Historically, there is a direct employment relationship between the employee and the employer. But the challenges of modern business have shaken this tradition by paving the way for alternative staffing strategies. While some organisations go for outsourcing their work, others look for contract labour as a solution to staffing problems.
Outsourcing and contract labour are not the same. In outsourcing, the work is given to an external organisation and it is for that organisation to organise things to get the work done right from setting up the plant and machinery to managing the human resources.
Whereas in contact labour, the external organisation appoints the people in its role and deploys them to your organisation. These contract workers will work in your premises under your supervision.
How it works
The practice of contract labour is governed by Contract Labour (Regulation and Abolition) Act 1970. While this law is applicable only to worker and supervisory cadre, the practice of contract employment has spread even to managerial positions.
According to this Act, the organisation which utilises the manpower is called Principal Employer and the organisation which appoints people in its role and deploys them to the workplace of its clients is called Labour Contractor.
The Act is applicable to an organisation (principal employer) which utilises twenty or more contract labour and to a labour contractor who employs twenty or more contract labour in the preceding twelve months. The principal employer has to obtain the certificate of registration and the contractor has to obtain license from the labour department of the government to engage contract labour.
The principal employer pays to the contractor the total amount of salary, allowances and benefits payable to the contract workers on a monthly basis and the contractor in turn disburses the salary to contract workers. The contractor also gets his service charges from the principal employer which is approximately 10 per cent of the salary bill.
While contract labourers work under the supervision of principal employer in his premises, they do not have employment relation of whatsoever nature with him. Their employer for all purposes is the labour contractor.
The nature of employment is always temporary for not more than one year duration at a time, since the contractor cannot assure regular employment on behalf of principal employer. Even if contract labourers have a grievance or dispute, they have to raise it only with the contractor who happens to be their employer for all practical purposes.
Why contract labour
Contract labour today is employed across several sectors and industries right from government departments to software industries. It is no more confined to worker level jobs, rather there are scientists, doctors, business managers and chartered accountants working on the roles of a labour contractor.
In the government departments, the recruitments are mostly frozen for the past twenty years and getting the increased work load completed with regular employees is difficult. Hence, the departments can have contract labourers by showing it as miscellaneous expenses.
While directly hiring temporary employees can create an industrial dispute at a later date for regularisation of services, this problem can be easily avoided by hiring people through labour contractor.
In the profit making multinational manufacturing organisations, the regular workers are highly unionised, their salaries are high, they are difficult to motivate for increased productivity and get easily provoked even for smaller issues. Taking disciplinary action for misconduct or terminating their services to right size the workforce is a lengthy process under the provisions of Industrial Disputes Act 1947. Hence, more than 50 per cent of the worker category employees in these organisations are hired through labour contractor.
In the software development organisations (IT companies), brand image of the employer by ensuring higher salaries and continuous employment is very important to attract and retain talented people. But all the work they do is not necessarily either of high paying or of continuous nature.
Hence, they hire the software engineers through the contractor for shorter periods and at lower salaries, and for all practical purposes they are shown as employees of the contractor. Many of the IT companies have more number of contract employees and less number of regular employees.
In the research and development organisations, the research projects are tenure-based and thereafter, the organisation may not get another project or they may get the project which may require an altogether new skill set. Hence, this sector prefers contract labour.
There is also a universal truth across all sectors that human resource selection techniques are often failing to produce intended results. In other words, all those who are doing well in the aptitude test and interview at the time of selection are not found to be best performers on the job.
Hence, many organisations prefer to engage the services of contract employees, watch them on the job for about six months to one year both for high performance and good behaviour and thereafter, consider employing them on company roles, by paying one month salary as recruitment charges to the contractor. Employers also believe that for certain functions like that of a janitor and security personnel, contract labour is the right solution not only to save on costs but also to improve efficiency.
Advantages
Contract workers are generally not unionised, hence, industrial disputes are minimal, salary bills can be minimised since they can be hired just by paying minimum wages, if there is indiscipline, they can be sent home immediately by informing the contractor, if there is excess workforce due to economic recession their services can be withdrawn immediately by informing the contractor.
Contract employees respond positively to incentive schemes since their salaries are low. Contract employees cannot compromise on productivity, quality, and good behaviour since continuance of their services depend upon these factors. The historical belief that people are motivated only by fear and greed is fully true in the case of contract employees. From the employees’ point of view, when he cannot find a regular job of the company, he has the option to either join as a consultant in company roles or become a contract employee.
But becoming a consultant results in deduction of 10 per cent, his consultant fees (remuneration) as tax deducted at source, if the total annual fees exceeds Rs 20,000 per year, which can be saved by becoming a contract employee.
Disadvantages
The cost of employing contract labour is in fact dearer by 10 per cent because of the service charges payable to the labour contractor. Certain industries like Apparel Manufacturing do not encourage contract labour because the industry works on thin profit margins and cannot afford to spend 10 per cent more towards the service charge payable to the labour contractor. Apparel industries are generally non-unionised and free from industrial disputes.
There is zero tolerance for indiscipline and employees not following norms are forced to exit immediately. Same is the case with industries owned by powerful politicians. In every organisation, certain activities are most important which are required to be carried out only by regular employees.
The advantages of contract employment will back fire if such activities are entrusted to be carried out by contract employees.
Challenges
Every job seeker prefers to work in the roles of a reputed company as a regular employee that gives him job security, social status and career growth, none of which can be expected in any contract employment.
As a result, attracting talented people into contract employment is a great challenge. Contract employees can be sourced only in the sectors which have abundant supply of manpower against the demand.
The quality of manpower sourced through contract employment also needs to be examined since best people always want to work in regular employment of a reputed company. If the organisation believes in management fads like employee engagement or psychological contract, then the practice of contract employment will go contrary to its own values.
Obligations
The contractor is responsible for payment of salary, allowances, benefits and ensuring the facilities required for health and welfare of the contract employees. However, principal employer cannot absolve from these responsibilities if the contractor fails to do so. Section 20 and 21(4) of the above Act stipulates that principal employer should provide the above amenities if the contractor fails to do so, by recovering the cost from the later.
Is it beneficial?
There is an important issue which needs to be analysed about the cost and benefits of contract labour or whether it is economical to engage contract employees instead of hiring regular employees on company roles.
Clause 25(V)(a) of the Karnataka Contract Labour Regulation and Abolition Rules 1974 states that where the employees engaged through contractor perform the same or similar kind of work as the workmen directly employed by the principal employer the wage rates, holidays, hours of work and other conditions of service of the contract employees shall be same as applicable to the employees directly employed by the principal employer.
If you add the services charges payable to the labour contractor it is far more expensive. There are also organisations these days which work entirely on contract employees and comparable data of company’s regular employees about salary and service condition is not available.
In this connection, the Government of Karnataka has issued detailed guidelines by a notification dated April 22, 2010 prescribing detailed service conditions applicable to contract employees. Hence, it is very clear from the above discussion that engaging contract employees is not economically beneficial to the organisation.
But strategic business advantages are immense. The employer will have the flexibility to increase or decrease the size of its workforce depending upon the needs of business, without seeking permission of the government.
It is easy to add additional workforce to meet the work pressure when recruitment is restricted by your organisation. Unionisation and indiscipline among contract employees is almost zero. Productivity of contract employees is better compared to unionised employees.
(The Author is Director at Talent Avenues Corporation. He can be reached at naik@talentavenues.com)