Contract Employees

Author(s): R Sridhar and S Panda

Source: Indian Journal of Industrial Relations , October 2014, Vol. 50, No. 2 (October
2014), pp. 204-212
Published by: Shri Ram Centre for Industrial Relations and Human Resources

Stable URL: http://www.jstor.com/stable/24549116

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 Contract Employees

R Sridhar & S Panda

Introduction

Post the onset of economic liberaliza

tion in the early 1990s, many Indian com

Companieshave
Companies havebeen
beendeploying
deploying panies relied on the conventional wisdom
numerous
numerous employment
employmenttypestypestoto «*! '"'he °"1!' wart0 succ,eed in an era
obtain labour
obtain labourcost
costAdvantages
Advantages - - «lobal »"»P*«"»» « to take advantage of
. , the benefits of a largely unregulated, non
temporary,
temporary, trainee,trainee,
casual, con casual, con- ... , , .
, rr, , ^ unionized, and low-wage environment
tract.
tract These
. These employment
employment types are types are ' TU. 6 . .
£, , , (Pfeffer, 1998). This conventional wis
aamajorcause
maiorcause of labor
ofunrest
labor and unrest ana , , •, , ,
, . » ./ . dorn, along with a host or other commonly
industrial
industrial strife,
strife, While the argu While the argu- i i
held beliefs, predicated the emplo
ment
ment in favor
in favor
of deploying
of Muldeploying Mul
practices that companies followe
tiple
tiple employment
employment
types are familiar
types are familiar
der to leverage numerical labor fle
--surplus
surpluslabour,labour,
uncertain market
uncertain market
. , ,. . , . Numerous employment types were de
demand, the ambiguity
demand, the ambiguity and incon and incon- . , . , . f . , . ,
. y, _ I ployed to obtain labor cost advantages -
sistencies in the Contract Labor
sistencies m the Contract Labor ' . . . . „
, , . , , , temporary, trainee, casual, contract. Fast
Act
Act - the
- the fact fact
is thatis that employees
employees and and e , . . , • , ^ ,
J , , , forward to recent times and we rind that
unions perceive the multiple em
unions perceive the multiple em- thesg emp,oyment practices are
ployment types as pure exploita
ployment types as pure exploita- majof cauge of ,abor unrest and
tion. This paper discusses the logic
tion. This paper discusses the logic strife Whj,e the arguments in f
that companies could use to arrive
that companies could use to arrive p,oyjng mu|tjp,e empioyme
at
at an
anemployment
employment policy. Moving
policy. Moving mj,jar _ surp,.js labor; uncertai
beyond the immediate benefit of
beyond the immediate benefit of demanc,5 the ambiguity and inco
cost
costarbitrage,
arbitrage,an an
"investment"
"investment" jn the Contract Labor Act _ t
■approach
■approach is being suggested
is being for
suggested for tbat empioyees and unions pe
this segment of the workforce.
this segment of the workforce. practice of multiple employment
pure exploitation.

Employees and unions perceive

this practice of multiple employ
RSridhar & S Panda (E-Mail:Swarup.Panda@itc) ment types as pure exploitation.
are from ITC Limited.

