KIIT SCHOOL OF LAW

BHUBANESHWAR

Labour Law and Industrial Law - II

CONTRACT LABOUR IN INDIA

A COMPARITIVE STUDY

Drafted by:

1. Ayushman Nag (Roll. No. 1783035)

B.A. LLB
Section - A
Batch - 2017 - 2022
9th Semester
 CONTRACT LABOR: A COMPARATIVE STUDY

Introduction:

Contract labour generally refers to “Workers employed by or through an intermediary on work

of any establishment”. Such labour can be distinguished from the direct workers in terms of
employee-employer relationship and the method of wage payment. The contract labour does not
have any direct relationship with the principal employer. It has a distinct way of working unlike
in any other classes of labour like permanent, temporary, casual etc. The contract labour system
is based on triangular relationship between the user enterprises, the contractors including the sub-
contractors as middle man, and the worker. The workers are recruited by an outside agency or
person and are supplied to an establishment or engaged on its work. Unlike direct labour, they
neither feature on the muster roll of principal employer/ establishment nor are paid directly. In
India, a legal definition of contract labour is given in Contract Labour (Regulation and
Abolition) Act, 1970. According to Section 2(b) of the Contract Labour (Regulation and
Abolition) Act, 1970, a workman shall be deemed to be employed as "contract labour" in or in
connection with the work of an establishment when he is hired in or in connection with such
work by or through a contractor, with or without the knowledge of the principal employer. The
expression “employed in or in connection with the work of the establishment” does not mean
that the operation assigned to the workman must be a part of, or incidental to, the work
performed by the principal employer. Further, workers employed by a licensee for its own
benefit are not considered as contract labourers. Similarly, a permanent employee of the
contractor who could be placed at different establishments at the choice of the contractors are not
called as contract labourer.

Contract Labour is a significant and growing form of employment 1. The practice of employing
contract labour is observed all over the world and has been in operation since ages. The origin of
Contract Labour can be traced back to the emergence of the small scale industries which found it
economically unfeasible or unviable to undertake all activities of production process themselves
and therefore got some part of work done from workers hired through contractors. The contract
workers generally belong to the unorganized sector as they lack bargaining power, have little or
no social security and are often engaged in hazardous occupations which could endanger their
health and safety. They often have little or no security of employment. However, factors like lack

1
International Labor Organization; Definition (1988).

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of continuity of work, difficulty in ensuring closer supervision by the employer, higher output or
productivity of such workers, cost effectiveness, flexibility in manpower deployment, facilitation
for focusing on core competencies, etc., constitute advantages of the system of contract labour.

Contract Labor in India

When a workman is employed for work through a contractor and not directly through an
employer, he is engaged in ‘contractual employment.’ A 2015 ICRIER Survey of the
Manufacturing sector in Haryana shows that approximately 41% of the labor employed was
contractual in nature.2 Indeed, half of the increase in total employment was built up by
contractual workers, as per data from the Annual Survey of Industries (ASI).

The system of employing contract labor is prevalent in most industries in different occupations
including skilled and semi-skilled jobs. It is also prevalent in agricultural and allied operations
and to some extent in the services sector. A workman is deemed to be employed as Contract
Labor when he is hired in connection with the work of an establishment by or through a
contractor. Contract workmen are indirect employees; persons who are hired, supervised and
remunerated by a contractor who, in turn, is compensated by the establishment. Contract labor
has to be employed for work which is specific and for definite duration. Inferior labor status,
casual nature of employment, lack of job security and poor economic conditions are the major
characteristics of contract labor. While economic factors like cost effectiveness may justify
system of contract labor, considerations of social justice call for its abolition or regulation. The
condition of contract labor in India was studied by various Commissions, Committees, and also
Labor Bureau, Ministry of Labor, before independence and after independence. All these have
found their condition to be appalling and exploitative in nature 3. The Supreme Court of India in
Standard Vacuum Refinery Company Vs. their workmen4observed that contract laborshould not
be employed where: —

1. The work is perennial and must go on from day to day;

2
RadhickaKapoor, P. P. Krishnapriya, Facts and myths on rise of contract labour, Business Line, The Hindu, (March
18, 2019), https://www.thehindubusinessline.com/opinion/facts-and-myths-on-rise-of-contract-labour/
article26571045.ece (last visited September 20, 2020).
3
Seth Associates, Contract Labour Law in India, https://www.sethassociates.com/contract-labour-law-in-india.html
(last visited September 21, 2020).
4
1961 AIR 895, 1961 SCR (3) 536

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2. The work is incidental to and necessary for the work of the factory;
3. The work is sufficient to employ considerable number of whole time workmen; and
4. The work is being done in most concerns through regular workmen.

