Contract Labour
or
Outsourcing?
Contract Labour Act has not defined either the terms “Contract
Labour” or “outsourcing” and hence attributing a meaning or comparison based on
that is not so easy. However, on an analysis, it could be seen that intention
of both the terms appears same. The coinage of the term “outsourcing” has been done
intelligently to create confusion between these two terms.
In general, “Contract Labour” is a term which is applied to
man power engaged by somebody else to produce a given result to principal
employer where this man power has no direct relationship of employer-employee
with the principal employer. In a case where the contractor is not involved in
specified activity this would mean simple supply of manpower to principal
employer by contractor.
However, “Outsourcing” conveys more or less same meaning when an employer
engages somebody else to deliver a specified result where employer is not
involved with the man power engagement or supervision or control activity over
such man power.
At the same time, if any activity which is outsourced to
someone and carried outside the premises of the principal employer, such manpower
engaged will not be termed as “workman” under Contractor Labour Act.
However, a specified work inside the factory or premises of
principal employer is assigned to a contractor who brings contract labour and
does the work through them; then such outsourcing also falls into the scope of
contract labour.
The major difference here could be that while a principal
employer is unconcerned about the labour deployed outside his premises in a
case of outsourcing; in all cases of outsourcing of a job within the premises
the principal employer would be fully liable for all statutory compliances with
respect to the labour engaged by the contractor for the work inside.
It is not the definition of the term which is important, but
the real intent to decide whether a contract is for Contract Labour supply or
outsourcing. While contract labour reflects manpower; outsourcing reflects the
job or the activity.
Bombay High Court in the case of Sudhir Kondiram Jadhav (2002
I CLR 97) has held that workers employed by agencies will be the Contract
Labour under the Act irrespective you call it contract labour or outsourcing.
It is now well settled that when the jobs and services are
outsourced and are carried out in some other premises not being premises under
controlled and management of the principal employer, Contract Labour (Regulation
and Abolition) Act will not apply. For all other jobs and services outsourced which
are carried out in the premises of the principal employer will be covered under
the Contract Labour Act.
“Perennial” and “Permanent”
There are occasions where we hear do not engage contract
labour on “perennial” and “permanent” jobs. These terms are also not defined
under the Act. However, what it means by “perennial” has been clarified under
sec. 10(2)(b) where it is said that if the job exists for sufficient duration
will be considered as of “perennial” nature. Still, the act nowhere prohibits engagement
of contract labour on any job or activity or service unless it is prohibited by
the Appropriate Govt. under the provisions of the Act. Certain state
governments like of Andhra Pradesh has amended the CL Act in 2003 and clarified
the jobs / activities on which contract labour can be deployed but under
central law clarity on this point is still missing.
At present, in strict legal sense, due to this lack of
clarity, contract labour can be engaged on any permanent nature of job. But, it
should be avoided as this may become a valid basis for the Govt. to prohibit
employment of contract labour on that particular job / activity / service in
the industry.
Alike, till the time it is not prohibited by Government, permanent
employees and contract labour working side by side on the same job also has no
taboo under Contract Labour Laws. However, the risk could be that in such cases
the law prescribes that the wages paid to contract labourers shall be equal and
similar to that of permanent employees.
Rules framed under Contract Labour Act by Central Govt. as
well as State
Govts. carry a specific condition [central rule 25 (2) (v)(a) & (b)] that
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 principal employer of this establishment on the
same or similar kind of work. However, in case of dispute regarding whether a
work is similar type of work, the same shall be left to be decided by the
concerned labour commissioner.
Although Madhya Pradesh High Court in the case of Steel Authority
of India Ltd. case (2007 LLR 79) has held that the workers through contractor
under CL Act will be entitled to equal wages which were being paid to regular
employees, Supreme Court in the case of U.P. Rajya Vidyut Utpadan Board case
(2010 LLR 453) however, has clarified that nature of work, duties and
responsibilities, attached to the job of permanent workmen and contract labour
are relevant in comparing and evaluating as to whether the workmen employed
through contractor perform the same or similar kind of work as the workmen
directly employed by the principal employer.
