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The Contract Labour Debate in India :

Another Policy Deadlock !

Dr. K.R. Shyam Sundar

Associate Professor, Guru Nanak College, Mumbai University

Associate Professor, Guru Nanak College, Mumbai University Introduction The drive towards achieving labour flexibility


The drive towards achieving labour flexibility especially numerical flexibility has been a global phenomenon. The “standard employment” is taken to cover full time, open ended contract with social security benefits and the employments not conforming to these are referred to non-standard employments. Controversies surround even on the usage of the terms, precarious, nonstandard, flexible, informal employment. Employment of labour intermediaries and establishment of triangular relationships have spread to many countries and grown over the years. It is known in different names in different countries, like temping, contract workers, labour dispatch workers, labour brokers and so on. They are essentially “disposable jobs”.

The growth of these disposable jobs is usually explained by factors like labour cost reduction,

numeric flexibility, risk aversion, distancing, core competencies, smart human resource management and so on. But two powerful arguments have been advanced to “legitimize” and “institutionalize” these jobs. The regulatory system including restrictive labour laws and insiders’ oriented trade unions creates unemployment. The temporary staffing agencies create jobs and thus contribute to reduction in unemployment and poverty. These jobs constitute “gates” to the labour market for those waiting at the margin. Further, they not only provide crucial training and exposure and constitute

a stage on the way to permanent employment. It is

a fine blend of flexibility with protection.

The trade unions’ counter these arguments. The best way to solve unemployment is to increase productive investment and not labour sub- contracting. Contract labour system has created

inequalities in the labour market and intensified insecurity, led to exploitative labour market practices and weakened the bargaining power of trade unions. The arguments that contract labour system is a stage for permanency and builds skills have been belied. The contract workers have been trapped in low quality and insecure jobs for years and do not climb up the skill pyramid. The dominant trend in the labour market has been not to achieve the golden balance between protection and flexibility but growing informalization.

The Global Context

This form of labour flexibility has constituted a major labour market strategy in many countries and they have been resisted as in India (as discussed below). In Russia two members of the Russian Parliament, Duma have called for legislation to ensure creation of “direct” jobs and banning labour intermediaries. The temporary labour agencies like Ciett with the support of global temping agencies are countering this move (see Workers and trade unions in Korea have taken up the issues of rights of freedom of association and collective bargaining of these workers with the ILO Committee on Freedom of Association. The issue of employment via labour broker (contract labour) has among others (like poor show on the employment front) strained the relations between the Congress of South African Trade Unions (COSATU) and the leader of the ruling coalition African National Congress (ANC). The COSATU is demanding a ban on this form of employment (a kind of slavery) with fragile employment security – its concern is also organizational as the growth of this employment is reducing its strength, both numerical and financial. The opposition parties

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and groups in South Africa is arguing for reform of labour broking (towards self regulation) rather than a ban on it arguing that such a proposal would result in higher levels of unemployment and they cite Namibia as an example. The powerful temporary staffing companies lobbied against the

legislation (passed in 2007) to ban them in Namibia


Unions issued Joint Principles on Temporary Work Agencies on June 14 2010 which among others insist that (a) the primary form of employment should be permanent, open-ended and direct; (b) agency workers should be covered under the same collective agreement that covers the workers in the user enterprise (i.e. the principal employer); and (c) the agency workers should receive equal treatment and there should be no gender gap on wages, social protections and conditions and so on

(Global unions agree joint principles on temporary


accessed 10 October 2010). In Sweden years of struggle and the threat of a nation-wide strike by Swedish Foodworkers to win a national agreement in April 2010 which does not ban the employment of temporary workers but requires the employers to negotiate with local unions before recruiting them. In the negotiations the interests of the flexibility needs of the employers will be weighed against the interests of the workers and the parties should agree that it is better for the company to employ the temporary workers. But, the wages and work conditions governing the temporary workers should not be less than those for the permanent workers (see “Swedish Foodworkers win extensive limitations on temporary agency employment”,




Contract Labour Law Debate in India

These arguments have relevance to the Indian context as the labour market actors, trade unions and the employers’ organizations are trading similar arguments with some Indian variations. Post- economic reform, the employers’ organizations and the critics of labour regulation have been exerting

pressure on the government (central and state) to reform the relevant labour laws to provide for the necessary labour flexibility to sustain and even enhance competitiveness of the firms which is so necessary in the globalized world. In the context of this article, the employers are demanding reform of the Contract Labour (Regulation and Abolition) Act, 1970 (henceforth, the Contract Labour Act) so as to enable them to freely use contract workers in the non-core activities and when necessary in the core activities also. The trade unions are resisting this demand of the employers and instead demand employment security for contract workers among others. The judiciary has delivered conflicting judgements on the issue of regularization of contract labourers upon abolition under the Act. The central government has been holding social dialogue with the social partners and appointed a tripartite committee to go into these issues. In the meanwhile some state governments have introduced reform of the Contract Labour Act. At the same time, the contract workers are being organized and significant struggles and collective agreements with regard to their issues and interests have been reached. Thus, there is a need to review the developments with respect to the contract labour law reform debate, the public policy and social dialogue (i.e. tripartite and bipartite interactions).

