September 28, 2021

Volume XI, Number 271

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September 27, 2021

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India: Proposed Changes on The Law on Employing Contract Labor

Several Indian businesses rely heavily on contract labor. Infact some of the largest private employers in India include manpower and staffing services agencies that are in the business of supplying or deploying contract labor to their customers, which are factories and commercial establishments.

Contract labor are workers who are hired in or in connection with the work of an establishment “by or through a contractor, with or without the knowledge of the principal employer”[1]. The arrangement got legal recognition when the Contract Labour (Regulation and Abolition Act), 1970 of India (CLRA) was enacted “to regulate the employment of contract labour in certain establishments and to provide for its abolition in certain circumstances."

India has witnessed significant increase in the number of contract labor engaged in both organised as well as unorganised sectors. Based on the data from the Annual Survey of Industries (ASI), there has been a surge in the usage of contract labor engaged by a third-party contractor in the organised manufacturing sector.[2] The share of contract labor in total employment increased sharply from 15.5 per cent in 2000-01 to 27.9 per cent in 2015-16[3], which is a huge number given India’s labor-intensive workforce. Reportedly, staffing agencies have seen a significant increase in hiring from IT firms working with banking and financial services etc. in the last year.[4]

In December 2020, thousands of contract labor who were recruited by contractors working at Taipei-based Wistron Infocomm Manufacturing (India), which makes iPhones for Apple, went on protest for non-payment of salary and overtime wages.[5] It was reported that the company had around 15,000 employees, of which 1,400 were on their rolls, the rest being contract labor placed through staffing agencies.[6]

Background of CLRA

The CLRA provides the duties of the principal employer and the contractor agency, and inter alia prohibits the use of contract workers in certain situations. As per CLRA, contract labor should not be employed in certain activities of the establishment which are perennial in nature and are done ordinarily through regular workmen in that establishment. The CLRA was enacted primarily to regulate employing contract workers and protect them against exploitation.

The ‘principal employer’ is required to take prior approval of the labor authorities (in the form of a registration certificate) in case it wishes to employ contract labor beyond the prescribed threshold, currently being 20 (50 in certain Indian states). Basis the principal employer’s registration certificate, the contractor agency is required to obtain a license. This allows the labor authorities to monitor the deployment and use of contract labor and ensure that the parties comply with their requirements under the CLRA.

In the landmark judgment of Supreme Court of India (SC) in the case of The Standard-vacuum Refining Co. of India Ltd. v. Its Workmen and Ors.,[7] the main issue raised before the SC was whether the work which was done by the contract labor was perennial in nature and if such work could have been done by the regular workmen of the employer. The SC held that the work carried out by the contract labor was incidental to the manufacturing process and was necessary and perennial in nature which must be done every day. Further, such work was generally done by workmen in the regular employees of the employer and there should be no difficulty in having regular workmen for such work. However, the SC also held that the contract, in this case, was bona fide and hence the court did not order the company to absorb the contract labour.

In another landmark SC judgment of Steel Authority of India Ltd. and Ors. v. National Union Water Front Workers and Ors.,[8] it was held that if contract labor is engaged in an establishment and employment of contract labor is prohibited either because the Industrial adjudicator / Court ordered abolition of contract labor or because the appropriate Government issued notification under the CLRA, there would not be an automatic absorption of the contract labor working in the establishment.

Proposed Changes

The CLRA has been subsumed by the Occupational Health, Safety and Working Conditions Code 2020 (OSH Code), which while enacted, is yet to be made effective. The OSH Code has introduced certain new definitions and revised some existing provisions relating to employing contract labor.

  1. The contract labor provisions under the OSH Code get triggered if at least 50 contract labor are deployed in any establishment, as opposed to 20 contract labor as under the CLRA (subject to state amendments). Unlike the CLRA, the OSH Code does not require a specific registration for principal employer’s establishment once the applicability threshold is met, for employing contract labor. The OSH Code introduces a common registration for every establishment employing at least 10 workers, irrespective of contract labour arrangements. Accordingly, if any establishment to which the OSH Code applies has a valid registration in place under any existing federal law at the time when OSH Code comes into effect, the same would be valid for the purposes of employing contract labor.[9]

  2. The OSH Code defines ‘contract labour’ which is a more detailed definition of the term ‘workman’ as under the CLRA. A new exclusion from the definition has been introduced, in relation to an employee who is regularly employed by a contractor for any activity of his establishment where such employment is governed by mutually accepted standards of the conditions of employment (including engagement on permanent basis) and the employee gets periodical increment in the pay and social security coverage as per the applicable employment laws.

