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Know your Workforce: Navigating and mitigating risks in India

Updated: Oct 19, 2023

(Jaya Ramachandran & Suruchi Kotoky)

We have often seen that terms like workers, employees, contract workers, labourers, contractor, independent contractor, etc. are used interchangeably and thus, the difference between the varied categories of workers can get blurry at times. An organization planning to hire individuals may face challenges in determining what type of workers suits their business the best. Therefore, having a clear understanding of the different kinds of employment when hiring in India becomes imperative or you could end up with the risk of misclassification of workers.

In this article, we explore the worker classifications that prevail in India, differences on the ground level between different employment structures and the things you might want to consider before hiring contract workers through a contractor.

Employment landscape in India

Under the employment sphere, you will find workers employed under two major categories which are as follows:

  1. Employees – These are workers that are on the company’s direct payroll and are engaged through appointment letters or employment contracts that specify the terms and conditions of their employment.

  2. Contract workers (“CW”) – These are workers who work for the company temporarily and are either (i) subcontracted by a contractor to the company; or (ii) independently engaged by the company as consultants or freelancers.

Primary differences on the ground level

An employee works for a company in return for salary or wages, and most importantly they are entitled to statutory benefits from the company, which include but are not limited to provident fund, gratuity, maternity benefit, leaves, statutory bonus, etc.

CW on the other hand works for a fixed fee if engaged directly by the company and is not entitled to statutory benefits from the company. In the case of CWs who are engaged through a contractor, it is the responsibility of the contractor to ensure that the CWs are receiving the above-mentioned statutory benefits. It is only in the event of default by the contractor that the company as a principal employer is held responsible.

Further, while employees are generally employed for an indefinite period, CWs are engaged for a fixed term for well-defined services or project work, which are generally not related to core function areas of the organization.

Navigating CLRA

In the complex ecosystem of a business, different layers of work coalesce to create a fully functioning enterprise. For instance, consider a steel manufacturing company. Its core activity, the very essence of its existence, is to produce steel. But the company doesn't operate in a vacuum. To support its main objective, there are non-core activities that, while not directly related to steel production, are indispensable for the company's operation. Often, companies find it more cost-effective to outsource these non-core activities to specialized organizations. This is where the Contract Labour (Regulation and Abolition) Act, 1970 (“CLRA”) comes into play, serving as a crucial framework for companies that choose to outsource various functions.

The CLRA outlines the responsibilities and obligations of the principal employer, the contractor, and the rights of the CWs employed by the contractor, providing a legal framework that ensures fair treatment of all parties involved. To better understand the scope and impact of the CLRA, it's crucial to distinguish between an employee and a CW (as covered above).

Core and Non-Core Activities: The CLRA Perspective

CLRA distinguishes between activities that are essential to the primary business of the company and those that are peripheral or ancillary. Activities essential to the primary business cannot be outsourced without violating the CLRA. For example, in an IT service company, providing IT services to its clients would be considered an essential activity. On the other hand, peripheral or ancillary activities like housekeeping, security, and maintenance services can generally be outsourced to CWs, provided certain conditions are met and responsibilities are adhered to by the principal employer and the contractor. The CLRA allows the State Governments the freedom to prohibit employers from employing CWs in its core process after inter alia examining whether:

  1. the work performed by contract labour is permanent in nature; 

  2. the process or operation is incidental or necessary for the employer;

  3. such process or work is ordinarily performed by regular employees of other similar employers; and

  4.  sufficient number of whole-time employees can be deployed to perform the work.

In view of the above, it is very clear that there are underlying risks associated with the misclassification of workers, which may range from liability for payment of statutory benefits to direct employment claims to court cases. Thus, it is crucial for the organization to know the differences, risks and have systems in place to mitigate risks.

Check List - Risk mitigation steps We recommend the following five top risk mitigation steps to be kept in mind by the principal employer, who engages a contractor to provide services by it and its CWs:

  1. Wages should be disbursed by the contractor to the CW and the principal employer must only witness such disbursement.

  2. Avoid engaging CWs for long durations.

  3. CW should preferably be engaged for support services like housekeeping, security, gardening, maintenance, transport, etc. and not in the core function areas like administration, operational, human resources, etc.

  4. Do not exercise direct control, management and supervision over the contract worker, including for matters related to payments, leaves, discipline, appointment and removal/termination.

  5. To ensure and specify in writing in the contract that the contractor shall:

    1. at all times be liable to make timely payment of all statutory dues and benefits such as provident fund contributions, wages, medical benefits, etc. and maintain all records, registers, challans/payment receipts thereof, whether statutory or otherwise which must be provided to the principal employer when called for; and 

    2. be liable to defend and indemnify the principal employer from any liability, penalty and/or legal actions against the principal employer due to breach of any laws, gross negligence, wilful misconduct and/or fraud by the contractor and its CW.

To conclude, we have tried to give you a bird’s eye view in relation to the engagement of CW. However, please note that the contract labour laws and their applicability may differ from state to state and may require a deeper dive to see what is applicable in your jurisdiction.


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