Contract vs Permanent Roles: What Are the Real Pros and Cons for Companies?

Hi All, please advise on whether a company should keep employees on contract or permanent roles. What are the pros and cons?

Thanks

If the role is permanent, why should an employee be kept on temporary or fixed-term contract terms? In some cases, the position may not exist after the project is over, and in such a scenario, we can go for FTC employment. But positions in Accounts, Administration, HR, Sales, etc., are more or less required as long as the company's operations exist. Therefore, it is the role that will decide whether to offer FTC employment or regular employment.

In the case of regular employment, you can also set a probation period, say, 6 months or one year. If the employee is not contributing, you can decide whether to confirm them or not. This period is more than sufficient for you to evaluate an employee.

Managerial Roles and FTC Employment

For persons with managerial roles, it is fine if you do not offer FTC employment. This is due to various reasons. First, the employability of senior management persons may be high, and you may not be able to get resources if you offer FTC employment to them. Second, a manager can be asked to leave even if they are confirmed in service by giving whatever notice is stated in the appointment order. They may not challenge the management's decision because they will not have the protection of the Industrial Disputes Act. If the New Labor Code is enforced (please consider it as enforced), then FTC employees will be entitled to get gratuity if the contract is not renewed. If a manager is given FTC and their contract is not renewed, and they are asked to leave, you should provide them with gratuity for the period they worked with you. At the same time, if they are in regular roles and do not meet your expectations, you can ask them to leave by giving one or two months' notice as per the appointment order. They will remain with you during the notice period, complete the knowledge sharing or handover, and then get relieved. No compensation, no gratuity (provided the length of service is less than 5 years).

Non-Managerial Roles and FTC Employment

Similarly, an employee not having any managerial functions may be given FTC employment. FTC will be more flexible. Even if you have to pay gratuity for the service period, since it is legally allowed to terminate the contract on the expiry of the fixed term prefixed, you will not end up in troubles of retrenchment clauses of the ID Act (Industrial Relations Code - PROPOSED).

Both have pros and cons. The usual practice in organizations involves non-core activities (though perennial in nature) such as security, cleaners, gardeners, helpers, office boy, loading & unloading, etc., being contractual. On the other hand, for core activities such as operators, maintenance, QC, Sales, Purchase, HR, etc., permanent employees are preferred.

The above rule may vary randomly between organizations. It also depends on the type of business activities of the organizations.

The cost of engaging contractual employees is obviously less than that of permanent employees. My personal suggestion is to engage permanent employees wherever possible to increase ownership among the employees.

Regards, S K Bandyopadhyay

Dear Shweta-Masson,

This is an important decision that warrants careful deliberation, as it can have significant implications for a company's workforce, operational flexibility, and long-term stability.

Evaluating contract versus permanent employment

In evaluating the pros and cons of contract versus permanent employment, there are several critical factors to weigh. On the one hand, contract employees can provide organizations with greater agility to scale their workforce up or down in response to fluctuating business demands. This can be particularly advantageous in dynamic or cyclical industries, where the ability to rapidly adapt the size of the labor force is crucial. Additionally, contract workers may offer specialized expertise for short-term projects or initiatives, without the long-term commitment required for permanent hires.

Conversely, permanent employees can bring a sense of loyalty, continuity, and deep institutional knowledge to an organization. By investing in the professional development and long-term growth of a core team, companies can foster a stronger, more cohesive organizational culture and benefit from the accumulated experience and skills of their workforce. Permanent roles also tend to attract top talent who value job security and the opportunity for career progression within the firm.

Determining the optimal mix

Ultimately, the optimal mix of contract and permanent employees will depend on the unique characteristics and strategic objectives of your organization. Factors such as your industry, business model, growth trajectory, and competitive landscape should all inform this decision. It may be beneficial to conduct a thorough analysis of your current and projected staffing needs, as well as benchmarking against industry best practices, to determine the right balance that will enable your company to thrive in the long run.

Best regards,