Since the employer employee relationship is between the employee and the contractor, the contractor should give notice and follow the procedures for terminating his employees.
There are both merits and demerits associated with such arrangements. From the point of view of Principal employer with whom the employees actually work, he is freed from the day to day management of these employees, initiating disciplinary action against these employees etc. In case any employee engaged is found to be not following the expected standards he can just ask the contractor to replace him. On the other hand, had he been a direct employee the employer should follow a set of procedures, like issuing show cause notice, taking his reply and conducting domestic enquiry etc. There is a general feeling that contract labour donot indulge in strikes and similar kinds of protest and we can ensure proper production. The social security matters connected with the contract labour will be taken care of by the contractor and the Principal employer is free from such hassles.
The system has a few demerits also. From my understanding and experience, I have found that contract workers do not shoulder any responsibility which a direct employee shoulders. Therefore, the productivity of these employees would be lower. Though advocates of outsourcing system do not agree this, I strongly feel that the productivity of direct labour will be far more than that of indirect labour. Though contractor should take care of the social security coverage (like ESI, EPF etc) of contract workers, the Principal employer is ultimately responsible for the coverage. That means if the contractor fails to pay, minimum wages, PF, ESI etc, then the principal employer should pay it. Though the amount so paid shall be recovered from the contractor, many times this will not happen and the principal employer will have to spend his precious time before the Enforcement Officers.
From the point of view of employee, outsourcing system does not have any benefits. At the same time being in direct rolls of the company where he is working or for whom he is working would have much benefits also.
Madhu.T.K