Contract Labour System in India

Contract labour has always been a contentious issue. It is considered to be a boon by management, as a threat by permanent worker and as a root cause for a lot of conflagration by industry experts. In order to surpass stringent labour regulations, the industrial sector in India is largely resorting to contract workers, who are governed by the “Contract Labour Regulation and Abolition Act (CLRA), 1970”.

The act has been in force for the past several years during which many changes have occurred in the industrial sector. With the introduction of economic reform process after liberalization in 1991, output and profitability have assumed even greater importance, encouraging employers to bypass or find loopholes in the laws enacted for the protection of the contract workers. Also the decisions by the Courts, in respect of this law, are now being used for the purposes contrary to the purpose for which the Act was enacted.

The paper shows the objective with which the Act was first introduced and analyses the judgement of various crucial cases to show how courts have deviated & contradicted themselves from the earlier principles laid down by them while interpreting the provisions of law. In this study efforts have been made to find out whether the purpose for which this law was enacted has been fulfilled.

The paper also investigates the impact of globalization & liberalization on the whole system of contract labour and state the reasons behind contemporary issues related to contract workers which has led to labour unrest like the one in Maruti’s Manesar plant in July, 2012. And finally, the paper suggests some changes which can be brought in the current system for its improvement and better functioning. INTRODUCTION

The objective of this paper is to critically analyse the effectiveness of the Act in doing justice to contract labours even after 42 years since its inception and to study the impact of various other factors like liberalization, globalization on the contract labour system. Contract Labour Regulation and Abolition Act (CLRA), 1970 was introduced with the objective of protecting the exploitation of contract labours by regulating their employment and introducing better conditions of work. Since the ratification of this act, the courts have repeatedly deviated from their earlier judgements. And this has defeated the very purpose of enacting the law.

The court in Best & Crompton case (1985) & in Food Corporation of India (1986) held that upon abolition of contract workers in the establishment, they would become workmen of principle employer. But, later in Dena Nath vs. National Fertilisers Ltd. (1992) court gave the judgement that abolition of contract labour doesn’t imply their absorption by the principal employer.

Court again contradicted and prospectively overruled its earlier judgement in Air India Statutory Corporation case (1997) & directed for absorption of contract labour which was again changed & overruled in Steel Authority of India Ltd. vs. National Union Waterfront Workers case (2001). These regular deviations have made the law confusing for the employers and haven’t been able to grant relief to the contract labour. With the introduction of liberalization in India, cutthroat competition & globalization made the use of contract workers a necessity in every establishment. In order to produce cheaper products & compete effectively in the market, organizations started using contract labour even in their core activities.

Employers also favoured contract workers as a means to achieve flexibility because they didn’t had to commit to permanent employees and the associated higher non-wage costs. So, gradually the number of contract workers increased in every sector. For example the percentage of contract workers in organized factory sector increased from 13% in 1993-94 to almost 30% in 2006-07. Also, organizations often paid them only the minimum wages whereas permanent employees enjoyed greater package and benefits. And this indeed became one of the major problems of labour unrest.

LITERATURE REVIEWReview of some of the past work along with in depth understanding of the act has been done to have a comprehensive approach towards the research topic. Also, similar studies, articles & other publications have also been studied to have a holistic approach towards the subject matter.

1. Contract Labour Regulation and Abolition Act, 1970:In India, contract labour is protected by the Contract Labour Regulation and Abolition Act, 1970. A contract labour is defined as the one who is hired in connection with the work of an establishment by a principal employer through a contractor. While contractor is the supplier of contract labour for the organisation, it is principal employer who responsible for the control of the establishment. This act applies to every establishment in which 20 or more workmen are employed as contract labour and also to every contractor who employs 20 or more workmen. Contract workers are to be paid atleast the minimum wages as per the minimum wage act.

Certain provisions such as safe drinking water, canteen & first aid facilities, social security benefits such as PF etc. have been made mandatory for the health and welfare of the contract workers. It is the primary responsibility of the contractor to provide all facilities to the workers as laid down by the Act. However, if the contractor fails to pay wages or provide other facilities, it becomes the liability of the principal employer to provide the same.

Apart from the regulatory measures, the Act provides government the power to prohibit employment of contract labour in any process, operation or any other work of an establishment. Such restrictions are often decided on the basis of whether the work is perennial in and whether the work is being done ordinarily through regular workmen in that establishment or a similar establishment.

Though the Act lays rules as to how the contractual employment should be maintained, the presence of two separate management systems, i.e., the contractor and the principal employer, often makes the employer-employee relationship blurred. Consequently, contract workers often do not get their due. Also, one of the important sources of controversy is whether contract labour can be used in the core activities of an establishment together with the regular employees. Core activities are defined in terms of what a company had declared as its main activities at the time of registration.

