Government of India, post 1991 has resulted in transformation of the Indian Manufacturing exposing it to the global competition. It has also resulted in restructuring of the economy with privatization and progressive dismantling of the license regime that had earlier encouraged monopolies and prevented competition.

The Contract Labour Act, 1970 never envisaged the dynamic market driven environment and the tremendous challenges that the new technology driven economic activity has posed. Technological innovations along with greater product and technological obsolescence have meant that workforces need to be flexible and adaptable to the changed scenario. However, the Chapter VB provisions in manufacturing industries do pose a lot of challenges for managements and hence the engagement of Contract Labour has become substantial. The Government inspite of several promises to bring forth an exit formula and liberalization of the labour laws, failed to live to its promise. Given the fragile nature of the coalition government at the Centre and also in many states, there has been no change in the labour laws and nothing more is also expected during the last few days of this UPA II Government. Even the Government of India has admitted that the economic growth that has taken place has been a jobless growth, but the growth in the employment of contract labour has been significant and in many industries, now contract labour outnumber the permanent workforce many times over. It will be misleading to evaluate a factory on the basis of its permanent workforce. This may be miniscule. To get a real idea of the real numbers working you will have to add the contract labour, the trainees and outsourced employees engaged through agencies like Team Lease, Addecco, Sodexo or the like to the permanent employees on the rolls. Then alone, a true estimate of the actual workforce strength will emerge.

Corporate India has opted for flexibility through contract labour in a major way. In states like Maharashtra, there have been problems with the engagement of contract labour and the state has been quite activist in threatening prohibition of contract labour and then permitting it. This bureaucratic control is the remnants of the license raj and there is no way this will ever be discontinued for it involves a benefit for the bureaucracy as well as the employer to continue without any addition to the permanent liability. In states like Goa and Gujarat, the engagement of contract labour has become very easy and there are whole companies running entirely on contract labour without any permanent workers. The advantage of running the company on contract labour is the advantage of low costs, high flexibility of wanting to discontinue the operations at will and also the headaches of permanent workmen being avoided. There is added benefit of no trade union hassles, though lately; the workmen of contract labour are also becoming increasing unionized.

Maruti at Gurgaon showcased how operations centered on contract labour can go horribly wrong. In many cases, this can prove to be the Achilles heels for the organization and can catapult them into serious conflicts and confrontation. Just as contract labour is getting organized, the contractors are also becoming an organized group and a force to reckon with. In some of the places like Nagar, Ranjangaon, Khed, Shirwal, contractors with enormous political clouts and power have emerged on the scene and companies operating in the area are now in the control of this groups. They are very intimidating and will not allow business to happen unless they are awarded the contracts. They have a good hold over the bureaucracy as well as the police, because all this is done with the political clout the ruling party enjoys.

While in Maruti, the contractor’s workmen refused to have any links with the internal union of the company, paid a heavy price for refusing to deal with the CPM affiliated union. Apart from paying 40 lakhs as a VRS to leaders of the Unions to exit from the employment as contract labour in the company, the subsequent violence leading to the death the AGM HR – Avanish Ku mar and over 100 officers of the company being hit with iron rods and subsequent termination of over 547 contract labour for the violence epitomized the darkest blot on the Industrial Relations scenario of Gurgaon that has sent shock waves all over India.

The subsequent settlement with the permanent workmen at Maruti;, giving the permanent workers a hike of Rs.18,000 p.m has further distorted the wages between the contract labour and the permanent workers and apart from the conflicts getting more sharply differentiated, the workers in many of the ancillary units have also become disgruntled and creating problems for a host of other companies because of these developments.

While these problems may be daunting, a few companies have managed to show that with intelligent planning and thought process, many of the issues the plague the employment of contract labour can be effectively addressed. What are the issues?

Issue 1: Engaging contract labour for jobs of a perennial nature – Demand for permanency or the same wages as permanent workmen:

The issue of what is perennial and what is not has been a major issue, that has always dogged the judiciary and the demand that the contract labour should be made permanent is an issue that has come up before the judiciary many a time. The concept of “sham contract” and “lifting the veil” has emerged because of the dispute of using contract labour for doing work of a permanent nature. This is the most rampant misuse and abuse of contract labour. Though the contract labour Act, Rule 25(v)(a) provides the same wages to contract labour doing the same work the permanent workmen, in many companies, this is observed only in the breach.