204 The Indian Journal of Industrial Relations, Vol. 50, No. 2, October 2014

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 Contract Employees

While companies should explore the fore discussing employment mode selec
use of different employment modes to tion logic and the management of con
allocate work in view of the pressure of tract employees, we consider it pertinent
achieving both efficiency and flexibility, to briefly examine India's formidable
it is important that a logical and consis- labor legislative framework and its im
tent approach be taken to arrive at deci- pact on employment and industrial
sions pertaining to the nature of employ- progress,
ment at the company level. It is also ap
propriate that as with other capital invest- Indian Labor Legislation
ments, the management of human capi
tal should be categorized into "make" or The World Bank in its India Country
"buy" decisions. Although the make-or- Overview (2008) states: "India's labor
buy distinction may appear simplistic, the regulations -among the most restrictive
growing number of subtle variations on and complex in the world - have con
this theme makes the effective manage- strained the growth of the formal manu
ment of employment modes at once com- facturing sector where these laws have
plicated, contentious, and more directly their widest application. Better designed
related to company effectiveness (Lepak labor regulations can attract more labor
& Snell, 1999). intensive investment and create jobs for
India's unemployed millions and those
In this paper, we discuss the logic trapped in poor quality jobs. Given th
that companies could use to arrive at an country's momentum of growth, the
employment policy. We also describe an dow of opportunity must not be lost
approach adopted by our company to improving the job prospects for the 8
manage contract employees that is prov- million new entrants who are expec
ing effective. We consider contract em- to join the workforce over the next
ployées to be an integral part of the cade." There are over 50 national l
workforce contributing to company op- and many, many more state-level la
erations. Moving beyond the immediate Traditionally, Indian governments at
benefit of cost arbitrage, an "invest- central and state levels have sough
ment" approach is being adopted for this ensure a high degree of protection
segment of the workforce. Apart from workers. For instance, a perman
managing basic issues of compl iance, the worker can only be terminated for prov
principles of industrial democracy, equal- misconduct or habitual absence and
ity, and equity are core elements in our legal process could, and usually does,
management of this segment of employ- years to complete.
ees. Another critical shift in our ap
proach in this area is to partner with
Indian go
specialized agencies (Professional Ser
and state levels have sought to
vice Providers) to ensure a more holis- .... , „
, „ , , ^ , ensure a high degree of protection -,
tic and professional approach towards „ ,
for workers.
■ * * r<\M ««I/\ mLa M<1

managing non-co

The Indian Journal of Indust

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 R Sridhar & S Panda

While the Indian legislature fully en- strength and thereby raise labor costs
dorses the general view of employers that either directly through wages or indirectly
the legislative framework requires dras- by inhibiting work reorganization in re
tic amendments, the political will to bring sponse to changes in demand and tech
about changes has been absent. Indian nology.
employers find that efficiency and flex
ibility are fettered by three labor enact- The Trade Union Act on its part is
ments in particular: The Industrial Dis- generally perceived as a millstone and
pûtes Act, 1947; The Trade Union Act, costly distraction by employers. It allow
1926; and The Contract Labor (Regula- seven or more members to apply for unio
tion & Abolition) Act, 1970. registration leading to multiple unions in
a work location which in turn hampers
The Industrial Disputes Act (IDA), recognition of representative unions by
though meant to promote industrial har- the management. Further, under the ex
mony by resolving disputes, in reality isting Act, up to 50 per cent of the mem
slows down change and impedes labor bers of the executive of a union can be
numerical flexibility. Particular attention outsiders resulting more often than not
has been paid to its Chapter V-B, intro- in the politicization of union leadership,
duced by an amendment in 1976, which
requires companies employing 300 or
Widespread criticism of the Act fo
more workers to obtain government per
. . _ , A , , cuses on the fact that it does not
mission for layoffs, retrenchments and _
. . £i « , provide a clear definition of con
closures. A further amendment in 1982
tract labor.
(which took effe'ct in 1984) expanded its
ambit by reducing the threshold to 100
workers. It is argued that since permis- The Contract Labor Act (CLA) was
sion is difficult to obtain, employers are legislated to regulate the conditions un
reluctant to hire workers whom they can- der which contract labor are employed
not easily get rid of. Job security laws and abolish their employment where un
thus protect a tiny minority of workers in warranted. Four guidelines in the Act are
thé organized sector and prevent the ex- to be considered by the government in
pansion of industrial employment that deciding whether abolishment of employ
could benefit the mass of workers be- ment of contract labor is warranted:
yond its compass. It is also argued that whether the work is of perennial nature;
the restriction on retrenchment adversely incidental or necessary for the work of
affects workplace discipline, while set- the establishment; sufficient to employ a
ting the threshold at 100 has discouraged considerable number of whole-time
factories from expanding to economic workmen; and whether the work is be
scales of production, thereby harming ing done ordinarily through regular work
productivity. Several other sections of the nien in that establishment or a similar
IDA allegedly have similar effects, be- establishment. Widespread criticism of
cause they increase workers' bargaining the Act focuses on the fact that it does