Several litigations have arisen because of the use of contract labour in the so called “core activity” and number of notifications have been issued prohibiting the companies to employ contract labour for some specified work. At present, an establishment is not prohibited, in general, to employ contract workers for the core activities. But government has the power to prohibit use of contract labour in any activity of the establishment. 2. Contract Labour Act in India – A Pragmatic View, (research paper) by Meenakshi Rajeev (2009): The following were the main highlights of the research paper: *

The research reveals that many of the statutory obligations made under the Act which were laid down to protect the contract labours are not being followed in practice. * Among the kinds of employment that have been created in the economy to circumvent labour laws, contract labour is becoming one of the prominent forms. * There are number of unlicensed contractors who deduct P.F. contribution from the contract workers but never deposit it in the P.F. office * Research showed that some of the companies maintained more than one register, one for the labour inspector and another for itself.

3. Downsizing Versus Contract Labour System, Productivity. Vol. 39 (1), April-June by E.M. Rao (1998): Highlights of the paper are: * Cutting of jobs post liberalization via Voluntary Retirement Scheme has led to continuous skill drain leading to poor productivity which has forced employer to use contract labours for skilled jobs. * In most cases, contractors are de facto employees of principal employer, operating as contractor & claiming another legal entity just for the name sake. *

Regulations in the law makes retrenchment of permanent employees practically impossible * Although the Act is placed on the statute book with all benevolent intentions, the legislature has not provided due relief to the concerned workmen

4. Study Report by Tata Institute of Social Sciences and Navjeevan Samiti on ‘Wages and Work Conditions of Contractual Conservancy Workers’ (April, 2008): The following were the main highlights of the report:

* Conservancy work is perennial in nature and so contract labour should not be employed for performing the same. * Where contract workers are engaged alongside the permanent workers in the same task, the issue of ‘Equal Pay for Equal Work’ emerges and need to be addressed. * Working conditions are very poor; compounded by the fact that core work itself is hazardous to heath. * Contract workers are mostly not provided any kind of safety gears.

OBJECTIVEThe basic objective is to study the Contract Labour System of India over the years analysing whether it has been able to fulfil the purpose for which the Act was enacted. The major points of the study are: * To review the various history of case judgements related to the act and to highlight the implications of the same on contract labours & other stake holders * To find out whether the purpose for which the Contract Labour Regulation & Abolition Act, 1970 was enacted has been fulfilled * To study the impact of liberalization & globalization on the system of contract labour * To review the reasons behind contemporary issues related to contract labour * And finally, to see what changes can be brought in the current system for its improvement through recommendations

METHODOLOGYSeveral authors (for example Carley, 1993; Woodrum, 1984) have affirmed the belief that content analysis is promising for rigorous exploration of many important issues of interest related to management. In this paper study has been made by using data from various sources and analysing the same.

Various secondary sources of information & data available has been used – history of cases & their judgements by courts and data related to contract labour market as published by ILO, Labour Bureau etc. For analysing the impact of liberalization on contract labour system, data pertaining to contract workers, their wages & other industrial data has been taken.

Information has been collected from journals, websites, books, research publications which has been suitably cited in references. Also, the views, feedback & information have been collected from industry experts who have practiced the system of contract labours for many years.

CONTRACT LABOUR SYSTEM – OVER THE YEARSPre-legislation Judicial measures:It was as early as 1931 when Royal Commission on Labour recommended the abolition of contract labour system who were then mainly engaged in textile & mining industries.

Then, in 1940 Bombay Textile Labour Enquiry Committee observed: “If the management of the mills does not take the responsibility for contract labour, then there is every possibility of then being sweated and exploited by the contractors,” and recommended abolition of the system. With the adoption of ‘Welfare State’ and ‘Socialism’, the Government initiated certain measures to improve the working conditions of contract labour. Importantly, the definition of ‘worker’ in the Factories Act, 1948; Plantation Labour Act, 1951; and Mines Act, 1952, was enlarged to include contract labours, so that the beneficial aspects of law would apply to them. It was in 1960 in the case of Standard Vacuum Refinery Company Private Limited vs. Their Workmen that judicial system woke up to the plight of contract workers.

The Supreme Court observed “so far as the work concerned is incidental to the manufacturing process and is necessary for it and of a nature which should be done every day, such work is generally done by workmen in the regular payroll of the employer and there should be no difficulty in having regular workmen for this kind of work”. But surprisingly, the court didn’t give any relief to contract workers regarding regularization in the establishment. Pursuant thereto a Bill was introduced in Lok Sabha in 1967 for the regulation and abolition of employment of contact labour in the establishments.

