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Source: The Hindu

Context

According to the Annual Surveys of Industries (ASI), the percentage of contract labor in the manufacturing workforce has doubled from 20% in 1999-2000 to 40.7% in 2022-23, affecting all industries.

Perceived Benefits of Contractualization

• Flexibility: Companies use contract workers to accommodate fluctuations in demand.
• When significant orders occur, more personnel can be quickly hired; however, when demand drops, they can be swiftly withdrawn. This enables an agile approach to workforce management.
• Lower Costs: Companies feel that hiring contract workers lowers their total expenses.
• These workers are frequently not subject to the same labour regulations or social security duties as permanent employees; they are exempt from basic labour rules under the Industrial Disputes Act 1947, resulting in lesser costs for bonuses, medical treatment, and Provident Fund (PF) contributions.
• As a result, their negotiating power remains weak, making them open to exploitation.
• The Industrial Disputes Act of 1947 oversees layoffs, retrenchments, and safeguards against arbitrary dismissals.

What Drives the Rise of Contract Labour in Formal Manufacturing?

• Cost Minimization:
  
  
• Firms hire contract labour to reduce wage expenses and avoid social security costs.
  
  
• Example: In large firms, contract workers may earn up to 31% less than regular staff.
  
  
• Bypassing Labour Laws:
  
  
• Using contract labour helps employers circumvent the Industrial Disputes Act, 1947, especially provisions on retrenchment and notice periods.
  
  
• Operational Flexibility:
  
  
• Firms adjust workforce size based on demand, avoiding long-term obligations.
  
  
• Example: Textile industries hire short-term contract workers during peak export seasons.
  
  
• Third-Party Shielding:
  
  
• Outsourcing shifts legal responsibility for labour conditions to manpower contractors.
  
  
• Example: Automobile firms outsource non-core work on assembly lines to reduce legal accountability.
  
  
• Sector-Wide Trend Across Sizes:
  
  
• Contract labour is growing in both small and large firms, including capital-intensive industries.
  
  
• Stat: From 2000 to 2022, the share of contract labour rose from 20% to 40.7%.
  

Why Contract Labour Hurts Long-Term Productivity

• Low Skill Development:
  
  
• Contract workers often don’t receive training, limiting their efficiency.
  
  
• Example: Dixon Technologies faces a shortage of skilled technicians in electronics.
  
  
• High Attrition and Turnover:
  
  
• Lack of job security leads to frequent exits, disrupting operations.
  
  
• Example: In Punjab’s food processing units, turnover among contract workers is over 70%.
  
  
• Reduced Worker Motivation:
  
  
• Absence of benefits and career growth lowers morale and performance.
  
  
• Example: In power plants, contract workers contribute less to maintenance efficiency.
  
  
• Weak Industrial Relations:
  
  
• Exclusion from unions and grievance systems increases workplace tensions.
  
  
• Example: Maruti Suzuki Manesar unrest in 2012 was partly due to contract worker discontent.
  
  
• Quality Compromise and Rework:
  
  
• Lack of ownership leads to errors and product rework.
  
  
• Example: In Tiruppur’s garment exports, quality issues were linked to untrained contract labour.
  

Impacts of Excessive Contractualisation

1. Lower Wages and Fewer Benefits

• Contractual workers earn significantly less than permanent workers—14.5% lower on average, and up to 31% in large factories.
  
  
• In 2018–19, their wages were 14.47% lower than regular employees.
  
  
• The wage gap is largest in large enterprises (31%), followed by medium (23%) and small enterprises (12%).
  
  
• Companies spend 24% less on contract workers in terms of bonuses, PF, and medical expenses, with the gap reaching 78–85% in some industries.
  
  
• Limited access to social security benefits like PF and insurance, and lack of protection under many labour laws.
  
  
• Middlemen take commissions, further reducing net pay.
  

2. Reduced Productivity

• Contract labour-intensive (CLI) firms show 31% lower productivity than regular labour-intensive (RLI) firms.
  
  
• Productivity is 36% lower in small enterprises, and 23% in medium ones.
  
  
• High-skill CLI enterprises show 5–20% higher productivity than low-skill ones.
  
  
• Large capital-intensive CLI firms show a 17% gain, but they form only 20% of formal manufacturing; 80% suffer losses.
  
  
• Perceived cost savings are offset by lower productivity.
  

3. Lack of Loyalty

• Workers feel less committed to the principal employer as they report to a third-party contractor.
  
  
• This reduces task ownership and weakens long-term organisational attachment.

Policy Imperatives for Fostering Formalisation

• To promote formalization, policymakers should allow large firms to hire directly. The Labour Codes, which went into effect in 2020, designed to allow large companies to engage contract workers directly, removing the need for third-party middlemen.
• This direct relationship would allow corporations to pay slightly higher wages, and the government could then impose basic benefits for these employees, such as PF contributions.
• The full implementation of this reform is critical, as it has been blocked due to concerns raised by trade unions.
• Employment Incentive Schemes: Schemes such as the Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) should be relaunched.
• PMRPY covered the employer's 12% contribution to the Employees Pension Scheme (EPS) and Employees Provident Fund (EPF).
• This scheme benefited one crore employees before being phased out in 2022.
• Reinstating such incentives would lower the financial burden on businesses involved with hiring permanent or formalized contract labor, discouraging an overreliance on informal contracting.
• Provide tailored Social Security Contribution Relaxation: The government should consider granting tailored reductions in social security contributions requested from employers.
• This approach would assuage employers' fears about the much higher expenses of permanent personnel, making them less hesitant to formalise employment agreements.

Existing Policies for Contract Labour

• Contract Labour (Regulation and Abolition) Act, 1970
  
  
• Regulates employment of contract labour in specific establishments.
  
  
• Aims to abolish contract labour in work of perennial nature.
  
  
• Weak enforcement allows employers to bypass the law via sub-contracting.
  
  
• Code on Occupational Safety, Health and Working Conditions (OSH Code), 2020
  
  
• Consolidates 13 labour laws related to health, safety, and working conditions.
  
  
• Applies to contract workers and mandates registration of establishments and provision of welfare facilities.
  
  
• Monitoring is inconsistent, reducing its effectiveness.
  
  
• Fixed Term Employment (FTE) under Industrial Relations Code, 2020
  
  
• Legalises short-term employment contracts.
  
  
• Ensures equal pay for equal work, but social security and job security often missing in practice.
  

Way Forward

• Ensure Universal Social Protection
  
  
• Mandate coverage under ESIC and EPF for all contract and gig workers.
  
  
• Benefits should be portable, and employers must be held accountable, regardless of contract type or duration.
  
  
• Improve Legal Enforcement and Transparency
  
  
• Use digital compliance portals, conduct randomised inspections.
  
  
• Ensure public disclosure of contract labour data to prevent misuse and enhance accountability.

Practice Question Q. Discuss the merits and demerits of the four ‘Labour Codes’ in the context of labour market reforms in India. What has been the progress so far in this regard?