Reducing risks related to engaging contract labour

By Rashmi Pradeep, Cyril Amarchand Mangaldas
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With the changing economic scenario, Indian employers are looking for options that provide flexibility in engaging personnel, to cut operational costs, facilitate downsizing during an economic downturn and for various other reasons. Deploying contract labour to meet contingencies or for projects where a unique skill set is necessary gives employers such flexibility. This is also preferred from a human resources perspective, since the payroll obligations of contract labour are managed by the contractor. While there are clear benefits in engaging contract labour, it is important to also be aware of the risks.

Rashmi Pradeep
Rashmi Pradeep

The Contract Labour (Regulation and Abolition) Act, 1970 (CLRA), is the primary legislation governing contract labour. The CLRA regulates the working conditions of contract labour and aims to gradually abolish contract labour under certain circumstances.

When contract labour and regular workforce are employed in the same establishment there is often a disconnect between the two categories in terms of expectations pertaining to benefits and conditions of service that is inevitably more favourable to the regular workforce.

Consequently, prolonged deployment of contact labour often leads to their claiming regularization and/or an increase in wages and other benefits to be on par with regular employees. Such claims are usually based on the following grounds: (i) contract labour undertake the same work as (some) regular employees of the principal employer, but their wages are not on par (“same work claim”); (ii) the contract entered into between the principal employer and contractor is not genuine but a camouflage to evade laws and deprive contract labour of benefits (“sham claim”); (iii) a notification is issued under the CLRA abolishing the engagement of contract labour in the notified establishment for certain processes (“prohibition notification”).

On the same work claim, courts have held that the responsibility to pay the same wages to contract labour lies with the contractor and the CLRA does not require the principal employer to make good any difference in pay between employees and contract labour for the same type of work. On the sham claim, the Supreme Court has held that some control is bound to be exercised over contract labour and this will not by itself create a relationship of master and servant, but if the contract is found to be a ruse to evade compliance with law, the principal employer will be obliged to treat contract labour as employees. Courts have also held that the issuance of a prohibition notification will not give contract labour engaged in such processes the right to automatic absorption, but the contract labour should be given preference if the principal employer employs regular employees for the processes covered under the prohibition notification.

Apart from the issues highlighted above, there is also a risk that the government may proceed against the principal employer for certain defaults by the contractor. Principal employers are responsible to pay wages and provide certain facilities to the contract labour should the contractor default in doing so. The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, and the Employees’ State Insurance Act, 1948, also impose an obligation on the principal employer to make contributions on behalf of contract labour. While market practice is to contractually transfer the primary liability to make contributions to the contractor, government authorities may approach the principal employer in case of default.

In order to reduce some of these risks, principal employers may consider implementing the following best practices:

(1) Maintain distinction between regular employees and contract labour including by prescribing different uniforms, identification tags, policies, etc.

(2) Minimize management and supervision of contract labour and ensure they report to a contractor’s representative deputed to the premises of the principal employer.

(3) Do not take any actions which are ordinarily exercised by an employer, such as sanctioning leave, evaluating performance or initiating any disciplinary action against contract labour.

(4) Verify that the contractor has obtained necessary registrations under various social security laws.

(5) Include clauses in the agreement to ensure that: (a) no employer-employee relationship is created between the principal employer and the contractor/contract labour; (b) the contractor is required to replace contract labour; (c) supervision and control of the contract labour will always be with the contractor; (d) the contractor provides a list of services being rendered; and (e) the contractor undertakes to comply with applicable labour legislation.

Many of the risks associated with engaging contract labour may be mitigated by ensuring that proper agreements are entered into, defining clearly the rights and obligations of the principal employer and the contractor, and ensuring that practices by the principal employer do not vitiate the checks and balances that have been agreed to in the contract.

Cyril Amarchand Mangaldas is India’s largest full-service law firm. Rashmi Pradeep is a partner at the firm.

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