206 The Indian Journal of Industrial Relations, Vol. 50, No. 2, October 2014

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 Contract Employees

not provide a clear definition of contract employment relationship and constrain a

labor, and when it comes to abolishment company's ability to adapt to environmen
of contract labor in industries or estab- tal changes, particularly those that influ
lishments, the guidance and directives ence the demand for labor. Contracting
often come from judiciary rather than and alliance are external employment
promulgated law. In addition, the Act lays modes that enable companies to de
down onerous conditions that are meant crease overhead and administrative
to regulate the employment of contract costs, balance workforce requireme
employees, which contractors and em- and enhance flexibility. They also pro
ployers find difficult to comply with, companies with more discretion in b
Hence, the CLA, paradoxically, provides the number and types of employees
fecund breeding ground for labor prob- while focusing critical resources on
lems and disputes. In the recent past, the development of core capabilities,
country has witnessed several incidents
of major industrial unrest, many of them More recently, Porter has argue
arising due to the provisions of the Act. (Magretta, 2012) that the logic of c
competences has led many companies to
Determination of Employment pursue outsourcing without thinking
Modes through the strategic consequences. In
stead of trying to determine wh
Porter (1985) suggested that it is a tivities are core, he a
company's valuable and unique activities tion: "which activ
that are the primary components of its which activities ar
competitive advantage, which help it to tivities - those tha
differentiate its value chain from those fully tailored to a
of its competitors. Building on Porter's position - can be
suggestion, Lepak and Snell (1999) use more efficient exte
the dimensions of value (human resource panies almost alw
skills that help cv mpanies to improve ef- decisions for sho
ficiency and effectiveness) and unique- These decisions limit th
ness (company specificity) of human uniqueness and fit in
capital, to identify four employment egy, and push an en
modes: internal development; acquisition; greater homo
contracting and alliance. Internal devel- 2012). We believe t
opment and acquisition are internal em- answer Porter's q
ployment modes providing the benefits of ing decisions on out
stability and predictability of a company's ing.
skills and capabilities, better coordination
and control, enhanced socialization and
In India, contract employees
lower transaction costs. However, inter
stitute a large part of the total
nal modes may force companies to incur
employment.
costs stemming from administering the

The Indian Journal of Industrial Relations, Vol. 50, No.

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 R Sridhar & S Panda

In India, contract employees consti- of value and uniqueness in their idiosy

tute a large part of the total wage em- cratic contexts,
ployment. Most of these workers are
engaged in generic activities (loading and Within in our company, in our bu
unloading of goods and materials; cater- ness division, contract employees a
ing including canteen services; security engaged to perform generic activiti
services; civil and construction works; such as housekeeping, gardening, mat
electrical/air conditioning/painting/white- rial loading and unloading and constru
washing; housekeeping services; com- tion work, and are not deployed in
puter maintenance, etc.) and those ne- rennial production activities. Our effo
cessitated by seasonal/occasional re- focus on raising their productivity leve
quirement or in situations where there is by providing them with automated tools
a temporary increase of work. However, and training them to adopt efficient wor
many companies today engage contract methods. Whereas some years ago th
employees in regular and core activities, average ratio of regular to contract
those that require "tailoring" to fit with a ployees in our factories was 2:1, this fi
company's strategy. Saini (2010) cites ure has improved to 3:1 today and
studies that have found the share of con- target is to stabilize at 4:1. We belie
tract employees in wage employment to that this approach is helping us consid
be as high as 60 to 70 per cent as against better wages and benefits to contr
the official claims of 15 to 26 per cent, employees and reduce the level of e
There are also establishments where the ployee dissatisfaction. We urge com
number of regular employees is just a nies to engage in activity analysis,
few hundred, but that of contract employ- neric and tailored, and use both intern
ees runs into several thousands. Although and external modes of employment
regular and contract employees are of- allocate human capital. This will provid
ten found to work on saipe or similar an unassailable logic that could help co
tasks, regular employees earn between panies explain and defend their m
two and six times the wages earned by and-buy decisions on human capit
contract employees. No wonder, employ- Though employee costs could rise in t
ers are accused of "misusing" and ex- short-term, in the longer term compan
ploiting this category of employees. Con- would stand to gain in better employmen
tinued reliance on external modes of relations and more durable competit
employment is almost certain to lead to advantage,
labor disputes and mitigates the develop
ment of core capabilities for long-term Management of Contract
company performance. Lepak and Snell Employees
(1999) argue that the discussion on em
ployment modes should not be reduced Lepak and Snell (1999) view each
to an either/or distinction, but companies employment mode as an inherently
should use the four employment modes ferent form of employment relationsh
simultaneously, based on the dimensions shaped by the company, in terms of

