Dear Mr.Vikram Singh,
Here are the answers for the questions you have raised.
1. What are the differences between contract labour and outsourcing? Which is better option and why?
The engagement of labour through a contractor / contractors for the accomplishment of certain works other than core ones in an organization can generally be termed as the system of contract labour, whereas, outsourcing refers to the practice of contracting out certain incidental or lean activities/services to outside agencies. Basically, both are in the nature of contractualisation of labor providing a better output at a reduced cost without compromising on the competitive working environment. In other words both are simple contractual arrangements between the de facto employer ie., the principal employer and the de jure employer ie., the contractor/service provider. But, difference between the system of contract labour and the system of outsourcing arises from the manner of their execution. In contract labour system, the ubiquity of actual practice would prove that the role of the contractor is normally limited to that of a supplier of the agreed number of contract workmen with necessary skill levels, ensuring their availability as and when required for the principal’s specified operations / services. Continuous supervision and control of the methods of work and the workmen are retained by the principal himself. In the case of outsourcing, it need not necessarily be so for in most cases the outsourced services are performed elsewhere under the direct supervision and control of the service provider. In contract labour system, engagement of contract labour is more or less a continuous operation as long as the services are required by the principal employer, whereas, in outsourcing, the arrangement is normally adhoc and intermittent depending upon the nature of the services outsourced. In contract labour system, the principal employer has got certain legal obligations such as ensuring payment of wages, gratuity, bonus, contributions to P.F. and ESI schemes, vicarious liability in respect of employment accidents to contract labour. In outsourcing, there are no such obligations on the part of the principal as the service provider himself is a separate legal entity. In contract labour system, the employment relationship between the principal employer and the contract labour still subsists in an indirect form by virtue of the place of work, concurrent closeness of supervision over the method of work and control of the contract workmen leaving hiring and firing and the existence of vicarious liability in respect of certain statutory compliances. However, in outsourcing, no employment relationship exists between the principal and the workforce of the service provider as long as the out-sourced services are generated from elsewhere, even though they are meant for the principal.
From the points of view of economy and control over performance, the contract labour system is a better one in respect of activities incidental to the core activities of the establishment. In terms of effective services and timely delivery, outsourcing is a better option for the principal is relieved of the responsibility of on- the job- supervision.
2. Is Contract labour Act applicable when jobs and services are outsourced?
Normally, as long as the outsourced jobs/services are performed elsewhere, the Contract Labour Act is not applicable. However, if they are performed in the premises of the establishment of the principal by the employees of the outsourcing agency, the Act will apply.
3. What are the non-perennial and non-permanent jobs which can be assigned to contract labour?
It is not possible to define non-perennial and non-permanent jobs with a mathematical precision. It is always relative or contextual to the trade, business, manufactory or core activity of the principal employer’s establishment. What is a core activity in a particular establishment may be an incidental one in another and vice-versa. For the sake of convenience, we can generalize that any distinct job whose performance requires only a short period of time is a non-perennial job and a job whose requirement is intermittent or only occasional is a non-permanent one.
4. Can we have permanent employees and contract labour working side by side on the same job?
Generally, no because such an arrangement, if followed regularly, would indicate that the contract is ruse or sham. How ever, occasional engagement of contract labor along with permanent employees on the same job to meet the contingency of sudden increase of volume of work in the core activity which needs to be accomplished in a specified time may be justified.
5. What is the best ratio between permanent and contract labour? Can we engage 100% contract labour?
The ratio between the core activity of the establishment and its non-core activities would be the determinant.
6. Can we have different wages and other terms for permanent employees and contract labour doing the same or similar job?
No; Pl. see Rule 25(2)(v)(a) of the Central Rules,1971. In this connection I would also furnish the extract of the relevant portion of the judgment of the h’ble Supreme Court in BHEL Workers’ Association, Hardwar v.Union of India [1985(1)SCC630] as hereunder:
“…..Contract labor is entitled to the same wages, holidays, hours of work
And conditions of service as are applicable to workmen directly employed
By the principal employer of the establishment on the same or similar
kind of work.”
7. Can we transfer casuals/temporaries on the rolls of contractor?
8. Application and implication of P.F., ESI, Bonus, Gratuity and other statutory benefits to contract labour, casuals etc. and how to ensure compliance?
The E.P.F Act,1952 takes the contract labor employed in the principal employer’s establishment into the sweep of its definition of the term ‘employee’ u/s 2(f). Provision has also been made for separate codes for contractors in the clarification issued by the EPFO.
