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.

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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