The said bill aimed at abolition of contract labour in certain conditions which were to be laid down by the government and at regulating the service conditions of contract labour where ever abolition is not possible. And, thus Contract Labour Regulation & Abolition (CLRA) Act was enacted in 1970.

Analysis of Landmark Judgements by Court: Post Enactment of the CLRA

CLRA Act was framed to regulate the working conditions of the contract labour and in extreme cases abolish contact labour in certain activities of the establishment. And, the Supreme Court while adjudicating in the Standard Vacuum Refining Company in 1960 corroborated this point. “The Act seeks to regulate the employment of contract labour in certain establishments and to provide for its abolition under certain circumstances.” It was also stated that the judiciary does not have constitutional power to abolish contract workers in an establishment or for that matter any particular activity. It was the completely up to the appropriate government to look into such matter.

Constitutional Validity of the Act:1. In Gammon India Ltd v Union of India (1974) the petitioner had challenged the constitutional validity and practicality of the act. The Supreme Court looking into the case upheld the constitution validity of the CLRA Act and observed that: “The Act was passed to prevent the exploitation of contract labour and also to introduce better conditions of work. The underlying policy of the Act is to abolish contract labour wherever possible and practicable and where it cannot be abolished altogether the policy of the Act is that the working conditions of the contract labour should be so regulated as to ensure payment of wages and provision of essential amenities.

Section 10 of the Act deals with abolition while the rest of the Act deals mainly with the regulation. The dominant idea of section 10 of the act is to find out whether contract labour is necessary for the industry, trade, business, manufacture or occupation, which is carried on in the establishment.”

On Abolition of Contract Labour:

2. Dena Nath v. National Fertilisers Ltd. (1992), the issue was non-compliance of section 7 and section 12 of CLRA Act by the principal employer and contractor and whether due to non-compliance, the employees of the contractor are deemed to be the employees of the principal employer. The two-judge Bench of the Supreme Court held that no such conclusion could be drawn, and that the High Court, in exercise of its power under Art, 226, had no power to direct absorption of the contract labour as the direct employees of the principal employer. It was further held that the only consequence of such non-compliance was exposure to prosecution.

The employers heaved a sigh of relief as a consequence of this decision, which expressly overruled all earlier decisions, to the contrary, rendered by various High Courts. 3. In Gujarat Electricity Board vs. Hind Mazdoor Sabha and others (1995) the Apex court expressed its dismay over the fact that even the public sector undertakings are indulging in unfair labour practices like engaging contract labour in activities where permanent labour could have been employed. It also stated “The economic growth is not to be measured only in terms of production and profits. It has to be gauged primarily in terms of employment and earnings of the people.”

4. While delivering a verdict in the Air India Statutory Corporation vs. United Labour Union Case (1997), Supreme Court overruled its judgement on Dena Nath v. National Fertilisers Ltd. (1992) case & held that in case of abolition of contract workers in an establishment, it becomes the liability of the principal employer to absorb them. The Supreme Court observed that: “The award proceedings as suggested in Gujarat Electricity Board case (supra) are beset with several incongruities and obstacles in the way of the contract labour for immediate absorption. Since the contract labour gets into the service of the principal employer, the union of the existing employees may not espouse their cause for reference under S. 10 of the I.D. Act.

The workmen, on abolition of contract labour system, have no right to seek reference under S.10 of the I.D. Act. Moreover, the workmen immediately are kept out of job to endlessly keep waiting for award and thereafter resulting in further litigation and delay in enforcement. The management would always keep them at bay for absorption. It would be difficult for them to work out their right. Moreover, it is a tardy and time-consuming process and years would roll by. Without wages, they cannot keep fighting the litigation endlessly. The right and remedy would be a teasing illusion and would be rendered otiose and practically compelling the workmen at the mercy of the principal employer”

Prospective Overruling

5. In Steel Authority of India Ltd. vs. National Union Waterfront Workers (2001), the Supreme Court overruled prospectively the Air India case and took a view which was diametrically opposite to that in the Air India Case. The court in this case observed that neither Section 10 of CLRA Act nor any other provision in the act, whether expressly or by necessary implication provide for automatic absorption of contract labour in case of abolition of contract labour by appropriate government in any establishment. So the principal employer cannot be ordered to absorb the contract labour working in the establishment concerned.

In case if the contract is found to be genuine and prohibition notification under section 10(1) of the CLRA Act and the principal employer intends to employ regular workmen he shall give preference to the erstwhile contract labourer, if otherwise found suitable and, if necessary, by relaxing the condition as to maximum age appropriately taking into consideration the age of the workers at the time of their initial employment by the contractor and also relaxing the condition as to academic qualifications other than technical qualifications.