Major Amendments

‘Ease of Doing Business’ is a mantra put forward by the World Bank and the International
Monetary Fund to boost economic growth. These institutions demand that countries reform their
labour laws in line with the growth strategy. World Bank Report indicates that 115 countries
have revised their labour laws with a view to boosting trade and industry (Doing Business 2020;
Comparing Business Regulation in 190 economies, WB Group). The government of India has
also amended 44 existing labour laws in the country, defining four labour codes, incorporating
anti-worker provisions. Though it is the country with the largest number of workers in the
unorganised sector, these amendments to the law have been passed, completely disregarding the
demand to raise the minimum wage.5 An expert committee headed by AnoopSatpathi had
submitted a report to the central government in February 2019 recommending minimum wages
of Rs 375 to Rs 447 depending on the region.

However, it is clear that the central government, which focused solely on the ‘Ease of Doing
Business’, had no interest in implementing the expert committee recommendations. According to
the Minimum Wages Act of 2019 passed by the central government, the minimum daily wage for
a worker is Rs 178; i.e, the monthly wage of a worker is only Rs 4,628! This is a complete
rejection of the Supreme Court’s ruling that required a minimum wage increase of 25%. It is
important to remember that the increase in prices of food and other consumer products is
between 15% and 39% in the same period. The Seventh Pay Commission had recommended to
the government that the basic income of workers should be increased from 18,000 to 20,000 in
view of the increase in the Consumer Price Index. This too was not taken into consideration by
the government.

As mentioned before, the Ministry of Labour has categorized the provisions of the 44 labour
laws under four Labor Codes: wages, industrial relations, social security and safety, health and
working conditions. The government has introduced new amendments in favour of the
5
Ashis Das, DhananjayPandey, Contract Workers in India: Emerging Economic and Social Issues, Indian Journal of
Industrial Relations, Vol. 40, No. 2 (Oct., 2004), pp. 242-265, www.jstor.org/stable/27767954 (Retrieved September
21, 2020).

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companies in the areas of workers’ wages and social security. The new labour codes make the
whole concept of ‘permanent job’ irrelevant; they permit employers to hire anyone for a
specified period of time and dismiss them with two weeks’ notice. The new amendments, which
would exclude firms employing fewer than 40 workers, could create great tensions in the
workforce. The Apprentice Act of 1961 stipulated a period of one year for an apprenticeship; the
amendment of the Act has made it possible for the employer to employ a person as an apprentice
for any length of time. The government has completely deregulated the labour sector by enacting
anti-worker reforms in the Bonus Act of 1965, The Contract Labour (Regulation & Prohibition)
Act of 1970, The Payment of Gratuity Act of 1972, and by repealing the Payment of Wages Act
1936, the Minimum Wages Act of 1948 and the Equal Remuneration Act of 1976.6

The Aftermath: Adapting the COVID-19 crisis

In India, workers are characterized as either organized or unorganized. Those in the former
category work in larger businesses and have some formal rights (which are being diluted further)
but often they find it difficult to enforce them. Increasingly the big and medium businesses are
employing contract labor provided by contractors from the unorganized sector, rather than
permanent workers. Businesses pay the contractors who then pay workers a part of the payment
they receive. So, businesses claim that they are paying the minimum wage but the workers don’t
get it. When even the minimum wage is inadequate for a dignified life, what the workers receive
cannot ensure a civilized existence. Most workers in the cities, where land prices and rents are
high, are forced to live in slums mushrooming on vacant land or in urbanized villages with
rudimentary facilities and massive overcrowding. Dharavi is an example of this.The organized
sector workers have greater social security and receive a higher wage but even that is inadequate
for a civilized life. The unorganized sector acts as a reserve army of labor keeping wages low in
the organized sector also. Consequently, large numbers of the organized sector workers also live
in slums like their comrades from the unorganized sector.7

The aftermath of the pandemic is expected to lead to a dramatic shift in the composition of
India’s 470 million-strong workforce with companies relying more on contract workers to lower
fixed costs. But let’s face it: the law governing contract workers is the rotten apple in labor
6
K. Sahadevan, Indian Labour in the Time of COVID is One of Changing Perspectives and Disappearing Identities,
The Wire, (July 15, 2020), https://thewire.in/labour/india-labour-laws-workers (last visited September 21, 2020).
7
Id.