208 The Indian Journal of Industrial Relations, Vol. 50, No. 2, October 20

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 Contract Employees,

exchange agreement between individu- tice, the wage differential tends to be

als and their companies. They also con- steeply inequitable, which labor activists
sider patterns of HR practices - or HR term "naked capitalism". The Contract
configurations - as helping to define the Labor Act provisions and rules and other
employment mode, maintain the employ- labor legislations are often violated with
ment relationship and support the strate- employees not having access to basic
gic characteristics of human capital, amenities at the work place; occupa
When contracting is chosen as the em- tional health and safety standards not
ployment mode, a "transactional" em- being applied and enforced; overtime
ployment relationship comes into being pay being denied; and medical and so
and the HR configuration is one of "com- cial security contributions not being
pliance". made. So many companies loudly and
often proclaim their zero tolerance for
T . , . poor quality and waste. We consider it
In numerous instances contract . 7 . , ...
time that they apply equal ferv
employment practices are found to
tract employment violations
be unreasonable and unfair.
sequences of not doing so are
present as evidenced by con
In India, employers emphasize arm's ployee agitat
length relationships with contract em- There have
ployees, focusing on the work to be vide contract e
done, the results to be accomplished, the representat
terms of the contract with contractors
- and virtually nothing else. Given the We are of the view that even if con
transactional nature of contract work, tract employees are engaged to perform
HR activities tend to focus only on se- generic activities they need to experience
curing compliance with the terms and "inclusion". If contract employees feel
conditions of the contract. Rules and excluded and alienated social tensions at
regulations governing work are strictly the work place will rise, impacting the
enforced and specific provisions regard- morale of regular employees as well,
ing work protocols are upheld with out Moreover, generic activities have a role
any breach. This may sound reasonable, to play in the overall operations of the
but in numerous instances contract em- establishment; otherwise they would have
ployment practices are found to be un- been entirely unnecessary. Porter and
reasonable and unfair. We discussed the others have suggested the classification
practice of deploying contract employ- of generic and tailored activities to ar
ees to perform activities that reasonably rive at make-or-buy decisions on human
should go to regular employees. Though capital, not to deny contract employees
the principle of equity would dictate that their due. Though a "transactional" em
contract employees be paid at par with ployment relationship is found to prevail
regular employees for performing the when the employment mode is one of
same or similar nature of work, in prac- contracting, we find the study of Tsui,

The Indian Journal of Industrial Relations, Vol. 50, No. 2, October 2014 209

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 R Sridhar & S Panda

Pearce, Porter and Tripoli (1997) illumi- ees performed better on core tasks, d
nating in answering the question, "Does onstrated more citizenship behavior,
investment in employees pay off?" They expressed a higher level of affect
examined employee responses from ten commitment to an employer, when t
companies under four types of employee- worked in a mutual investment or o
company relationships, as defined from investment (by the employer) relationship
the employer's perspective. than when they worked in a quasi-spot
contract or under investment relationship.
These four types are: (a) Quasi- The finding that both the mutual invest
spot contract, where the employer of- ment and over investment approaches
fers short term, purely economic induce- perform substantially better than the other
ments in exchange for well-specified two employee-company relationships sug
contributions by the employee; (b) gests that offering open-ended induce
Mutual investment which involves a com- ments and a high level of social exchange
bination of economic and social ex- to employees is more important than bal
change. In this case, the employer of- ance in the exchange. This has impor
fers an extended consideration of an tant implications for human resource
employee's wellbeing as well as an in- management practices for regular and
vestment in the employee's career within contract employees,
the company. In exchange, the
employee's obligations and contributions Our Approach
include working on job assignments that
fall outside of prior agreements or ex- The management approach that we
pertise, assisting junior colleagues, ac- are seeding in our business division with
cepting job transfers, and, in general, regard to contract employees seeks in
being willing to consider the unit's or elusion of those employees based on "in
company's interests as important as core vestments" being made in them. Some
job duties; (c) Under investment, where key features of our approach are:
the employee is expected to undertake
broad and open-ended obligations, while - Contract employees are to be con
the employer reciprocates with short- sidered as a category of employees
term and specified monetary rewards, just as regular, supervisory, frontline,
with no commitment to a long-term rela- and managerial categories would be.
tionship or investment in the employee's To reinforce this, we have attempted
training or career; and (d) Over invest- a name change - from contract la
ment, where the employee performs only bor to employees of service provid
a well-specified set of job focused ac- ers (ESPs).
tivities, but the employer offers open
ended and broad-ranging rewards, includwe have attempted a name change
ing training and a commitment to provide- from contract labor to employ
the employee with career opportunities. ees of service providers (ESPs).
The study found, in general, that employ