The Contract Labour Law in India

The contract labour system issue dates back to colonial times and the Royal Commission on Labour (1929-31) took cognizance of the exploitation of the contract workers in the mills and recommended institutional mechanisms to regulate the contract labour system. Post- Independence, the government, tripartite bodies and the judiciary discussed the issues of exploration of the possibility of gradual abolition of contract labour system where possible and regulation of their working conditions (Ramanujam 2004). Since there was no specific law to regulate this segment of the labour market, contract labour conflicts were issues in industrial relations (like wages, bonus)

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and litigation abounded. The Supreme Court’s

observations in an industrial dispute case (Standard Vacuum Refinery Company Vs. their workmen and

others, 1960, at

accessed 10 September 2010), the discussions in the tripartite bodies and the recommendations of the First National Commission on Labour (1969) prompted the government to enact the Contract Labour Act in 1970. Indeed, the Supreme Court’s observations in the said case provided the basis for the orientation and architecture of the Contract Labour Act – the four criteria mentioned in Section 10 (2) of the Act are drawn from this judgement (see

also Upadhyaya 2008:p.6).,

The Act provides for prohibition of employment of contract labour and regulation of the conditions of work of contract labour and applies to establishments employing 20 or more contract workers and to contractors employing 20 or more workers. It is not applicable to establishments performing intermittent work, i.e. work performed for less than 120 days and seasonal work performed for less than 60 days. The principal employers should register their establishments and the contractors should obtain license to be eligible to execute work through contract labour. The central or the state government may constitute an Advisory Board (Board) to advise it on matters relating to administration of the Act.

The most controversial clause of the Act is Section 10 (1) which empowers the state government to prohibit after consultation with the Board and keeping in mind some considerations (stipulated by the Act) employment of contract labour in any process, operation or other work in any establishment. The appropriate government before issuing the prohibitory orders should consider (1) the conditions of work and benefits provided for the contract workers in the establishment concerned and (2) other relevant factors such as whether (a) the process or work is incidental or necessary for the industry, (b) it is of perennial nature, (c) if it is done ordinarily by regular workers, and (d) it is sufficient to employ considerable number of full- time workers. The Act also seeks to promote the

health and welfare of contract labour (sections 16 to 19 in Chapter V).

The Contract workers are also covered under other laws. The Factories Act, 1948 which governs the work conditions among others applies to contract workers as relevant. The Employees’ State Insurance (ESI) Act which provides for medical insurance applies to contract workers also (vide sections 40 and 41 of the Act). The principal employers are primarily responsible for payment of employer’s

(4.75 percent of total wage bill) and the employee’s (1.75 percent of wages) contributions to the ESI Fund and the same should be recovered from the


Similarly the Employees’ Provident Fund (EPF) Act, 1971 also provides for initial payment of employer’s and employee’s provident fund contributions (12 percent by the employers and matching contribution by the employees) and recovery of the same from

the contractors (section 8-A of the Act; see also http://


Magnitude of Contract Workers in the Organized Manufacturing Industries

The employment of contract workers in the organized manufacturing sector has increased from 13.24 percent in 1993-94 to 30 percent in 2006-07. But the micro level and field studies reveal a larger share than what the official data captures (Shyam Sundar 2010; see also Maiti 2009). The contract workers accounted for a significant proportion of total workers in the organized manufacturing sector in states like Andhra Pradesh (55.23%), Haryana (44.12%), Gujarat (34.28%), Rajasthan (33.51%), Uttar Pradesh (31.48%), and Maharashtra (31.27%) during 2004-06. Their share was lower in states like Kerala, Tamil Nadu, West Bengal, though rising as in the former group of states (Shyam Sundar 2010).

Contract labour employment is highest in tobacco (66.19 percent), followed by non-metallic mineral (48.99 per cent), petroleum (43.16 per cent), fabricated metal (39.28 per cent), and recyling

contd. on page no.28

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contd. from page no. 25

(36.80 per cent), and basic metals (34.31 per cent) industries. In ten out of 24 two-digit industry groups considered here the contract labour share was higher than 30 per cent. In six of them the share was lower than 20 per cent. It was lowest in textiles and printing.

