Contract labour law debate: Do we need more flexibility?

The pitch for labour flexibility by employers and critics of labour regulations citing global competition and to improve the ease of doing of business has largely dominated the government’s thinking on the labour law reforms.  One of the policy options being talked about by the government is to fix the upper limit of the proportion of contract labour that a firm can hire which could be anywhere between 40 and 50 per cent, which is higher than the organised factory sector’s average of 34 per cent for 2012. 

The then Planning Commission and some industry bodies like the CII have sought to build “voluntary guidelines” on contract labour system after violent industrial unrest which were in a sense attributed to mishandling of contract labour system. Some of them sought to determine the upper limits to contract labour numbers in a firm and their wage levels vis-à-vis the permanent workers.

The primary fact that all seem to forget is that the contract labour law, the Contract Labour (Regulation and Abolition) Act, 1970, is itself a legal instrument that legitimises employment of flexible labour as far as back in 1970 and this law has merely sought to abolish contract labour engagement in certain circumstances and to regulate its employment. 

The law was in response to tremendous abuses pertaining to employment of contract labour and rising incidents of industrial disputes which led the Supreme Court to suggest to the government to frame a law to govern the contract labour system.

The similarities in abusive practices relating to the contract labour system between then and now cannot be more striking. Even after legitimising employing of contract labour, abuses abound — employment of contract workers in permanent/ regular jobs, high levels of income gaps even in cases of contract workers performing same work as the permanent workers, poor working conditions, higher incidence of accidents experienced by contract workers, swindling of social security payments by the contractors and so on. 

In the worst case scenario, many trade union leaders allege mafiaisation of contract labour system. Even though the principal employer assumes eventual legal responsibility in several legal liabilities, punitive and corrective action is far from satisfactory.

The ironical aspect of the contract labour system is that the governments and public sector enterprises employ contract labour in every possible manner, even to collect national sample survey (NSSO) statistics! It is estimated that 20 lakh contract workers worked for the government and public sector enterprises in 2012-13.

Some research and anecdotes suggest that everyone involved in contract labour system, be it HR manager or inspector or even a trade union leader, “benefit” from the contract labour system. 

The biggest problem is that even big companies hire petty contractors who are not “cultured” to offer decent work conditions.  The big companies especially in the automobile sector employ unwieldy number of contractors - in hundreds - and contract labour management poses serious governance issues at the firm level.

While it is true that industries facing seasonal and volatile product markets need contract labour, the demand for universal employment of contract labour even for regular tasks amounts to an aggressive even economically irrational demand on the part of the industry. 

Irrational because of three reasons. a) skills formation in the firm will be low owing to short term contracts; b) aggregate demand in the economy will be weak in the short run and will have weak multiplier effects owing to low wages; and, human capital formation in the economy.

The last will be weak in the long run owing to poor capacity of the ill-paid and irregularly employed and social security deprived contract and casual workers. These workers cannot afford to provide for good education, health care and so on for their children.  Hence, contract labour system is a short-sighted low cost strategy both at the firm and society level, which will have radical implications for both.

Chinese experience

Let us look at the Chinese experience with respect to dispatch workers (akin to contract workers). The 2013 amendment to the Labour Contract Law has toughened up the provisions regarding employment of labour dispatch workers.

Among others, the law covers more labour dispatch agencies by lowering the minimum registered capital, impose stern regulations on the internal functioning of the agencies, legalise the principle of equal pay for equal work, limit the engagement of dispatch labour only to temporary (work not lasting more than six months), auxiliary (not a core business of the firm) and substitute position (temporary replacement of permanent employee on leave), and impose tougher penalties for both principal (host) employers and the agencies.

The changes to contract labour law requires covering every contractor and fix capital limits such that they are economically capable of delivering the legal requirements, provide for equal pay for equal work, strengthen collective bargaining and trade union rights of contract workers, and so on. The penal system should probably consider not only cancellation of licences of contractors for flouting social security laws but also blacklisting them.

Instead of law regulating the proportion of contract workers in a universal manner as industry conditions would vary, this issue could be best left to bipartite consultations and the law should make it mandatory on the part of the employers to consult trade unions on this issue as others regarding the contract workers. 

The basic reform that the law needs is that every worker including the contract and a casual worker should be given a written contract and failure to comply with provision should invite initially monetary penalty and on non-redressal even deemed permanency.  The law must provide that if the same contract workers are re-employed after frequent terminations they should be regularised as the work then is perennial and regular.

(The writer is Professor, XLRI School of Management, Jamshedpur)