The contract labor employed in factories and other establishments covered by the ESI Act,1948 are also employees under the Act as per section 2(9).The term ‘immediate employer’ defined u/s2(13) of the Act includes a contractor also.As per S.40 of the Act, the principal employer has to pay contributions in the first instance subject to the right of reimbursement.
Regarding payment of bonus under the P.B Act 1965 to contract labor, no mention in either statute.However, since the charges payable to the contractor would include all proportionate statutory dues to the contract labor for the entire period of contract, one can safely conclude that the principal employer should ensure bonus disbursement to the contract labor engaged for his establishment.
The liability of the principal employer for the payment of gratuity to the contract labor under the P.G Act1972 is also in the twilight as there are divergent views among different High Courts. For instance,in Cominco Binani Zinc Ltd. V.Pappachan[1989 LLR 123] the Kerala High Court held that neither the C.L.R.Act nor the P.G Act provide that the employees engaged thru the contractor would be entitled to gratuity from the principal employer and as such the principal employer would not be liable to pay gratuity to the contract labor.On the contrary,the Madras High Court has held in Madras Fertilizers Ltd.v. C.A under the P.G Act [2003 LLR 244] that the principal employer can be directed to pay gratuity to his contract labor subject to reimbursement by way of recovery from the contractor. I would request others to throw more light on this!
9. How to ensure submission of PF and ESI returns by the contractor?
Make a specific clause in the agreement that the contractor will submit the periodical returns to the PF and ESI authorities within the stipulated dates and furnish a certificate to that effect along with copies of challan for remittance accompanying his monthly bills for payment.
10. How to get a new PF code number from PF authorities?
Learned members well versed in EPF procedures may answer please.
11. Security, Housekeeping, Drivers, Canteen, Horticulture etc. on
contract/voucher payment. Sustainability? Is there any Case laws?
The question is a little bit hazy.
If it is pertaining to employment of such personnel through contractors, the answer is ‘yes’ in so far as such jobs are incidental and not prohibited by a notification u/s 10 of the CLRA Act. However,if there is a statutory obligation on the employer to provide certain services, the labor employed therein, though engaged through contractors, will become the employees of the principal employer ( eg., contract labor employed in a canteen of a factory of 250 or more workmen)-----Steel Authority of India Ltd., v National Union Water Front Workers [2001 LLR 961]
If it is pertaining to “engagement of people on some incidental works” in order to avoid the intricacies of their regular employment, the emphatic answer will be ‘No’. Payment by voucher or other means or its periodicity are just mere modes. Mode of payment cannot determine or alter the status of employment. Even if watering the gardens in and around the premises of the establishment requires just one hour each in the morning and evening every day and the gardener does it on part-time basis regularly, he is an employee.
12. Liability of principal employer for injury, illness, disability, death etc.
Section 12(1) of the Employees Compensation Act,1923 provides that if an employee is employed by a contractor for the trade or business of the principal employer and in case he suffers any injury during the course of employment, the principal shall be liable to pay compensation.Sec12(2) entitles the principal employer to be indemnified by the contractor. The object of this provision is to safeguard the right to compensation when employer delegates work to another person for the contract between the principal and contractor cannot affect the right of the employees or their dependents to claim compensation from either of them at their option. However, the following 4 essential conditions have to be satisfied before invoking Sec12: (1) engagement of a contractor by the principal employer to execute the work relating to his trade or business. (2) the work is ordinarily a part of the trade or business of the principal (3) the accident saddling the liability for compensation should have occurred on, in or about the premises on which the principal has undertaken or usually undertakes to execute the work or which is in his control or management and (4) the occurrence of the accident while the employee was in the course of his employment in executing the work.
13. Can and should the employer have a say in the number and selection of contract labour?
Yes; since the contract is for the purpose of getting things effectively done within a specified span of time and the principal is well aware of the economics of the project to be contracted out, he has got a say in the minimum and maximum no. of contract labor likely to be employed. But, the selection of contract labor is only limited generally to that of specific skills required for the project and not in terms of pick and choose.
14. Who is to take disciplinary action against contract labour? Under what rules? Are standing orders applicable to contract labour?
The principal employer has no disciplinary control over the contract labor employed for his establishment.
15. Is it necessary and desirable to issue employment card/gate pass/identity card to contract labour? If so under whose authority/signature? Safeguards?
Even though employment card in form XIV is given to every contract worker, ID card signed by the contractor may be given as an additional safeguard.
16. Each contractor engaging less than 20 but together they engage more than 20. Will the provisions of registration, licensing and other statutory provisions apply?
