Contract labour

Utilizing contract workers in India can be tricky for Chinese-invested enterprises. The following guide provides the opportunities and pitfalls of working within this system

Many foreign investors find Indian labour laws challenging but it is an especially significant challenge for Chinese-invested enterprises, due to their high concentration in the manufacturing sector. Labour law reform in India is receiving a lot of attention from the Modi (2.0) government.

One ambitious project underway is to consolidate 44 labour laws into labour codes under four categories, namely wages, social security, industrial safety and welfare, and industrial relations. This article focuses on the widely employed contract labour system that can prove useful to many manufacturing companies, but can also expose them to risks if not implemented properly.

The contract labour system refers to a legal mechanism whereby a labour contractor hired by the company acts as an independent agent to employ workers, and then supplies them to the company as a service, thus obviating the need for a direct employer-employee relationship between the company and its workers.

Some advantages of the “contract labour” system are: (1) overall cost of engaging contract labourers might be lower compared to direct hiring; (2) short-term requirements can be met without long-term commitments; (3) minimal direct supervision is required on the part of the employer; (4) non-core activities can be outsourced so that the company can focus on its core activities; (5) increasing or decreasing labour supply is much easier; (6) it can lead to potential gains in productivity; and (7) labour contractors can be held responsible for performance-related issues.

The primary aim of the Contract Labour (Regulation and Abolition) Act 1970 (CLRA Act) is to abolish contract labour in certain circumstances, and regulate it in others.

The proper application of contract labour is in areas where continuous employment is not possible, or in work processes that are seasonal, intermittent or ancillary to the role of the permanent workforce in an industrial establishment, such as gardening, security, etc. The Indian Supreme Court enunciated these principles in Gammon India Ltd. v Union of India. The provisions of the CLRA Act are normally applicable to every establishment and contractor that employs more than 20 workmen, although certain states have increased these thresholds.

The three main players in the contract labour system are: (1) the labour contractor; (2) the workman (contract labour); and (3) the principal employer, with clearly identified rights and obligations attached to each of them. The labour contractor or sub-contractor is defined as a person who undertakes to produce a given result for the establishment, other than a mere supply of goods or articles of manufacture to such establishment, through contract labour,, or who supplies contract labour for any work of the establishment.