Degree of skills and various dimensions of a given job have
to be gone into to reach a conclusion that nature of duties of the workmen in
two categories are on par or otherwise. Often the difference may of a degree.
It is well settled now that nature of work can’t be judged by mere volume of
work; there may be qualitative difference as regards reliability and
responsibility.
A company with 100% contract labour
It’s a concern for many managements how much contract labour
can be engaged or what should be the ratio between permanent and contact labour.
The Act does not give any guidance regarding this. Many wonder whether a
company can outsource 100% or operate without any permanent workers. The concept of engagement of contract labour
or giving job on contract basis originated to get the things done in a given
time frame to be paid on the basis of net result and not on the number of manpower
involved and this can always be applied to those areas of the industry where activities
are such that they do
not require full time workers for the major portion of the working
hours or any sudden increase of volume of work which needs to be accomplished in
a specified time. So 100% contract labour can’t be engaged unless the whole
industry is leased out to someone else, who ultimately becomes the principal
employer for the manpower engaged by him. Hence ideal ratio of contract labour,
to keep the healthy industrial relations should be around 70/30 (70% to be
engaged by principal employer and 30% through contract labour) and not more.
But it needs to be remembered that once the job / services /
activities are allocated to a contractor under proper contract/ agreement,
principal employer should not have a say in number and selection of contract
workmen, at least on documents. If the principal employer is selecting the
contract labour, appointing them under the name of contractor, it is sufficient
to establish the relationship employer-employee between the principal employer
and the so called contract labour.
Do and Don’ts
Alike principal employer shall not transfer
casuals/temporaries/workers on the rolls of contractor. Because, such transfer would
establish that contract is sham and camouflage and the real control and
supervision is of principal employer. Even if one wants to do this, better way
would be
to do it by proper documentation. In the whole process of such a thing, documentation
is the key to establish whether the arrangements are genuine or fake and there
has to be sufficient care to evade any complications.
Rotating contract labour and contractor for the same job /
activity / service also may be held as unfair labour practice unless there are
sound reasons and proper documentation exists in favour of principal employer
as bona fide action.
In all cases of contract labour, Principal Employer is fully responsible in case of injury, illness, disability or death unless the contract labour is covered under ESI with his contractor employer. Hence as a matter of minimum prudence the employer shall see that ESI coverage exists for the contract labourers.
In all cases of contract labour, Principal Employer is fully responsible in case of injury, illness, disability or death unless the contract labour is covered under ESI with his contractor employer. Hence as a matter of minimum prudence the employer shall see that ESI coverage exists for the contract labourers.
Another thing to be kept in the mind of a Principal Employer
is that he shall not initiate any disciplinary action against contract labour. As long as standing orders are not applicable
to contract labour not Principal employer but Contractor as employer in
relation to contract workman should take disciplinary action against such
errant workman under the service rules of his organization / terms of employment.
It has to be noted that Standing Orders are generally not applicable to
contract labour as the definition of the
workman under Industrial Employment Standing Order Act does not cover contract
labour unless a certain Standing Orders specifically cover this category.
To be away from undesired consequences, Principal Employer
shall not issue employment card/gate pass/identity card to contract labour. But
at the same time Issue of employment card / identity card is an obligation under
the provisions of contract labour act and rules and such Employment card / Gate
pass / identity cards should be issued by and under the seal of contractor
because he is their employer.
It is known that a contractor engaging less than 20 but
together the contractors of an employer if engage more than 20 the provisions of registration and other
statutory provisions do apply in such cases except licensing of individual contractors having
less than 20 workmen.
However, if a contractor happens to employ 20 persons on any day during the
preceding 12 months, the act will apply in whole including obtaining license by
the contractor.
Even if the license of the contractor is not renewed but
continues to work, contractor labour can’t claim permanency with the principal
employer merely on this ground. However contractor can be prosecuted for the
violation of the provisions of the act for not getting his license renewed.