Section 1(4) of the CLRA Act,1970 deals with the applicability of the Act to the establishment and the contractor in its following two limbs:
(a) to every establishment in which 20 or more workmen are employed or were employed on any day of the preceding 12 months as contract labor
(b) to every contractor who employs or who employed on any day of the preceding 12 months 20 or more workmen
So not withstanding the fact whether every contractor engaged has less than 20 workmen under him, the Act will apply to the establishment if the number of contract labor aggregates to 20 or more in the specified period of time and registration u/s 7 as principal employer is mandatory.
In so far as the individual contractors engaged by the principal employer are concerned, it is my personal view that they need not take licence u/s 12 for there is no change in the status of the workmen employed through them and themselves as ‘contract labor’ and ‘contractor’ defined respectively u/s 2(1) (b) and (c).
17. Statutory requirements and precautions in awarding contract for safeguarding managements interests.
(1) The management should be very clear about the nature of job/work/activity to be contracted out; it should not be an activity prohibited u/s 10 of the Act.
(2) If the work is of a composite nature involving various specialized componential sub-works, a single contractor having all the where-withal and infrastructure can be preferred. Even then it should be ascertained before hand whether he would be engaging sub-contractors for technical reasons.
(3) As for as possible, sub-contracting should be avoided; if inevitable, the number should be limited.
(4) A reasonable fore-cast should be made about the requirement of man-power for the entire work to be contracted out. Particularly, when different contractors are to be engaged, the probable no. of men likely to be employed by each should be determined.
(5) Apart from technical expertise, the experience of the contractor with the CLRA Act should be assessed for ensuring his statutory compliance during the execution of the contract.
(6) It should be ensured whether adequate insurance coverage under the Employees Compensation Act has been taken by every contractor engaged.
(7) While determining the cost of the contract work, minimum wages if any fixed for the employment, statutory contributions to EPFO and ESIC,bonus,insurance premium etc., should added to the labor cost.
18. If License not renewed but contractor continues to work – legal implications including permanency?
In Labourers Working in Salal Hydro-Project v.State of J&K [AIR 1984 SC 177] the Supreme Court said that if contractors undertake or execute any work through contract labor without obtaining a licence u/s 12(1), they would be guilty of a criminal offence punishable u/s 23 or 24. The same is the position when the licence obtained earlier is not renewed later u/s 13(3).But it should be noted that the Act does not provide for automatic absorption of contract labor either expressly or by necessary implication. Hence it is difficult to say that the provisions of the Act or the Rules made there under would lead to abolition of contract labor in the concerned establishment with a simultaneous absorption of the existing contract labor engaged through a defaulting contractor in the absence of provision for absorption or grant of permanency.
19. Contractor changing but contract labour not changing – implications, precautions required?
This would be an anomalous situation of rotating the same group of contract labor among various contractors in the same establishment one after another and is normally called as “umbrella contract.”Apart from being a clear vindication of the fact that the arrangement is sham or ruse, it can also be considered as an unfair labor practice on the part of the principal employer as enumerated at item No. 10 of part I of Schedule V of the Industrial Disputes Act,1947.
20. Contract terminated due to unsatisfactory performance of the contractor, contractor leaves – can contract labour claim permanency? What should employer do?
The engagement of a particular group of contract labor is coterminous with the contract between their contractor and the principal employer. When the contract itself is terminated for whatsoever reason, the exit of the contract labor is simultaneous too. In such an unfortunate situation, look-out for a next suitable contractor is the option.
21. Contract labour terminated through a settlement. Should principal employer be a party?
22. When contractor runs away leaving his workforce and supervisor, how to manage work and labour and who is to handle pending conciliation reference?
Stop engaging the abandoned contractor’s workforce and supervisor; settle their wages due, if pending and adjust it with the payments due to the contractor. Inform the conciliation officer about the developments and keep yourself off.
23. What to do if the contractor refuses to pay the labour?
Make direct payment and debit it to the contractor’s a/c.
24. What are the action required to be taken by the management after abolition of contract labour?
Don’t engage any more contract labor in the prohibited activity. Since absorption of the erstwhile contract labor is a separate issue depending upon so many factors like the conditions, if any stipulated in the orders, demand and willingness of the contract labor for absorption etc., wait and decide accordingly.
25. Can management challenge the decision of appropriate Govt. regarding abolition of jobs?
Yes, if there are valid grounds.
26. Should contractor and contract labour be rotated? Why? How often?
27. How to reduce number of contract labour?
The engagement of multi-skilled regular workmen in sufficient numbers on jobs of perennial and intermittent nature would help reduce the number of contract labor.
28. Contract labour demanding permanency – How to handle?
Normally contract labour cannot stake a claim for permanency against the principal employer. However, in the case of the alleged contract is said to be sham or a camouflage, they can raise a dispute under sec 2(k) of the Industrial Disputes Act, 1947 for the remedy of absorption as regular employees of the principal employer.
