Transitioning Labor to Contractors: Is It Feasible and How to Navigate the Change?

Hi, I am working in Jaipur as an HR person in a manufacturing organization controlled by three brothers. The elder brother handles all the administrative activities, but after the partition between them, my organization will now be controlled by another brother. He wants to change all labor and assign all labor work to contractors. My question is, is this possible? If yes, what is the process for implementing this change? Please provide the correct solution for this situation.

Thanks,
Neeraj Saraswat

How many laborers are working?

It is not all that easy to lay off all the workers and employ laborers through a contractor. Legal formalities are to be observed. But what is the reason for wanting to lay off all workers?

Layoff Procedures Under the Factories Act

As per the Factories Act, if you want to lay off employees, you need to follow the formalities/process outlined below.

"During layoff days, workers who have been in continuous service for at least one year are entitled to be paid layoff compensation at 50% of the normal wages. However, no compensation shall be paid if the layoff is extended for a period beyond 45 days. For establishments employing 100 or more employees, prior permission from the government should be obtained before laying off employees."

For more details, please refer to Chapter V A & B of the Industrial Disputes Act.

Regards,
Roopesh S
[Phone Number Removed For Privacy Reasons]
ISO 27001:2013 Internal Auditor
HR & Management Representative

Dear Neeraj, You have sought legal opinion; however, have you considered the issue from a Management Science point of view? There is a difference between "Human" and "Physical" assets. While the latter, when changed, may give the same output, this need not be the case for the former. When you change the workers, they could carry along with them the knowledge assets developed over the years, like machine operations, resource optimization, etc. Until the newcomers settle in, your company could incur some losses due to a depletion in productivity. Will your owner be able to quantify those losses?

Furthermore, your company will have an increased wage bill owing to the service charge to the contractor plus service tax. Is this acceptable to the owner? Therefore, review your decision from a management science point of view and not necessarily from a legal point of view.

Thanks,

Dinesh Divekar

You have not given any details about your industry or the size of the organization. This makes it very difficult for anyone to give a definite answer to your question.

Legal Considerations for Contract Labor

There is actually no rule under the Factories Act or Contract Labour Law that specifies the percentage of contract labor allowed. However, the provisions of the law and the stance taken by the courts indicate that you cannot use contract labor for core manufacturing activities or any process that is incidental to the main purpose of your business. Therefore, employing one hundred percent contract labor would not be allowed under the law.

Challenges of Retrenching Staff

Another issue to consider is that retrenching your entire staff would be costly and could get you stuck in a long legal battle. The amount of retrenchment compensation required to be given under the law may make it unviable to switch to contract labor.

A more detailed explanation can only be provided by studying the complete circumstances and situation. You should get in touch with a good consultant who can help you find the correct answers.

Regards

Like the other members pointed out, please confirm the following aspects of the situation if you wish to have actionable suggestions or solutions:

1. What sector/industry do you work in?
2. What is the size of the workforce, including both permanent employees and contractors, as of today?
3. You mentioned, "he wants to change all labor and give all labor work to the contractor." Do you mean that all the existing employees, both permanent and contract, are to be replaced, or only those who are currently working on contract?
4. What are the reasons for making these changes? Please note that in such situations, there could be more undisclosed reasons than what is openly admitted.

If you are genuinely seeking realistic solutions or suggestions, kindly clarify the above points so that the members can respond.

@Dinesh—I agree with you regarding the "Human/Physical assets" aspect of the issue. However, please note that many factory owners, not to generalize, especially those who have come to lead them through legal or inherited rights, often do not or perhaps cannot comprehend such perspectives. Regardless of the advice given, they tend to believe that everything that has occurred thus far is inadequate, and they possess brilliant ideas to significantly improve operations. Such individuals usually learn the hard way when faced with consequences, often severe. Unfortunately, individuals like Neeraj Saraswat, coincidentally the HR, and even the operational staff are likely to bear the brunt of such situations.

Regards,
TS

Dear Neeraj, This is the usual affair in family businesses. The new captains often adopt a cavalier attitude in excess of enthusiasm when taking the reins of the organization. Our learned friends M/S Nathrao, Saswat, and Dinesh have rightly cautioned you about the potential ill-consequences, both legal and moral. Without knowing the constitution of the undertaking, the number of employees, etc., any opinion given would be generalized and not situation-specific.

Regards

Labor Laws and Business Management in India

Labor laws are specifically enshrined in our nation to ensure that labor is not treated like disposable commodities. Today, I became the boss and decided to change all staff. This is no way to run a business. India faces a problem when labor becomes too organized; then management is hamstrung in even routine decisions. But the pendulum swings to the other side when we dilute all laws to the extent that owners are masters of all they survey and can hire and fire at will, all in the name of ease of doing business.

We need to adopt a middle path where checks and balances are functional and not grease-based. Equally, the condition of unorganized labor in industries is backbreaking and suffers merciless exploitation. India is a long way from being an ideal welfare state and is dominated by greed and unregulated functioning.

Mr. Roopesh, please understand that the Factories Act does not have any provision on lay off. In this case, the Industrial Disputes Act shall be followed.

Mr. Neeraj,

We can do one thing in your case: if your labor is not on the company rolls, you can engage 2 or 3 contractors by dividing the work based on the nature of the job. Keep all the contract labor under these contractors.

Rambabu

After the partition, the business becomes a new entity. The owner can bring in changes as per the labor laws applicable.