Why Does the Contract Labour Act Set the Threshold at 20 Workers? Curious About the Reasoning

Dear HR team, as per the Contract Labour Act of 1970, under Sec. 1(4)(a), it defines that every establishment in which twenty or more workmen are employed or were employed on any day of the preceding twelve months is considered contract labour.

Question on Contract Labour Act Threshold

My question is, why is it specified as 20 or more? Why not 10, 30, or 50?

Thanks in advance.

Dear Colleague,

Overview of Key Labour Laws

We will have a quick look at the below provisions:

The Factories Act 1948

The Act is applicable to any factory using power and employing 10 or more workers. If not using power, it applies to factories employing 20 or more workers on any day of the preceding twelve months, where a manufacturing process is being carried on with the aid of power or is ordinarily so carried on.

The Employees State Insurance Act 1948

The ESI scheme is applicable to all factories and other establishments as defined in the Act with 10 or more persons employed. Beneficiaries whose monthly wage does not exceed Rs 21,000 are covered under the scheme.

The Employees Provident Fund and MP Act 1952

EPF registration is mandatory for all establishments, which is a factory engaged in any industry having 20 or more persons, and to any other establishment employing 20 or more persons or class of such establishments which the Central Government may specify by notification.

The Contract Labour Act, 1970

Under Sec. 1(4)(a), this Act applies to every establishment in which twenty or more workmen are employed or were employed on any day of the preceding twelve months as contract labour.

Broadly, the magic number 20 arises from the threshold number mentioned in the Factories Act 1948, where it is 20 or more workers without the aid of power. The Government, to not overburden itself and to focus on reasonably large factories while excluding tiny factories from the coverage of Labour Laws Provision, follows the magic number 20 for similar laws, including Contract Labour.

As you may be aware, in the proposed THE OCCUPATIONAL SAFETY, HEALTH AND WORKING CONDITIONS CODE, 2020, the threshold for Contract Workers is proposed to be increased to 50 workers or more.

Thank you,

Dr. P. Sivakumar
Dr. SIVAGLOBALHR
Tamil Nadu

Threshold Limit for Applicability of the Act

The threshold limit for the applicability of the Act is decided by looking at the minimum feasible number for the implementation of the Act. Labour legislations are welfare-oriented, and hence the avowed objective is to widen the coverage so that more people benefit. The decision on such numbers is made by the framers of the Act and is not justiciable.

Dear Ganesh,

The very question you have raised is one that always arises in the inquisitive mind of a person who gives serious study to labor laws and their applicability based on the number of people employed in certain types of industries and certain types of employment benefits, as mentioned by Dr. Sivakumar.

Practical difficulties in implementation

The primary reasons appear to me to be the practical difficulties due to:

1) The implementation of technical standards involving the safety and health of the people who are directly associated with the processes carried out therein and the environmental impact on the surroundings where such industries are located.

2) The nature of certain employment benefits like payment of bonus, gratuity, enrollment into social security schemes like provident fund, and insurance against injuries arising out of employment accidents, which require constant adherence to rules and regulations and upkeep of proper professional accounting, which might be very difficult for a small employer.

3) The number criterion could have been, as opined by Dr. Sivakumar, adopted from the Factories Act, which is the mother of all labor laws of the past two centuries. The reasons should be ease of compliance and effective enforcement.

Impact of labor laws on smaller establishments

This explanation may sound inadequate as there is the possibility of employees of other establishments being deprived of the rights and benefits available to the employees of large establishments. If we trace the general origin of laws, we will find it emanating from the customs and practices of orderly societies to regulate the conditions of living and cordial relationships. Therefore, the main purpose of the enactment of laws is to prevent possible mischief likely to be dictated by unscrupulous tendencies. The relationship of employment, i.e., master and servant, is not an exception. This relationship naturally turned out to be an agreement earlier specifying the mutual rights and obligations of the master and servant, slowly metamorphosing into what we call now a contract of employment. The advent of the industrial revolution and the emergence of joint-stock companies coupled with the trade union movement necessitated the passing of numerous labor laws pertaining to establishment-specific, employment condition-specific, and industrial relations-specific. The impacts of the IT revolution and LPG brought about a paradigm shift in the employment pattern, as a result of which we have new classes of employees like gig workers, platform workers, etc. However, you may note that labor laws governing certain basic and universal conditions of employment like working hours, leave benefits, minimum wages, tenure of employment, and redress of employment grievances do not rest on the number criterion for applicability.

Provisions for small employers

You should also note that a saving clause has been included in such number-based laws to ensure continued application even if the number of employees falls below the minimum later, and enabling provisions are there to reduce the number to extend the application. In technical labor like the Factories Act, 1948, there is a provision under section 85 to notify industries engaged in certain manufacturing processes as factories for certain purposes of the Act, even if they do not have the minimum threshold number of employees. There is no legal bar on a small employer to bestow the benefits of bonus, gratuity, etc., to his employees, and in fact, such things happen depending on their cordial relationship and customary practices as in the case of puja bonus to employees.

Therefore, the number of employees in an establishment as a requirement for the applicability of any particular labor law is based on the principles of technical feasibility, professional accounting system, the nature of the service conditions and employment benefits, and so on. That's why it is 10, 20, 50, 100, or 300, and even the number game comes into play in respect of certain conditions like layoff, retrenchment, etc., in laws which are not restricted by the number of employees principle.

Dear Ganesh,

Our senior members and colleagues have given their valued opinions on your query.

Understanding the Intent of Lawmakers

In my view, the lawmakers might have intended to provide the same and equal status and welfare measures to the workmen under a contractor as extended to workmen in a "Factory." Therefore, it might be thought that in any work where twenty or more workers are working, or were working on any day of the preceding twelve months without the aid of power, it is ordinarily considered a factory. This is because the CL(R&A) Act came much later, even after two decades of the Factories Act.

Current Challenges with the Act

It is unfortunate and regrettable that this Act has become paralyzed by the authority of execution and administration. At present, the sole objective seems to be to get manpower at a much lower cost. This can be witnessed in all factories by comparing the wages and facilities extended to both categories of workmen. The workmen under contractors are subjected to the structure of minimum wages, ranging between 300-500, which is their plight.