29. Contract labour demanding similar benefits as permanent employees. Is the claim legally valid?
Yes, if they are engaged in similar or same jobs as the permanent employees.
30. Is Pension Scheme also applicable to contract labour?
31. Is Minimum Wages Act applicable to contract labour?
32. What is the liability of Principal Employer in the case of sub-contracting?
Since sub-contractor is also a contractor, no change in the liability of principal employer vis-à-vis sub-contractor.
33. What are the implications of Supreme Court Judgment in the SAIL case reversing earlier Air India Judgment?
Let’s first have a brief look at the principles emerging out of the judgment in Air India Statutory Corporation v. United Labor Union & Others [ 1997(I) L.L.N.75 ]:
(1) Since the public law interpretation is the basic tool of interpretation in that behalf relegating common law principles to purely private law field, the term “appropriate government” occurring in Sec 2(1)(a) of the CLRA Act should be interpreted so as to ascertain whether an establishment is an instrumentality or agency of the State not merely with reference to its constitution, pervasive control exercised by the State over it, but, with reference to its activities complying with the basic law requirements of Art.14 of the Constitution. Hence, for the Air India Statutory Corporation, the appropriate government is the Central Govt from the inception of the CLRA Act.
(2) Since the notification prohibiting employment of contract labor from December 9, 1976 for sweeping, cleaning, dusting and watching of buildings owned or occupied by the establishments in respect of which the appropriate govt. under the said Act is the Central Govt. was in exercise of its power as appropriate Government after consultation with the Central Advisory Board is valid in law.
(3) In tune with the Directive Principles of State Policy, on abolition of contract labor system from any establishment u/s 10 of the Act by the appropriate Government, the logical and legitimate consequence thereof, will be that the erstwhile regulated contract labor covered by the sweep of such abolition for the concerned activities would be entitled to be treated as direct employees of the employer from the date of abolition.
Now, the principles laid down by the Hon’ble Five-Judge Constitution Bench of the Supreme Court in Steel Authority of India Ltd and others v. National Union Water Front Workers and others [ 2001(4) L.L.N.135 ] on the same issues are:
(1) In the case of a Central Govt. company/undertaking, an instrumentality of the Govt., carrying on an industry, the criteria to determine whether the Central Govt. is the appropriate Govt within the meaning of the CLRA Act, is that the industry must be carried on by or under the authority of the Central Govt. AND NOT that the company/undertaking is an instrumentality or an agency of the Central Govt. for purposes of Art.12 of the Constitution; such an authority may be conferred either by a statute or by virtue of principal and agent or delegation of power and this fact to be ascertained on the facts and in the circumstances of each case.
(2) Since the impugned notification dated December 9, 1976 by the Central Govt. apart from being an omnibus notification devoid of compliance of sub-secs (2) of Sec 10, it is ex facie contrary to the postulates of Sec 10 of the Act. Besides that in as much as it is indicative of non-application of mind by the Central Govt., it can not be sustained.
(3) Beneficial legislation should be construed liberally in favor of class for whose benefit it is intended but that does not mean reading in provisions of enactment what legislature has not provided, whether expressly or by necessary implication, or substituting remedy or benefits provided by legislature. A combined reading of ss 2© and 2(i) of the CLRA Act and Se 2(s) of the Industrial Disputes Act,1947 would reveal that contract labor engagement by contractor does not create relationship of master and servant between principal employer and contract labor. Therefore, neither Se10 of the CLRA Act nor any other provision in the Act, whether expressly or by necessary implication, provides for automatic absorption of contract labourer on issuing a notification by appropriate Govt. under ss(1) of Se. 10, prohibiting employment of contract labourer, in any process, operation or other work in any establishment. Consequently, the principal employer cannot be required to order absorption of the contract labourer working in the concerned establishment.
IMPLICATIONS OF THE JUDGMENT
(1) The reasoning adopted for the determination of “appropriate government” in Air India case cannot be accepted. The appropriate govt. for the Central Undertaking would be those covered under sec 2(a) of the I.D Act, 1947.
(2) No automatic absorption of contract labor consequent abolition u/s 10.
(3) If a notification prohibiting contract labor in any process/job in any establishment is devoid of consideration of all the factors mentioned in ss(2) of Se.10, it is invalid.
(4) Since the over-ruling of Air India’s judgment is explicitly declared to be prospective, any direction issued by any industrial adjudicator/any court including High Court, for absorption of contract labor pursuant to the over-ruled judgment will hold good and the same should not be set aside, altered or modified in cases where such a direction has been given effect to and become final.