Sham and Camouflage

6. In International Airport Authority of India v. International Air Cargo Workers’ Union (2009) the supreme court held that where there is no abolition of contract labour under section 10 of the CLRA Act, but the Contract labour contends that the contract between the principal employer and the contractor is a sham and camouflage, the remedy is purely under the Industrial Disputes Act, 1947. The industrial Adjudicator looking into the case can grant the relief sought if it finds that the relation between the contractor and the principal employer is indeed a sham and merely is a camouflage so as to deny employee benefits to the employees and that there is in fact a direct employment, by applying tests like: a. Who pays the salary;

b. Who has the power to remove/dismiss from the service or initiate disciplinary action; c. Who can tell the employees the way in which the work need should be done, in short who has the direction and control over the employees.

Conclusion of the above study:It is evident from these verdicts that the courts have been delivering different judgements at different times. This has created a lot of ambiguities for both the employers as well as the Contract Labour. And these judgements have left some unanswered questions, which are extremely vital to the society. Most importantly, on abolishment of contract labour from a particular establishment, what happens to the contract labour who loses his earning opportunity. The Act in itself does not provide any clear indication as to what needs to be done with the Contract labour in such a case and this has been one of the reasons that the courts have been giving different interpretations.

The issue of abolition of contract is like a double-edged sword. It would be extremely unfair it the principal employer is asked to regularise these employees, on the other hand if they are not absorbed then these workmen would be left in lurch. There is an urgent need to make amendments to this act that would provide some sort of relief to the contract labour and the same time isn’t harsh on the principal employer.

Developments Post-Liberalization: Impact on Contract LabourBefore 1991, Indian economy was a highly regulated one where public sector played an inportant role. In order to remove the ineffeciencies that had crept into the system government went in for economic liberalization in the year 1991. Gradually it opened up the economy for foreign players and by 1993 India started attracting substandtial amount of FDI. After the entry of foreign institutional investors in the country, for the first time the focus had shifted from providing social security through jobs to profit making. All the companies started looking for different options available to them in terms of employment in order to decrease their labour costs.

And so, companies started hiring through contractors which resulted in sharp increase in the employment of contract workers. It was seen that the percentage of contract workers in organized factory sector increased from 13% in 1993-94 to almost 30% in 2006-07 which is displayed by the figure below:

Contract labour performing core activitiesWith time organizations realized that using contract labour was proving very efficient, as it provided them with the kind of labour flexibility required. Using contract labour not only made them price efficient, but also improved their productivity. Lack of guidelines in CLRA Act on usage or non-usage of contract labour in “core activities” prompted organizations to use contract workers in core activities too. This feature was observed not only in the private organizations, the competition had driven the public sector organizations to indulge contract labour in their core activities. And this resulted in a sharp increase of employment of contract workers who were paid almost a quarter of what permanent employees got which became one of the major problems of labour unrest. The table below shows the percentage of contract labour used by different organizations in same or similar kind of work i.e. in “core activities”.

**Source: Original information has been collected by V.V.Giri National Labour Institute and is published in Trade Union Record, 06-20, July 2011 Wages of contract and permanent workers: A Comparison

The issue of usage of contract labour has been debated for long now. One of the main reasons for this debate is the wage differences that is observed between the permanent and the contract workers. It has been observed that for same kind of work carried out by permanent and contract workers, permanent workers get substantially higher wages than their less privileged counterparts. Adding to it permanent workers also get other benefits which contract workers don’t. Below table is an illustration of substantial difference in the wages of contract and permanent labour.

**Source: Original information has been collected by V.V.Giri National LabourInstitute and is published in Trade Union Record, 06-20, July 2011

CONTEMPORARY ISSUESThe following table summarizes the sphere-wise statistics of strikes and lockouts during the years 2010, 2011 and 2012.