Labour Flexibility Demands and the Contract Labour

The employers and others have decried the legal framework of the pre-reform period governing the labour market and the industrial relations system as being highly regulatory and costly and have made several demands for reforming it. Two issues have dominated the discussion and debate on labour reforms in India in the post-reform period, viz. the employment security provisions in the Industrial Disputes Act, 1947 (ID Act) and the restrictive provisions relating to the employment of contract labour in the Contract Labour (Regulation & Abolition) Act, 1970 (the Contract Labour Act). The arguments of the employers with regard to the reformoftheContractLabourActcanbesummarized as follows. Employers in India operate in a highly competitive globalized economic setting and hence require flexibility in their hiring systems and their ability to adjust their work force in response to the changing market conditions. As markets in some cases and at some periods are volatile, the firms should have the flexibility to employ worker for a fixed term and dispense with their services when not needed. Secondly, though not made explicit, the productivity gains from the employment of contract labour are likely to be more than those from the regular workers (who are rendered complacent thanks to employment security). This coupled with the labour cost reduction gain will lead to lower unit costs and hence enhanced competitiveness of the firms. Thirdly, the employers can maximize their efficiency by concentrating on their “core’ functions and outsource or contract out the “non- core” activities. Employers are against the “prohibition” clause of the Contract Labour Act

and do not mind strengthening the “regulatory” aspects of it. However, they are against the principle of “parity” in wages of regular and the contract workers and the institutional procedures requiring the principal employers to register and assume liability for the contract workers.

The trade unions argue that the contract labour system is exploitative as these workers work for long years, are paid low wages, in many cases denied social security and even the minimum wages and work in unfavourable conditions. The SNCL (2002:p.365) observed that the Commission frequently listened to the submissions that the contractors in many instances abscond without depositing either their contributions or the workers’ contributions they collected from the workers; it is a double-fraud. There seems to be a number of logistical issues with regard to securing EPF code numbers by the contractors (like the EPF code numbers taken by the contractors, the workers covered by them, the use of principal employer’s sub-code numbers and so on), which is a subject of research and investigation in its own right (see Krishna Murthy 2010). The field survey by Maiti (2009) of 50 units each in Gujarat and West Bengal showed that while none of the contract workers (supplied by the contractors) in the units in Gujarat received social security benefits, a little more than half of them in West Bengal did so. Nearly two- thirds of the contract workers interviewed by Rajeev (2006) said that they were not able to retrieve their PF dues because of the poor survival rates of small time contractors who are often unregistered under the Contract Labour Act – the number of unregistered contractor agencies was found to be high in Karnataka (Rajeev 2006). The contractors employ a large number of workers and at the time of inspections or queries from the principal employers they show the challans (receipts) of payments made in case of some workers and covers up the issue and the former agencies are ill- equipped to probe deep into these logistical issues (see Krishna Murthy 2010). On the flip side, some workers do not prefer EPF and ESI deductions in view of the lower take home wages they get. The

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large scale and public sector establishments do not default on the legal claims of the contract workers, it is the small sized firms and contractors who do

(see Rajeev 2009; Shyam Sundar 2010).

The unions have largely focused on two major issues, viz. employment security via regularization of contract workers’ jobs and payment of minimum wages payable to the unskilled regular workers comparable to the contract workers. They demand suitable changes in the law to regularize jobs upon abolition, for universal application of the law (removing the 20 workers’ threshold), for inserting suitable provision in the Act the principle of “same wages for same work” (which is presently in the Rules under the Act), and denial of license for employment of contract labour in “perennial” jobs and so on (see Shyam Sundar, forthcoming for more details on unions’ and employers’ demands).

The government has been deliberating on these issues for more than a decade. It has made several attempts to introduce reforms and also held dialogue with the social partners through tripartite institutions. We will briefly review them.

Contract Labour Law Reforms : Proposed and Implemented

In March 2000, the Group of Ministers (GoM) constituted by the National Democratic Alliance (NDA) government at the Centre recommended that certain activities which constitute “support services” of an establishment should be excluded from being considered for prohibition clause of the Contract Labour Act (under Section 10). This was the beginning of the distinction between two sets of activities. Over the course of the debate the policy makers have introduced the terms “core and non-core” activities to extend freedom to the employers to use freely contract labour in the latter and not in the former. This is a policy compromise that seeks to satisfy the employers by some flexibility in terms of freedom to use contract labour in the “non-core” activities and take care of trade unions’ opposition by restraining contract labour in the “core” activities. However, employers question this very distinction and the credibility of

an administrative exercise (see Sabharwal 2008). The trade unions counter this by complaining that contract workers are hired for performing the so- called “non-core” activities like gardening but in reality are employed in the “core” activities on the shop floor.