  3. The employment of contract labor in core activities of any establishment is prohibited. Unlike the CLRA, the OSH Code defines ‘core activity’. ‘Core activity’ refers to any activity for which the establishment is set up and includes any activity which is essential or necessary to such activity, excluding certain activities such as sanitation works, watch and ward services, canteen and catering services, housekeeping and laundry services, etc. provided that such activities “shall not be considered as essential or necessary activity, if the establishment is  not set up for such activity".

  4. The OSH Code also allows the principal employer to employ contract labor through a contractor for any core activity if “a) the normal functioning of the establishment is such that the activity is ordinarily done through contractor, or b) the activities are such that they do not require full time workers for the major portion of the working hours in a day or for longer periods, as the case may be; c) any sudden increase of volume of work in the core activity which needs to be accomplished in a specified time.” 

  5. The OSH Code introduces a specific obligation with respect to principal employers, that is if any principal employer of an establishment is employing contract labor through a non-licensed contractor who is required to obtain a licence under the OSH Code, such employment of contract labor would be deemed to be in contravention of the OSH Code, which may attract penalty under the provisions of the OSH Code.

  6. The OSH Code also introduces certain new obligations for contractors with respect to contract labor. For example, there is a requirement to notifying the labor authorities about all work orders received from principal employers, and issuing the contract labor an experience certificate giving details of the work performed by them.

  7. Certain compliances relating to contract labor can be made electronically under the OSH Code including maintaining registers electronically in prescribed forms, filing returns to Inspector-cum-Facilitator, informing the principal employer by contractor agency electronically the amount of wages paid to contract labor, as opposed to the obligation of the principal employer under CLRA to nominate a representative to certify that the wages are paid by the contactor.

  8. Penalties for non-compliances have been significantly increased under the OSH Code extending up to INR 300,000 (approx. US$4000) as compared to the monetary penalty up to INR 1,000 (approx. US$15) under the CLRA. Luckily, there is no imprisonment for first-time offenders for non-compliance of the provisions of the OSH Code.

On November 19, 2020, the central government issued the draft of the proposed central rules called the Occupational Safety, Health and Working Conditions (Central) Rules, 2020 (OSH Rules) under OSH Code. The OSH Rules contain a chapter on contract labour including provisions on qualifications / criteria for the contractor and conditions to be fulfilled to obtain the license, responsibilities of the contractor and procedure and statutory forms for obtaining such license as well as renewal of the license.

Conclusion

Given that the manpower and staffing services agencies are some of the biggest private sector employers and employment generation remains core on the government’s agenda, we expect the government to continue to support this form of engagement of workers in factories and commercial offices. However, once the OSH Code is made effective, there will be a need to relook at these existing arrangements of employing contract labor. With a definition of ‘core activity’ under the new law, it should reduce some confusion and hopefully the discretion of the labor authorities. Hopefully, the new labor codes in India will help further the momentum of generating employment and reducing the current unemployment rates.

[1] Contract Labour (Regulation & Abolition) Act, 1970

[3]Ibid

[7] AIR 1960 SC 948

[8] AIR 2001 SC 3527

[9] Notwithstanding anything contained in this Code, where any establishment, to which this Code applies, has already been registered under any—

(a) Central Labour law; or

(b) any other law which may be notified by the Central Government and which applies to the establishment which is in existence at the time of the commencement of this Code,

shall be deemed to have been registered under the provisions of this Code, subject to the condition that the registration holder provides the details of registration to the concerned registering officer within such time and in such form as may be prescribed.

Nishith Desai Associates 2021. All rights reserved.National Law Review, Volume XI, Number 214
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About this Author

Vikram Shroff Attorney Nishith Desai Assoc. India-centric Global Law Firm
Leader of HR Law Team

Vikram is the leader of the HR Law (employment & labour) team at the research & strategy driven international law firm, Nishith Desai Associates with offices in Mumbai, Silicon Valley, Bangalore, Singapore, New Delhi, Munich and New York.He has been employed with the firm since over 22 years.

Vikram has been consistently ranked as India’s leading labour and employment lawyer by most of the leading international publications.  He advises leading technology, media and financial services sector companies in drafting and negotiating employment contracts; non- disclosure...

91 98670 31941
Archita Mohapatra Attorney Nishith Desai Assoc. India-centric Global Law Firm
Labour and Employment Practice Member

Archita is a member at Nishith Desai Associates’ Labour and Employment Practice. Nishith Desai Associates is a research based international law firm having offices in Mumbai, Silicon Valley, Bangalore, Singapore, New Delhi, Munich and New York. Archita is based out of the Mumbai office of Nishith Desai Associates.

Archita is specialized in labour and employment laws and has been advising clients on a wide range of employment law matters. She has been involved in various matters relating to workforce management and re-structuring, compensation and benefits, reductions in force,...

+91 8657435886
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