34. Implications and liabilities of temporary/casual/probationer employees/trainees? Is there any maximum duration?
The Schedule specifying matters to be provided in standing orders under the Industrial Employment ( Standing Orders ) Act,1946 deals with classification of workmen by means of examples. Therefore, depending upon the type of industry, nature of employment etc., workmen can be broadly classified into the following categories:
“ A workman engaged on a work of permanent nature which lasts throughout the year and who has also completed his probationary period, if any, not being engaged to fill in a temporary need of extra hands on permanent jobs, e.g., in leave vacancies.”[ Jaswant Sugar Mills Ltd. V. Badri Prasad-AIR 1967 SC 513 ]
One of the literal meanings of the term ‘probation’ is a fixed period of time during which a new entrant to a job is put on the job with simultaneous training or orientation and watched over to find out his/her suitability to be confirmed. So, a probationer is a provisional employee in the waiting for confirmation. The period of probation will be as fixed in the Standing Orders or Service Rules applicable. The period of probation of an employee may be extended by the employer if the rules so provide. Therefore, an employee can not get automatic confirmation on completion of the specified period of probation and there should be a specific written order by the employer. Similarly, keeping an employee as probationer indefinitely even after the expiry of the specified period may, in judicial review, lead to deemed completion of the probation period.
(3) Temporary workman:
The Model Standing Orders in Schedule I of the Industrial Employment ( Standing Orders ) Central Rules, 1946 defines that a temporary workman is a workman who has been engaged for work which is of an essentially temporary nature likely to be finished within a limited period. When a workman is engaged either for work of a temporary or casual nature or on a work of permanent nature to fill in a temporary need of extra hands, he is called a temporary workman. What is important here is the nature of his engagement and its regularity. In other words when a person is employed only whenever a suitable work is available, his nature of employment under the employer is considered to be purely temporary. Per contra, if the same person is regularly employed, that is to say without intermittent break, if any, he cannot be deemed as a temporary workman and deprived of the benefits of continuous service under the employer.
(4) Casual labor:
In casual labor also the prominent feature is the absence of regularity in employment due to several factors such as the nature of works to be done, the periodicity of the works etc., and casualization of certain works are resorted to in order to save costs.
A combined reading of the terms ‘apprentice’ and ‘apprenticeship training’ occurring in ss ( aa) and ( aaa ) of Se 2 of the Apprentices Act, 1961 respectively would mean that a person undergoing a course of training in any industry or establishment in pursuance of a contract of apprenticeship is an apprentice. The Central Model Standing Orders defines that apprentice is a learner who is paid an allowance during the period of his training whereas the TamilNadu Model Standing Orders defines that apprentice is one who is engaged in learning any skilled work provided that the period of such learning, shall not exceed one year for those with prescribed technical qualification and three years for others.
For the purposes of certain labor enactments viz., the Employees Compensation Act,1923, the Industrial Disputes Act,1947, the Factories Act,1948, the Employees State Insurance Act,1948, the Employees Provident Fund Act,1952,[ other than Act apprentices in the last two] apprentices are treated as workmen. The Payment Bonus Act,1965 and the Payment of Gratuity Act,1972 explicitly exclude apprentice from their respective definitions of the term “employee”.
35. What is the relevance of 180/240 days & what are the Implication of breaks?
Sec. 25B of the Industrial Disputes Act, 1947 defines continuous service of a workman under an employer. Simply put, if a workman’s service under an employer for a period is said to be continuous inclusive of interruptions on account of sickness or authorized leave or an accident or a legal strike or lock out, a cessation of work not due to any fault of the workman. When it is not possible, sec 25B introduces a legal fiction by way of providing deeming clauses under sub-sec 2 of sec 25B. Clause (a) of 25B(2) states how to determine continuous service of a workman for a period of one year; Clause (b) of sec 25B(2) states the case of a period of 6 months. The explanation provided thereunder specifies certain interruptions to be treated as non-interruptions for the purpose of computing the number of days on which a workman has actually worked. They are – 1) Lay-off days, 2) Days spent on leave with wages, 3) Days of absence due to temporary disablement arising out of an employment accident and 4) 12 weeks of maternity leave in case of female worker. For a period of one year, a workman should be deemed to be in continuous service under an employer if during the preceding 12 calendar months, he has worked for 190 days in case of employment below the ground in a mine and 240 days in any other case including the breaks/interruptions mentioned above.
I have tried to answer all the 35 questions to the best of my knowledge and experience. Corrections or improvements if any will be gratefully appreciated.
19th May 2013 From India, Salem