The core and non-core terms entered the debate and discourse on contract labour as the employers began to justify the contract labour system arguing that they in the era of globalization cannot afford to “fritter away” their energies in taking care of the functions which are not core their business and need to concentrate on the “core” activities (SNCL 2002: p.364). The Second National Commission on Labour (2002) endorsing these arguments recommended that “contract labour shall not be engaged for core production/services activities.” (Ibid.).

The government of Maharashtra has attempted in vain since 2000 to introduce reforms relating to contract labour. For example, in 2000, it proposed to apply the Contract Labour Act to establishments employing 50 or more workers in the urban areas and those employing more than 99 workers in the backward areas as against the present threshold of a universal 20 workers (see the notification issued by the Directorate of Industries in 2000,

maharashtra.htm, for full details). In its Industrial Policy 2001, it proposed to exclude certain activities like cleaning, loading and unloading, canteen, mail distribution, gardening from the coverage of the Act; it also sought to exempt the 100 percent export oriented units from the coverage of the Act (Shyam Sundar 2008). Both these reform measures could not be enacted owing to strident and united opposition from trade unions (cutting across party affiliations) and the coalition political parties (see Shyam Sundar 2008, for further details).

However, the government successfully amended the Contract Labour Act (sections 1 and 10) to deem certain ancillary activities - like canteen, gardening, cleaning, security, courier service, transport of raw material and finished products, or loading

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and unloading of goods – performed within the premises of a factory of the establishment in SEZs and the work in the factories and establishments which are declared 100 per cent export units by the government as “temporary and intermittent work”. This amendment thus takes these activities out of the purview of the Contract Act. The justification provided by the government is that these activities “may be performed with more efficiency and at lesser cost on contract basis rather than employing workers on a permanent basis”. Further, these “helping” provisions are expected to aid the export- oriented industries to face tough competition (Bill No. XLI of 2005 printed in Labour Digest, June 2005, pp.248-9).

Taking cues from the proposals of the bodies appointed by the central government, the Andhra Pradesh government introduced the “core and non-core activities distinction” into the law by an amendment in 2003. According to this amending Act, core activity of an establishment means “any activity for which the establishment is set up and includes any activity which is essential or necessary to the core activity …”. By excluding certain activities from the core activity definition, it defines the non-core activities. The latter include sanitation works, including sweeping, cleaning, dusting, and collection and disposal of waste. watch and ward services, canteen and catering services, loading and unloading activities, courier services (as support services to the establishment), civil and other constructional services, gardening and maintenance of lawns, etc., housekeeping and laundry services, transport services and so on. The law allows the use of contract labour even in core activities “under certain circumstances” (Reddy 2008). The employers in other states demand the “A.P. model” of contract labour law reform in their states.

The government of Maharashtra has recently introduced a Bill to amend the Payment of Wages Act, 1936 to require wage payments to be made through bank instruments like cheque or through bank accounts in order to formalize wage payments and to minimize the fraudulent practices

by contractors and the Bill has been sent for the assent of the President [The Payment of Wages and the Minimum Wages (Maharashtra Amendment) Bill, 2010)]. The recent labour policy note put

up on its website pdf/Draft_Labour_Policy.pdf) talks of a dialogue

process to introduce reforms that would satisfy both the social partners. Curiously, it argues that employers must pay a “premium” (or “loading”) to achieve flexibility in contract labour hiring and outcompete low cost operators. It aims to afford “flexibility” to the employers and assure “rights” to workers, a kind of flexi-curity which would seek to combine fairness and flexibility. The details of “rights” and “fairness” are yet to be spelt out, while the “flexibility” measures are straight forward. The issues involving in calculating the “loading”, defining the “basket of labour rights” for the contract workers and determining the “extent” of flexibility need to be sorted out. Is it going to be a state wide social dialogue agreement as in Europe which would be honoured by local level firms and unions? Given the poor opinion of social dialogue in the country and the state by the social actors, these issues pose daunting challenges though the present dispensation in the Labour Department is keen for a solution to this vexed issue. I highlight this issue because social dialogue at the centre has failed to evolve a solution on these issues.