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legislation and everyone became witness to it during the nationwide lockdown. 8 The heart-
rending death of 16 workers who were sleeping on rail tracks, exhausted during their 700 km
walk to home highlights the plight of workers today made a significant impact on the face of
humanity. Workers are desperate. Not only have they lost their meager income, but now their
only options are to risk contracting COVID-19 or facing starvation. So, many of them set out to
walk hundreds if not thousands of kilometers to return to their villages, carrying their few
belongings, children on their shoulders and no food in their bellies. Some have already perished
on the way. In Karnataka, they were not even being allowed to go back home, in a controversy
that sparked allegations of contractlabor, forcing the government to quickly take a U-turn. With
COVID-19 as an excuse, state after state is reducing what little security was available to workers
by eliminating or diluting various laws so as to favor businesses. In Uttar Pradesh, at least 14
labor laws like the Minimum Wages Act and Industrial Disputes Act are being suspended for
three years in an effort to attract capital. Similar is the case with MP and Gujarat. The plea is that
this is needed to revive economic activity. The chief minister of MP has said that this would lead
to new investment in the state. Whether or not new investment will come at this time when
businesses are unable to start or they face a situation of low capacity utilization, what this would
ensure is competition among states to relax and eliminate labor laws. Thus, the poor working
conditions of labor will deteriorate further.

Government Recommendations

In recognition of the pandemic, the Ministry of Labor& Employment issued an advisory

requesting various establishments to not terminate contractual workers and ensure payment of
their wages.9 Since it is a nonbinding advisory, employers are still well within their power to
terminate a contractual worker. Hence, the COVID situation has worsened conditions of
insecurity that characterize contractual employment. This is made worse by the fact that the
protection accorded to these workers is ‘basic’ in comparison to the safety net of provisions for
permanent employees. For instance, contractual workers cannot raise their own cause for
regularization of labor, as they fall outside the definition of ‘workmen’ per the Industrial
Disputes Act, 1947. As States prepare to lift the lockdown, contractual workers have to return to
8
SomeshJha, India’s contract labour laws are riddled with incentives for corruption, Business Standard, (June 16,
2020), https://www.business-standard.com/article/companies/india-s-contract-labour-laws-are-riddled-with-
incentives-for-corruption-120061601861_1.html (last visited September 21, 2020).
9
Ministry of Home Affairs, Government of India, No. 40-3/2020-DM-I(A), (March 29, 2020).

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workplaces with a heightened sense of uncertainty — both of health and poverty. Additional
safeguards that ensure their health, safety, and socio-economic conditions must be implemented
to remedy the situation. Further, in relation to establishments which are completely non-
operational due to COVID-19, the employees of such units are to be deemed to be on duty, and,
therefore, no deduction should be made from the entitled leave accrued. 10It must be noted that the
orders issued by the Central Government and State Government have been issued under the DM
Act and ED Act, the violation of which will attract a penalty, including imprisonment up to two
years or fine (or both) under the DM Act and imprisonment up to six months or fine or both
under the ED Act. However, the circulars issued by different Ministries for integrating national
plans and policies and aiding implementation at a State level, as on date, are in the form of
directives and advisories, the enforceability of which still remains to be tested.However, given
the unprecedented nature of circumstances facing all nations globally, restraint in movement and
providing support to our work force in all manners possible does seem to be the need of the hour.
With time as it becomes more likely that the lockdown orders will be extended further, it remains
to be seen if more specific legislative measures will be adopted by the Government of India, in
relation to employment. Striking a balance between the rights of employees vis-a-vis the rights
of employers has always been, and continues to remain a critical matter, especially in light of the
current unprecedented circumstances.

ContractLabor in Malaysia

The ContractLabor issue is Malaysia has been one that has plagued the country since a very long
time. The results are plain. In Kuala Lumpur cranes stretch outward among the gleaming towers
in a perpetual construction boom powered by foreign investment. The streets are spotless and
well policed, the water is clean, and the politics are relatively stable. Malaysia calls itself a
‘heaven’ for foreign companies. Consumers around the world benefit from products like mobile
devices, circuit boards, and LED screens. However, this declaration does not come free but
rather a very heavy price. In order to understand the issue we first need to understand why
Malaysia is one of our core focal points for this paper. The International LaborOrganization, the
International Textile Garment and LeatherWorkers Federation (ITGLWF) members have all
raised the issue ofparticular problems regarding migrant workers in Malaysia.The Malaysian

10
Ministry of Labour and Employment, Government of India, DO No. M-11011/08/2020-Media, (March 20, 2020).

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Government figures for 2007 state a presence of 2.04 million foreign workers and a further 1.2
million undocumented (illegal) workers. This massive surge of migrant and undocumented
workers raises a number of concerns. The most important of which is if these individuals cannot
be tracked then they cannot be brought under the arm of the law, thus leaving them open to
exploitation. This is a growing problem in Malaysia and it has to be studied in a much more in-
depth manner.11 This of course has led to violations of their rights. Some of the typical violations
are written down below:

 Deception about contract conditions in sending country

 Substitution of contract once in destination country

 Charging of additional/ higher costs to worker than agreed

 Withholding ID

 Withholding salary

 Non-payment of salary

 Lower salary than sector standard or collective agreement,

 No provision of other sector standards (overtime, day off, paid holidays, health coverage
etc.)

