Understanding Contractualisation of Workforce

What is the issue?

There is an increased contractualisation of the workforce in India.
It is essential to understand the reasons behind and take the necessary measures to make it fair and favourable.

What is the contract workforce share?

Contract workers are those who are not employed directly by the employer, but by an intermediary/contractor on short-term contracts.
Annual Survey of Industries (ASI) shows a surge in contract worker usage in the organised manufacturing sector.
There was an increase in total employment from 7.7 million to 13.7 million between 2000-01 and 2015-16.
Of this, over half of the increase was accounted for by contract workers.
The share of contract workers in total employment increased sharply from 15.5% in 2000-01 to around 28% in 2015-16.
On the other hand, the share of directly hired workers fell from around 61% to 50% over the same period.

What does it imply?

The rise in the use of contract workers indicates significant informalisation of the organised workforce.
Data from the Labour Bureau’s Employment-Unemployment Survey (2015-16) brings out a social aspect to it.
As per this, contract and casual workers have higher shares of society’s vulnerable caste groups as compared to regular workers.
The proliferation of such informal alternative work arrangements deepens the labour market segmentation.
It also has widespread ramifications for economic stability and social cohesion.

Is rigid labour law the reason?

It is largely argued that the widespread use of contract labour is because of India’s rigid employment protection legislations.
E.g. Chapter V-B of the Industrial Disputes Act (IDA,1947)
This makes it necessary for ﬁrms employing more than 100 workers to obtain the permission of State governments to lay off workers.
If labour regulations were the only factor driving contractualisation, contract worker intensity should have increased largely in labour intensive industries.
This should have particularly been the case in States which have a relatively rigid labour regulatory environment.
But, over the last 15 years, contract worker usage has sharply increased in capital-intensive and not in labour-intensive industries.
Also, labour regulations in India have, in fact, become more employer-friendly over the last 15 years and not more rigid as is proposed.
E.g. amendments made by several State governments since 2015 to raise the threshold to which IDA applies to 300 workers

What then are the reasons for contract worker intensity?

Contract workers receive roughly half the wages of those workers employed directly by firms.
Also, firms make significant savings by hiring contract workers as they receive fewer employee benefits compared to regular workers.
This enables firms to reduce costs and improve competitiveness.
Also, the presence of contract workers acts as an alternative workforce to the firms.
This helps firms suppress the bargaining power of their regular unionised workers and keep the wage demand of regular workers in check.
Consequently, the real wages of the directly-employed regular workers have remained almost stagnant over the last 15 years.
So it is largely the profit motive that is driving firms’ decisions to hire contract workers.

What should be done?

The Contract Labour Act prescribes that contract workers are entitled to “same wages” for the same kind of work as regular workmen.
It is thus important to ensure that wages of contract workers are at par with directly hired workers.
This is necessary not just for the benefit of contract workers, but also for directly employed workers who have had meagre growth in their real wages.
Further, now, contract workers should not be engaged in “core” and “perennial” activities as per the law.
However, with increasing substitution of regular workers with contract workers and the changing nature of core and perennial activities, there is an urgent need to review the Contract Labour Act.
The provision of decent conditions of work and social security for contract workers must be strictly adhered to.

Source: Business Line