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Friday, August 12, 2022

Preference for fixed-term employees can improve industry relations

Contract workers, who are hired via an intermediary (contractor) and are not on the payrolls of the company on whose shop floors they work, have been at the centre of much dispute over the last decade.

Written by Radhicka Kapoor |
Updated: December 24, 2020 8:57:09 am
Broken windows at a facility run by Wistron Corp, a Taiwanese contract manufacturer for Apple, in Narsapura near Bengaluru, India. (Reuters)

As the government attempts to woo investors in the electronics manufacturing sector, the violence at Wistron’s iPhone manufacturing factory could not have been more ill-timed. The iPhone manufacturing plant came under attack from thousands of contract workers over alleged non-payment of wages. Wistron asserts it had deposited the money in the account of the contractor (staffing firms). Reports suggest that the staffing firms who supplied the labour may be fined or even blacklisted. This incident is just the tip of the iceberg.

Contract workers, who are hired via an intermediary (contractor) and are not on the payrolls of the company on whose shop floors they work, have been at the centre of much dispute over the last decade. Such third-party contracts which entail a division of responsibilities wherein the contractor is responsible for the payment of wages and the principal employer is responsible for welfare facilities deserve scrutiny.

The increasing reliance of industry on contract workers is well-established. According to the Annual Survey of Industries (2017-18), contract workers accounted for 36.4 per cent of total production workers in the registered factory sector. Contract workers often find themselves doing the same tasks as regular employed workers but receive lower wages, have limited social security benefits and operate under poor working conditions. In a bid to discourage the use of contract workers, given the discrimination against them in comparison to regular employees, the government introduced the option of fixed-term employment in the Code on Industrial Relations (2020).

Fixed-term employees can be directly hired by employers without mediation by a middleman. They are ensured of the same work hours, wages, allowances and statutory benefits that permanent workers in the establishment are entitled to. However, fixed-term employees are not entitled to any termination notice or payment in lieu of services terminated as a result of non-renewal of the contract of employment. Employers are not required to provide retrenchment benefits. This imparts flexibility to the enterprises to adjust their workforce as per their requirements and at the same time, offers workers some amount of job security.

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Despite the introduction of fixed-term employment, firms continue to rely on contract workers. The question that then arises is: Why do firms continue to do so when they have alternative options? It is worth noting that fixed-term employment in India is indeed quite open-ended. The Code does not specify a minimum or maximum tenure for hiring fixed-term employees. Nor does it specify the number of times the contract can be renewed. The absence of such safeguards can, in fact, lead to an erosion of permanent jobs. Workers may find themselves moving from one fixed-term contract to another, without any assurance of being absorbed as permanent workers by their employer. While this does not bode well for labour market security, it is clearly a very flexible arrangement for firms.

It is indeed odd that despite such a liberal fixed-term employment regime, firms continue to hire contract workers. One possible explanation is that the cost of hiring contract workers continues to remain lower than the cost of hiring fixed-term employees, who are required to be paid pro-rata wages and social security including gratuity. In addition to the fact that hiring contract workers is cheaper than fixed-term workers, in the case of the former, the monitoring, legal compliance and litigation costs are shifted onto the contractor, thereby reducing the transaction costs of recruitment to firms. The rapid growth of staffing companies which supply contract labour is perhaps unsurprising in this context.

Ideally, to encourage a shift away from contract workers to fixed-term employees, the government should have completely prohibited the use of contract labour in core activities, that is, those activities for which the establishment is set up and includes any activity which is essential or necessary to the core activity, but does not include services such as security, catering and sanitation. Ironically, it has done the opposite. The Labour Code on Occupational Safety and Health has allowed for use of contract workers in core activities under certain conditions such as a sudden increase of volume of work in the core activity which needs to be accomplished in a specified time. Such a provision encourages the use of contract workers, undermining the initiative of introducing fixed-term employment. Resolving the underlying conflicts in the labour codes pertaining to these two categories of workers is critical if they are to be effective in arresting the increasing trend of contractualisation.


Finally, it is worth drawing attention to the fact that Wistron hired a large number of contract workers this summer after the government notified the Production Linked Incentive (PLI) Scheme for the mobile manufacturing sector. The scheme offers government subsidies for a limited period (five years for mobile handsets) at rates starting from 6 per cent and declining to 4 per cent on incremental sales over a specified base year level. While there has been much debate around PLIs, it is relevant to note that given the objective of the scheme is to create “good jobs”, it may have been more useful to link these incentives (for which a financial outlay of Rs 1.45 lakh crore has been approved over five years for 10 sectors) explicitly to job creation, in particular, those jobs that are directly on the firms’ payroll and not the contractors’. Significantly, under the Atmanirbhar Bharat Rozgar Yojana, the government is offering provident fund subsidies to employers for hiring new formal workers. Both these programmes could jointly be leveraged to give a big boost to formal job creation in the manufacturing sector.

This article first appeared in the print edition on December 24, 2020 under the title “The insecure worker”. The writer is senior fellow at ICRIER

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First published on: 24-12-2020 at 03:05:38 am
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