Contract labour is paid the Minimum Wages, but certainly not the same wages as earned by the permanent workmen. It will be worthwhile having a look at the provisions of the Act to deal with this situation that is very common in the industry. The (Central and similar under the State Laws) says : 25 (2) Every licence granted under sub-rule (11) or renewed shall be subject to the following conditions, namely:

• the licence shall be non-transferable;
• the number of workman employee as contract labour in establishment shall not, on any day , exceed the maximum number specified in the license;
• save a provided in these rules, the fees paid for the grant, or as ‘the case may be, for renewal of the license shall be non-refundable;
• the rates of wages payable to the workmen by the contractor shall not be less than the rates

prescribed under the Minimum wages Act, 1948 (II of 1948), for such employment where applicable, and where the rates have been fixed by agreement, settlement or award, not less than the rates so fixed;

(5) (a) In case where the workmen employed by the contractor perform the same or similar kind of work as the workmen directly employed by the principal employer of the establishment, the wage rates, holidays, hours of work and other conditions of service of the workmen of the contractor shall be the same as applicable to the workmen directly employed by principle employer of the establishment on the same or similar kind of work. Provided that in the case of any disagreement with regard to the type of work the same shall be decided by the Chief Labour Commissioner (Central)

(b) in the other cases the wage rates, holidays, hours of work and conditions of service of the workmen of the contractor shall be such as may be specified in this behalf by Chief Commissioner (Central);

Explanation -- While determining the wage rates, holidays, hours of work other conditions of service under CI.(b) above, the Chief Labour Commissioner shall have due regard to wage rates, holidays, hours of work other conditions of service obtaining in similar employments.

It is very clear that the law has the power to see that the contract labour working at the manufacturing site is not exploited by the employer. But in reality, what is provided in law is hardly enforced and there have been contract labour working on jobs of a perennial nature for several years and paid merely the Minimum Wages. This provides a fertile breeding ground for conflicts and some of the enlightened companies have got around this problem by providing in agreements better terms and conditions of service for the contract employees. Companies like Sobha Developers have understood the basic desire of any contract employee to work in a company rather than with a contractor and formed a separate outfit to take on its rolls the contract labour. Yet, the employees could not claim that they were employees could not claim that they were employees of the principal employer, yet enjoy all benefits of permanency, security of employment and assurance that they are not engaged by a fly by night operator. Companies like Hindustan Aeronautics have contractors, who offer employment to the employees with a very clear understanding that they would retire as employees of the contractor only and not get absorbed in HAL. But as contractors, their terms and conditions of service are far superior to what other contractors offer and this in turn is a better alternative for the contract employees, though falling short of their expectations. Similarly, companies like Thermax have signed settlements on behalf of the contract workmen with the regular union providing for reasonable wage hikes periodically and benefits. But they do not get the same wages as permanent workers. Some agreements, like in the case of Larsen & Toubro Ltd. Provide for outsourcing of the routine jobs and the company has welders and other skilled persons working in the company, but who will be paid as per the rates applicable. They are more than the Minimum Wages, but substantially lower than what the company pays its permanent staff. These are some ways by which companies have tried to meet the aspirations of the contract labour, yet be particular that the costs as well as flexibility is not endangered.

Issue 2: Coverage of contract Labour under PF/ESI:

For the principal Employer, this is a prime concern. The contractor may come and go, but the liability for the PF and ESI Contributions of the employees engaged by the contractor is the principal employer’s headache. More so, when the contractor has done the job and left, the PF Inspector or the ESI Inspector visiting may raise a claim for the contribution and if it has not been done, then they will demand the employers contribution, the employee’s contribution and penal interest on the same along with a penalty. And neither the contract employee nor the contractor will get any benefit out of this. It is purely a levy that benefits the corporation. More importantly, for any breach, the Directors of the company will 

get the notices and this is best avoided. Hence companies take licensed contractors, who have their own code and ensure that this matter of coverage under the PF and ESI Act is taken care of. If the contractors is a small time operator and not having his own ESI or PF number.