210 The Indian Journal of Industrial Relations, Vol. 50, No. 2, October 2014

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 Contract Employees

Treat contract employees distinctly, employees fair wages, determined on

but without discrimination. No dis the basis of region-cum-industry sur
crimination when it comes to em veys.
ployee amenities at the workplace,
- We encourage and support contrac
shift timings, work breaks timings,
tors to have "employee-connect"
etc. For instance, one of our facto
events; provide training for skill up
ries celebrated its centenary this
gradation; and consider them for
year. All regular employees were
regular employment when vacancies
given a memento to commemorate
arise.
the year. Nothing new there. But
what was a welcome "new" was that Conclusion
all the contract employees engaged
in the factory were given a memento We consider it apt to paraphrase Max
as well - no discrimination.
Frisch, the Swiss playwright and novel
ist, to sum up the discussion: "We asked
100 per cent compliance to laws ap
for contract labor. We got people in
plicable to contract employees includ
stead." And people want a "Decent Work
ing work place safety, with zero tol
Agenda" to be fulfilled -full and produc
erance for any violation. The
tive employment, rights at work, social
factory's HR department works with
contractors to ensure that contract protection and promotion of social dia
logue (ILO Manual, 2012). This isn't too
employees are not denied their dues
much to ask and, therefore, certainly not
and their grievances, if any, are re
too much to give. Whether employees
dressed quickly. It is also our intent
perform generic or tailored activities is
to conduct employee satisfaction
an important consideration in deciding
studies for this category of employ
ees in the near future. their employment mode. But it is more
important to acknowledge that by work
Contract employees are to enjoy theing together they can boost a company's
freedom to form collectives. Two ofperformance and ensure its success.
our factories have unions represent
ing contract employees. PeriodicReferences
Long Term Agreements are entered
into between the contractors and theILO Manual (2012), Decent Work Indicators:
Concepts and Definitions, International
contract employees after due collec
Labor Office, Geneva.
tive bargaining. The process of ne
gotiations is facilitated by managers Lepak, D.P. & Snell, S.A. (1999), "The Human
of the factory's HR department. Resource Architecture: Toward a Theory
of Human Capital Allocation and Devel
These agreements ensure that con
opment", Academy of Management Review,
tract employees enjoy the same rights 24(1), 31-48.
and obligations as regular employees.
Magretta, J. (2012), Understanding Michael Por
Where there are no collectives, we
ter: The Essential Guide to Competition
ensure that contractors pay their

The Indian Journal of Industrial Relations, Vol. 50, No. 2, October 2014

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 R Sridhar & S Panda

and Strategy, Boston, Massachusetts.

Saini, D.S. (2010), "The Contract Labor Act 1970:
Harvard Business Review Press. Issues and Concerns", Indian Journal of
Industrial Relations, 46(1 ).
Pfeffer, J. (1998), The Human Equation: Build
ing Profits By Putting People First, BosTsui, A.S., Pearce, J.L., Porter, L.W. & Tripoli,
ton, Massachusetts. Harvard Business Re A.M. (1997)," Alternative Approaches to
view Press. the Employee - Organization Relationship:
Does Investment in Employees Pay Oft?"
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Academy of Management Journal, 40 (5),
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New York. Free Press.

212 The Indian Journal of Industrial Relations, Vol. 50, No. 2, October 201

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