Late last year, around 200 workers of a Chinese smart phone manufacturing unit, Hipad Technology India, were “sacked” without any prior notice. Reports suggest that the workers were employed on a contractual basis and due to the shortage of raw materials their contractor was asked not to supply workers. Thereafter, the agitated workers resorted to violence.

This and several such incidents of massive unrest and protests in India over the last decade are reflective of the pent-up anger of contract workers who find themselves in an increasingly precarious position.

Data from the Annual Survey of Industries (ASI), which covers establishments registered under the Factories Act, shows a surge in contract worker usage in the organised manufacturing sector. Over half of the increase in total employment from 7.7 million to 13.7 million between 2000-01 and 2015-16 was accounted for by contract workers.

The share of contract workers in total employment increased sharply from 15.5 per cent in 2000-01 to 27.9 per cent in 2015-16, while the share of directly hired workers fell from 61.2 per cent to 50.4 per cent over the same period. The rise in the use of contract workers who are not employed directly by the employer, but by an intermediary or contractor on short-term contracts, indicates significant informalisation of the organised workforce.

Data from the Labour Bureau’s Employment-Unemployment Survey (2015-16) show that 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 not only deepen labour market segmentation but also have widespread ramifications for economic stability and social cohesion.

Rigid labour laws?

Existing literature attributes the widespread use of contract labour to India’s rigid employment protection legislations, in particular Chapter V-B of the Industrial Disputes Act (IDA,1947), which makes it necessary for firms employing more than 100 workers to obtain the permission of State governments to lay off workers.

But labour regulations in India have not become more rigid over the last 15 years. If it all, they have become more employer-friendly. A case in point is the amendments made by several State governments since 2015 to raise the threshold to which IDA applies to 300 workers.

Das, Choudhury and Singh (2015) have also identified a series of court judgements on the Contract Labour Act which have made it easier to hire contract workers over time. Significant amongst these is the Steel Authority of India Ltd (SAIL) and Others versus the National Union of Waterfront Workers and Others (2001) which snapped the direct relationship between the principal employer and contract labour. The judgement stated that once the government has abolished contract labour, there is no obligation on the employer to employ former contract labour in regular jobs.

If labour regulations were the only factor driving contractualisation, we should have seen increasing contract worker intensity largely in labour intensive industries and in States which have traditionally been classified as having a relatively rigid labour regulatory environment.

Yet, data over the last 15 years suggest that it is capital-intensive and not labour intensive industries, which have witnessed a sharper increase in contract worker usage. Moreover, even States which have made amendments to their labour laws to make them more amenable to employers have witnessed a sharp increase in contract worker usage.

Cost factor

So, what then explains the increase in contract worker intensity?

First, 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 far fewer employee benefits compared to regular workers. This enables firms to reduce costs and improve competitiveness.

Second, the presence of contract workers in the firms’ workforce acts as an alternative workforce to suppress the bargaining power of their regular unionised workers.

In a recent study ( Explaining the contractualisation of India’s workforce , ICRIER Working Paper 369), we find that firms’ management tend to use contract workers to their strategic advantage to not only curb the bargaining power of regular workers but also keep their wage demand in check.

It is no surprise, then, that the real wages of directly employed workers (a proxy for regular workers in the data) have remained almost stagnant over the last 15 years.

That firms are not hiring contract workers simply to circumvent labour regulations suggests that making labour regulations more flexible and increasing the size threshold to which Factories Act and Chapter VB of IDA applies is unlikely to arrest the trend of increasing contractualisation.

Given that it is largely profit motive that is driving firms’ decisions to hire contract workers, it is important to ensure that wages of contract workers are at par with directly hired workers when performing the same work.

This is necessary not just from the lens of contract workers, but also for directly employed workers who have experienced negligible growth in their real wages as the pool of contract workers continues to expand. In principle, the Contract Labour Act prescribes that contract workers are entitled to “same wages” for the same or similar kind of work as regular workmen.

Further, it prohibits the use of contract labour in “core” and “perennial” activities. However, in practice these rules are not diligently followed. Given the increasing substitution of directly employed workers with contract workers and the change in the nature of “core” and “perennial” activities such that even in its “core” activity an enterprise does not have the same amount of work throughout the year, there is an urgent need to review the Contract Labour Act.

While the need for flexibility in the use of contract labour for activities that are not of a regular nature and vary from time to time is understandable, the provision of decent conditions of work and social security for these workers must be strictly adhered to.

The imperative of having robust labour regulations which protect workers, even as firms retain the flexibility to adapt to new technologies, assumes even greater significance in a changing world of work where the balance of power has increasingly shifted from labour to capital due to decline in unions and the globalisation of the economy.

Kapoor is Senior Fellow, ICRIER, and Krishnapriya, is a research scientist at Sanford School of Public Policy, Duke University