In a few companies, the liability for PF and ESI contribution of the labour employed by the contractor is avoided by the company on the ground that the person concerned is performing a job contract. But where a person remains on the premises of the principal employer, it is the duty of the Principal Employer to ensure that the workmen working in the factory premises are covered for PF and ESI liability, failing which it will become his headache at best and nightmare at worst!

Issue 3: Better terms and conditions than the Minimum Wages:

Many contractors keep the workmen on the Minimum Wages (some pay less than the Minimum Wages, but on paper they will show that they pay the Minimum Wages). However, the contract labour seeks higher wages, particularly those who have worked in the same company for more than one year. Some companies come around this problem by asking the contractor to change the labour once in six months, so that the issues raised by the contract labour are nipped in the bud. But where the same person works in the company for more than 240 days and for several years, companies become vulnerable to claims of the contract labour or their unions and their demand to give them better terms and conditions of service. Paying persons with more years of service higher amounts is a way of resolving this issue. Ensuring that the contract labour gets their dues is the responsibility of the principle employer, particularly when they work more beyond their normal duty hours. The principal employer must ensure that contractor pays the contract labour double the wages for overtime (and not the single rate he pays for work done beyond 8 hours.)

Issue 4: Welfare and Amenities for the Contract Labour:

In many organizations, there is a difference in treatment meted out to the contract labour compared to the permanent workmen. Canteen may not be the same. Food may not be the same. Facilities given to the permanent workmen may not be available for them. This is because the employer of the contract labour is the contractor. This creates some heartburn amongst the contract labour. However, some companies have addressed this issue and many provide transport, lunch, snacks and tea on equal footing to the contract labour. When this is done, there is a substantial reduction in the heartburn and angst, experienced by the contract labour. Small things matter and companies that attend to the small things find that they enjoy harmony and prosperity and success in the big things that matter. Some companies provide transport, canteen and other amenities on the same footing to the contract workmen as provided for the permanent workmen. In a few companies, the contract workmen are also part of the annual social get together and this makes them feel that they are part of the same organizations, bonus paid to the permanent workmen is 20% gross salaries plus ex-gratia. But the contractor may not even pay the minimum bonus to the contract labour. This does create avoidable heartburns. Companies like Global Innova, a firm of contractors providingcontract labour builds viable colonies for its contract labour at the sites where they work and these colonies have swimming pools and other amenities like in any up-end housing colony. Employees working as contractors vie with each other to get such jobs, which give them a great them a great lifestyle.

Issue 5: Contractors Change, but employees remain the same:

In many contracts such as housekeeping, security, gardening, there is no need for the same set of persons to work and the contract being changed periodically is a very good way of not only ensuring that the service provided is in keeping with the best, but also a way of ensuring that no vested interests develop. But amongst employers, there has been a penchant for keeping the same persons, even if the contractor is changed or changing the names of the employees but keep the same person even under a different contractor. These are sharp practices and that can lead the company into a lot of difficulties. Employers prefer the same person as he is trained and conditioned and resent having to retrain and get involved all over again with a new set of employees. Old wine in new bottle is preferred and such practices create enormous difficulties for the organization. This is observed more on the shop floor, where skilled or semiskilled operations are required to be performed.

These are some of the topical issues that have emerged in the engagement of contract labour. Today in many organizations, the contract labour has become more significant and strategic than the regular labour. To expect that the contractor, who is interested in making money (The more the lebour employed, the more the merrier!!) will attend to the problems is only a fond hope. In practice, it is belied and the principal Employer will be landed up with the problems of the contractor. He must realize that unless innovative and practical steps are taken to resolve the issues and problems, they will become bigger headaches for the principle employer. The law and case laws in the engagement of contract labour has become more complex and the degrees of freedom and choice which employers enjoyed is being whittled down steadily and unless employers learn also how to manage the affairs governing the contract labour, it will become a major nightmare. It need not become as bad as in Maruti for employers to sit down and take notice. Yet it can be ignored only at your own peril and costs. The costs are becoming astounding both in money terms as well as taking an account on the life or life-expectancy f the people involved in the management of control labour!!

Problems of contract labour has become more strategic than the regular workmen whose number is becoming more and more miniscule compared to the contract labour being engaged, many on direct manufacturing activities. Attending to the above mentioned issues will save Manufacturing HR professionals many headaches and pre-empt problems and worries.

This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.