Karnataka High Court in the case of Steel Authority of India Ltd. (1990) 64 FLR
573 has held that licensing is only a regulatory measure and it does not create
any privilege. Bombay High Court in the case of General Labour Union (Red Flag)
has held that the employees engaged by a contractor to run a canteen for a
company does not become employees of the company if the contractor fails to
register the contract with the appropriate authorities. Supreme Court in the
case of Deena Nath (1992 LLR 46) has also held that consequence on
non-compliance with the provisions related to registration and license is penal
and will not result in grant of any privilege to the Contract Labour.
Punjab & Haryana High Court in the case of Food
Corporation of India (2008 LLR 391) has held that when the contractor does not
possess valid license only penal provisions would be attracted and it is
nowhere provided that such contract labour would become the employees of
principal employer.
Award of contract
Compliance to Statutory requirements and taking necessary precautions
in awarding contract for safeguarding managements interests. Principal Employer
for this should execute well drafted agreement and other documents to
establish the relationship of principal employer and contractor. Principal
employer should not establish the supervision and control over the contract
labour for carrying out any activity. It is advisable to have the expert
services for this whole process. Because any minute lacunae in drafting of
various documents may land principal employer and the organization in trouble
in case of dispute. the growing habit of copy paste exercise normally concerned
managers do while engaging contractor for their organization in terms of
various documents has to be strongly discouraged because each organization has
its own specifications, limitations, nature of work and requirements etc. and
the contract should be realistic and shall have all terms essential in the
context and ambit of the matter.
The situation where contractor is changing but contract labour remain same may
be viewed against the principal employer as it reflects against the spirit of
the act unless the shift of labour from one contractor to other is properly
documented. This may lead to declaration of sham contract. Supreme Court in
R.K. Panda case (1994 LLR 634) has held that workers working under different
contractors for last 10 years shall be absorbed by the principal employer for
the proven sham nature of the contract and contract labour deployemnt.
As per law, the moment, contract is terminated or closed, the
workers employed by such contractor looses the right to enter into the premises
of the principal employer to work as it is the responsibility of the contractor
to either keep such labour under his employment or clear their accounts. If
principal
employer allows such contract labour to work in the premises without any tag /
identification, in all probabilities such contract labour will be deemed as the
workmen of the principal employer and this should be essentially avoided.
Principal employer should not become a party to any
settlement executed
between the contractor and his workman so as to see that he never binds himself
to any covenants with contract labourers. A settlement is a mutual matter
between the contractor as employer and his workman and management of principal
employer has no role there to play.
However, it is the responsibility of Principal Employer and he
is under legal obligation to pay wages to the workmen employed by contractor in
the premises in case contractor refuses to pay as per section 21 (4) of the
Act.
Kerala High Court in the case of Cominco Binani Zinc Ltd.
case (1989 LLR
123) has also held that if the contractor fails to pay wages to his employees
engaged by him, principal employer will be liable to pay the same.
By any means Principal Employer is prohibited to engage
contract labour on such job / activity / service which is abolished by the
Appropriate Govt. In such situation principal employer should not engage
contract labour for such job / activity / service. If he does so, such contract
labour would be deemed as the employees of the principal employer. But Management
can challenge the decision of the Appropriate Govt. regarding abolition of jobs
in High Court through writ. Still it is advisable not to engage the contract
labourers in the abolished work during the pendency of the case unless
management gets a stay on the operation of abolition order.
Reforms
Industrial Disputes Act was amended recently with reference
to definition
to workman, introduction of grievance redressal committee, right of workman to approach
labour court directly in case of individual dispute etc.
Govt. is also considering amending Contract Labour Act which
is in terms of providing clear cut equal benefits and wages to contract labour
with regular workman but such considerations are at very preliminary stage and
no one knows whether it takes shape or not.
In case if so required, there would be a time we have to
consider reduction of outsourcing and in such case we should start doing it by
first identifying those perennial or permanent job and then extending it to
other jobs by downsizing or recruiting more permanent employees.
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