Hiring On Contract - Legal Implecations For Proprietorship Firm

Dear Seniors,

I need your suggestions for the following situation:

I am working as a consultant in a start-up company. Due to some financial restrictions, we have to cut down on costs. I would like to suggest to my employer that we transition to contract-to-hire in the future and convert the existing on-role employees to off-role/contractual positions. The company is currently a proprietorship, but the employer is planning to convert it to a private limited company within the next 6-8 months.

I would like to know if we can shift all employees from on-role to off-role positions at once or if it should be done selectively. Are there any legal implications for such actions? Additionally, when the company becomes a private limited firm, can we hire contractual employees (only on a contract-to-hire basis)?

An early response from you would be appreciated as I need to present my suggestions by Monday. Your insights will greatly assist me in presenting my ideas to management.

Dear Mr. Benarji,

To shift on-roll employees to off-roll and keep them on contract muster amounts to victimization on the part of the employer under the ID Act. If any existing employee resists or makes a complaint in any appropriate form, there is definitely a chance for them to win the case. Instead of doing so, you can hire freshers on a contract basis for a fixed term, such as one or two years. After observing their performance at the end of the given period, the management has the liberty to terminate their services if their performance is found to be unsatisfactory.

It is further noted that certain works cannot be carried out by engaging a contractor in a particular industry as per the provisions of the Contract Labor (R&A) Act. Moreover, there is not much difference between taking a person on the regular roll or the contract roll. Even contract employees are entitled to receive bonuses, PF, gratuity, etc., nowadays.

Regards

Dear Gunjan ji,
It seems to me that you need to first clear your mind as to what the term is consultant, on roll-off roll ( in your words role), contract to hire etc..
My question is to you, how you will cut down your cost by shifting the employees from regular employment to fix term contractual employment? In fix term contractual employment also you need to incur same cost towards salary, leave salary, bonus, social securities such as PF / ESI / gratuity etc.
Only difference between regular employment and fix term contractual employment is, fixed term contractual employment is excluded by ‘retrenchment’. Del. HC 1131.
Mr. NVRao amply answered you.

Dear Gunjan,

The other two learned members have raised valid points. Putting on-roll employees to the contractors would mean additional payment of service charge + service tax to the contractor. Now, how will you offset this additional expenditure? By cutting down the salaries of the staff? Will it be acceptable to the staff?

My next point is from a management science point of view. Nobody would like to work on contracts. The status of a contract employee is accepted willy-nilly. It appears that you feel that the employees are at your disposal; therefore, there will be a smooth transition from on-roll to the contractor's role. But then there is something called motivation as well. Will the motivation level remain the same after this transition? If the motivation level goes down, what would be the cost? Have you measured that? What would be the cost of lost opportunities? Have you measured that? As a consultant, have you done a Cost-Benefit Analysis (CBA) on various parameters?

By the way, in your long post, you have not mentioned what kind of business yours is. What kind of consulting services do you provide? Out of the total spend, what percentage forms the total employee cost? How many employees are there, and what savings would accrue (in terms of value) by putting them on the contractor's role, and what would be the percentage savings? What about other expenditures? Is there no scope to reduce the expenditure at all?

There are so many questions. The silver lining of your post is that before giving this ungracious suggestion to your client, you have asked this question in the open forum, and you could get divergent views. Hope you take benefit of these.

Thanks,

Dinesh V Divekar

Dear Dinesh Ji,

Thank you so much for covering the aspect of contract labour. You have rightly said that putting on-roll employees to the contractors would mean additional payment of service charge + service tax to the contractor.

The aspect of contract labour is not covered by me since the queriest intended to convert the employees in "contract to hire" or in "contractual" employment, as I understood. Due to your post, the implication of contract labour is made clear to the HR fraternity who reads this post.

Dear Dinesh,

You have handled the matter excellently. I request your team to explore the feasibility of retrenching some unwanted, troublesome, or ill-behaved workers, subject to fulfilling statutory requirements.

S. Balasubramanian
M. 9941476005