Theissuessurroundingthecontractlabourhavebeen discussed in both tripartite and federal consultative forums. Pursuant to the recommendation of the Working Group [which was constituted in the 42nd Indian Labour Conference (ILC) in February 2009], a tripartite group was constituted by the government in June 2009 to suggest suitable amendments to the Act and suitable measures to ensure social protection to contract workers. These issues also figured in the State Labour Ministers’ Conference held in January 2010. The tripartite group could not reach a consensus and its report was inconclusive. The matter once again featured

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in the 43rd ILC held in November 2010 and it reached consensus on “less important issues” like strengthening the enforcement of the Act, formal mechanisms of payment of wages, compulsory constitution of the Advisory Boards in every state and on “the core controversial issues” like regularization and same wages for same work, etc. the groups for employers and the workers stuck to their positions. Various writers and the

social actors, especially the employers often make

a mention of China whenever labour flexibility

issues are discussed in India. Hence, it would be instructive to briefly discuss the position in China here.

The Position in China

China made a progressive but definite transition from administrative determination of job and wages during the planned economy to market economy since the late 1970s. This constituted a move away from dominance of SOEs, rice bowl system of employment to introduction of labour contracts for a fixed term since 1986. The Labour Law 1994 institutionalized the labour contract system by treating the fixed term contract as the new standard form. It stipulated that those workers with a ten year contractual relationship with the employer can request for a non-fixed term employment. The 1994 Law had more provisions on termination of contract rather than forming one. Flexible employment in China has different connotations from that in other countries. One, it has to be understood that in China the standard form of employment meant the fixed term contract

unlike elsewhere standard contracts mean full time, open-ended contracts (see Xu 2009). Secondly, a large pool of rural migrant workers constitutes “supply” of flexible workers. Three, the reform

of SOEs in China led to massive lay offs (off post

workers) - some 45 million workers (four-fifths of them from state sector) were laid off during 1995- 2002 (Tao, 2006:p.511). These workers were mostly picked up labour dispatch companies for flexible work. The reform of state administration (non-

profit and non-production institutions like research and educational institutions) and the reduction in the authorized staff in them led to growth of employment of dispatch workers (Xu 2009). Flexible employment was one of the “incentives” offered to attract foreign direct investment (FDI).

The abuses of the employers like non-issuance of written labour contracts, wage arrears, long cycles of renewals of short term contracts and so on and the massive lay offs (and unemployment led to wide spread labour and even social unrest in the 2000s which led to the passing of the Labour Contract Law (LCL) in 2007 in pursuit of “social harmony” (see Shyam Sundar 2009).

The LCL contemplates five types of employment contracts, viz. fixed term contract (whose termination date is pre-determined), open ended contract (no stipulation of ending date of the contract by both the parties), task-oriented contract (the contract ends as and when the job ends), part time employment, and seconded (dispatch work) employment. It stipulates that open ended contracts should be awarded to the workers with 10 years of continuous employment or ten years of employment and within ten years of retirement with the employer (who adopts the employment contract system newly) or upon second renewal of fixed term contract or not given a written contract within one year of service. For the first time, the law provides for severance pay for termination of fixed term contract, though not for that of the dispatch worker. The LCL recognized four types of employment contracts, viz. The LCL sought to undo many of the wrongdoings created by the earlier legal and institutional framework. It also dealt with temporary work agencies which interest here.

It is interesting to note that the original draft of the LCL stipulated that when a dispatched worker worked for one year with the client company for one year and if the corporate client wishes to make use of her services further then that worker will become the employee of the client company and the employment relationship between the dispatch

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worker and the dispatch agency will be terminated. In Indian parlance, the contract worker will be regularized as a worker of the principal employer. However, this provision was dropped owing to the opposition of the temporary staff companies in China (Xu 2009).

The main features of the LCL with respect to staffing employment are:


The staffing firm with at least RMB 500, 000 should be registered under the Company Law and it is the legal employer of the seconded employees.


It should issue written employment contract on

a fixed term basis whose tenure should be at

least two years.


The seconded employees should generally be used for “temporary, auxiliary or substitutable positions” (but these are not defined).


They shall have the right to receive “equal pay for equal work” and also be paid at least statutory minimum wage as compensation during the period of “no work”.


They will have the right o join unions of their staffing firm or those at the user enterprise.


The user enterprise should implement all relevant labour standards, provide the workers with training necessary for their job positions, pay overtime pay and performance bonuses, etc.

While “hard” labour reform issues like removal of Chapter V-B from the Industrial Disputes Act, 1947 to afford flexibility in firing workers and closing down establishments without prior government permission and flexibility in hiring of contract workers defy solutions both at the national level and in most states, social dialogue seems to be the only institutional action that could lead to some socially and economically optimal outcomes. The optimism may be misplaced give its poor track record especially in recent past: but is there any other alternative in a democracy?


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