Current contract labour system continues to attract lot of problems. The following are some of the cases involving contract workers which have cropped up in the recent past and has led to a lot of labour unrest: Hyundai Motors, Chennai (2012):

In September, 2012, Mobis, a sister concern of Hyundai Motors, which manufactures and manages supply of spare parts for Hyundai suspended about 300 contract workers. The reason given by the management was that they had joined a trade union Anna Thozhir Sangam. In addition to rendering the 300 odd workers unemployed, the spare parts shipments from Mobis to Hyundai dealers came down drastically, hitting customers whose cars were stuck for repairs. It is a constitutional right of any worker, whether he is permanent or contract, to form/become part of a trade union. Hence such actions from the management clearly outlined its insensitive and indifferent attitude toward the contract labourers. Maruti Suzuki, Manesar (2012):

The events of 18 July in the Manesar plant of Maruti Suzuki which ended with the murder of a company manager were not a sudden conflagration. There were lot of burning issues surrounding the condition of contract workers: – Extreme Exploitation

The condition of the workers, especially those on contract basis, was pathetic to say the least. They stood to lose close to half their salary for taking two days leave in a month. Also the management had put insensitive and inhumane rules in place. For instance, a worker got only two 7.5 minute tea/toilet breaks during an eight-hour shift, and overshooting the time limit meant losing half a day’s pay. – Denial of Trade Union

The workers wanted to create a separate union as they did not feel that theexisting trade union was successful in voicing their concerns. But the management opposed the registration of the separate trade union formed by the workers. And when the new trade union Maruti Suzuki Employees’ Union (MSEU) was eventually registered, the management within a month got rid of it by using its monetary clout such as offering them a VRS-type settlement.

Such anti-worker measures did not bear any long term result as subsequently the workers formed a new union the Maruti Suzuki Workers’ Union (MSWU) the entire situation was back to square one, with MSWU engaging in the negotiations throughout 2012 involving the same issues – wage increases, for transportation facilities, slowing down the robotic pace of work, and regularisation of leave benefits. – Equal pay for equal work

The contract workers took home a maximum of Rs. 7000, which was only about 40 % of the wage earned by the permanent worker. This caused a sense of dissatisfaction among the contract workers as supposedly they worked harder than the permanent employees as they did not enjoy job security unlike the latter. Such an inhumane mind set of the management lead to more profits and dip in costs in the short run, but eventually it lead to an outburst like the one seen on July 18th 2012. Graziano Trasmissioni, Noida (2008):

In September 2008, an angry mob of about 200 workers, attacked and brutally murdered the CEO of India unit of Italian MNC, Graziano Trasmissioni. Some workers were suspended in relation to a partial lockout declared by the company. They had supposedly come to re-negotiate their employment terms, but soon they indulged in large-scale violence smashing cars, office buildings and subsequently attacked the CEO. This incident highlights how the management should carefully deal with issues pertaining to suspension and termination. Also there seemed to be total disconnect between the management and the union, as the management was unable to sense that such a widespread attack was imminent. Hero Honda, Gurgaon (2006):

In May 2006, around 4000 contract workers of Hero Honda went on a strike citing anti-worker stance of the management. In addition to their claim for regularization since 6 to 7 years, other key issues included wage hike, job regularization, extra casual leave and medical benefits at par with the permanent workers.

During that period a contract worker was paid only about Rs. 4000 per month, which was about 10-15 % of the wage paid to a permanent worker doing a job of similar nature.To add to their woes, the contract workers did not have a union of their own. Despite the challenges, the contract worker voiced their discontentment and continued with the strike. Finally the management had to bend and although it considered some of the demands of the contract workers, there was still a long way to go to improve the miserable condition of the contract workers. Recommendations:

Distinction between Core and Non-core ActivityThe main issue surrounding employment of contract workers arises due to lack of proper distinction between core and non-core activities. Certain states such as Andhra Pradesh and Goa have implemented amendments to Section 10, which address this issue. Section 10 (2a) of the CLRA, Andhra Pradesh State Amendment defines designated authority.

“The ‘appropriate Government’ may by notification in the Official Gazette appoint a designated authority to advise them on the question whether any activity of a given establishment is a core activity or otherwise;” Further Section 10 (2c) specifies that the appropriate government may refer any question to the designated authority by itself or such application made to them by any aggrieved party. The above amendments should be further refined and incorporated in the central act so as to ensure clarity between core and non-core activities. Issue of Absorption of Contract Labour, Post Abolishment

A clear and unambiguous procedure should be outlined in the act pertaining to regularization/non-regularization of contract workers post abolishment. Equal wages for equal work The principal employer should be held responsible for ensuring equal pay for equal work among the contract workers. The welfare of the contract worker is compromised in the blame game between the principal employee and the contractor regarding payment of wages and other benefits. The principal employer gains the most by engaging the contract workers.

Also important decisions such as – which contractor to choose, how many workers are required etc. are directly taken by the Principal Employer. Hence the onus of ensuring equal pay for equal work should be placed on the principal employer. Also failure of following these strictures should entail severe punishment to the Principal Employer. Sham and Bogus contracts/contractors

There have been many cases have involved sham and bogus contracts/contractors. But the current central act does not define or elaborate on these. Hence there have been lots of ambiguities and misunderstand