 Deduction of levy, food, accommodation, bribes for law enforcement officials & RELA

 Confinement in sub-standard accommodation on employers' premises

 No access to communication

 Utilization of underage migrant workers (below 18 years in hazardous sectors)

The Malay government also does not look to keenly on foreign workers in the country and has
often taken steps to discourage it. For example, Members have raised the issue of a levy which
the Malaysian government collects on certain categories of foreign workers (skilled, semi-skilled

11
Hock Lee, SivananthiraAlagandram, ILO, Contract labour in Malaysia: perspectives of principal employers,
contractors and workers, (1996), http://lst-iiep.iiep-unesco.org/cgi-bin/wwwi32.exe/[in=epidoc1.in]/?
t2000=007455/(100) (last visited September 23, 2020).

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or unskilled workers in manufacturing, construction, service and plantation sectors). The levy
was designed to discourage employment of foreign workers but in practice, there are millions of
foreign workers from several countries as listed above. In large firms, some employers pay the
levy. However, in small or informal settings, the levy is often passed onto workers (for example
as deductions from wages, where it can represent a high proportion of workers’ wages), or
workers are employed illegally. The basic understanding of the law is that the employer should
pay the levy and we have written to the High Commission seeking formal response on this
matter. The law also binds workers to their employers, creating a situation of forced labor. Under
circumstances where workers have no flexibility of employment, it is also hard for unions to
organize as workers have no leverage. There are many other ways for a migrant worker to
become trapped in a forced-labor situation, in which a worker has no recourse if work conditions
are poor or he or she is not being paid. But the problem typically begins at recruitment, the
kickoff to a cycle of debt and bondage that can trap people for years and decades. The Verité
study found that 92 percent of foreign workers paid recruitment fees to get their jobs, often
exceeding what’s standard in the industry (one month’s wages). The money often goes to both a
recruiter in Malaysia and in the worker’s home country. These fees are due well before the
worker leaves his or her home country, and often plunge an entire family into debt.12

Hence we see that the rights of workers are not only at stake due to the levy that is imposed upon
them, but also of the fact that often employers are busy in making the life of these migrant
workers terrible. The benefit that brings about to these employers is that there is a greatly
reduced cost of human labor thus ensuring greater profit margins. Sadly enough, this is the
reason why lots of multinational companies prefer to outsource a lot of their labor related work
to Asian countries, as this ensures cheap labor which comes with no liabilities. The electronics
sector for this reason is booming in Malaysia as cheaply made products can then be sold at
premium prices around the world. This makes it a all the more lucrative offering. Ofcourse,
human life is degraded but never has the idea of immense profit margins deterred corporations
into taking the moral high ground.13

12
Ethical Trading Initiative, Briefing on forced labour- a special focus on Malaysia, (December, 2008),
http://www.rhsansfrontieres.org/images/ressourcestravailforce/Briefing_on_forced_labour_Malaysia_english.pdf
(last visited September 23, 2020).
13
Ariel Ramchandani, Forced Labor Is the Backbone of the World’s Electronics Industry, The Atlantic, (June 28,
2018), https://www.theatlantic.com/business/archive/2018/06/malaysia-forced-labor-electronics/563873/ (last
visited September 23, 2020).

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Solutions and Actions being taken :

Malaysian trade unions, civil society groups and NGOs have been campaigning withemployers,
workers and government on these issues. They try to inform workers intheir home countries and
in Malaysia that it is their employer’s duty to pay the levy.They inform workers about the risks
of illegal work and the almost total lack of anysupport for ‘illegal’ workers. They lobby the
government to abolish the levy and allowworkers to register their employment with the
government at a national level, ratherthan with an individual employer. 14 They also work to
combat the discrimination andstigma which is the norm for foreign workers in Malaysia. The
Johor Textile andGarment Workers’ Union has pushed for better conditions for foreign workers
and fornational workers. We can conclude that there seems to be a lack of participation from the
government’s side when it comes to reducing the exploitation of migrant workers. It is dependent
upon the NGOs and other smaller organizations to mitigate the issues faced by these migrants.

14
Bradley Dunseith, Malaysian Labor Contracts: What You Need to Know, ASEAN Briefing, (August 25, 2019),
https://www.aseanbriefing.com/news/malaysian-labor-contracts-need-know/ (last visited September 23, 2020).

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