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Flimsy arguments to justify contract labour -KR Shyam Sundar and Rahul Suresh Sakpal
-The Hindu Business Line

The Economic Survey’s efforts to link ‘excess’ labour regulation to this practice do not stand up to scrutiny

The Economic Survey has unconvincingly linked the practise of contract labour to an excess of labour regulation — what it calls ‘regulatory cholesterol’. The Survey alleges that to negotiate the regulatory “cholesterol” in labour law firms resort to contract labour. This is a contestable view.

According to the Survey, extensive use of contract labour is largely accounted for by the rigid labour laws, especially Chapter V-B of Industrial Dispute Act, 1947 (terms of retrenchment in industrial establishments employing more than 100 workers), and the cumbersome nature of compliance with labour regulations which often incentivises rent-seeking behaviour.

The employers’ stand is that had it not been for Chapter V-B, they would prefer to employ regular workers, as the contract labour system is more expensive. But trade unions wonder whether in the absence of employment security regulations the employers won’t easily dispense with these “regular” workers.

Oddly enough, the Survey, while extolling the virtues of regular workers, is critical of the employees’ provident fund (EPF). Excluding the odd “good” employer/contractor it is well-known that contract workers are an exploited lot. They are denied social security.

Will removal of Chapter V-B completely do away with the contract labour system? What about the employers’ argument that they need contract labour definitely for “peripheral” activities so that they could concentrate on “core” business activities? Why do principal employers employ “contract/trainee” workers in “regular work” and deny them equal compensation?

The burden of the counter argument is that by using rigid labour laws as a pretext employers have instituted an exploitative system of contract labour.

Weak law enforcement

Whether contract labour is a result of ‘regulatory cholesterol’ or ‘flexibility cancer’ is the moot question. To this end, some issues need to be looked at.

Is the demand for contract workers equal across all types of industries? Is labour regulation the sole factor triggering the demand for contract workers? Even assuming for a moment that labour regulation is the trigger, is the magnitude of contract labour employment and the work in which they are employed proportionate to the “regulatory cholesterol”?

Aggressive contract labour employment is not so much a result of the regulatory system but an effort to take advantage of employers’ superior bargaining power in the labour market, thanks to a weak law enforcement system. Why is the Survey utterly silent on the “governance failure” in arresting perverse managerial practices?

It is well-known that the enforcement intensity of the state (the number of labour inspectors for 1000 units/workers) is inexcusably low and the inspectorates utterly lack support infrastructure.

It is reported that the demand for contract worker workers is higher in States with low enforcement intensity, whether these are pro-worker states (Maharashtra and West Bengal) or pro-employer States (Rajasthan, Karnataka and Rajasthan).

Contrary to the “impression” given by the Survey, in a recent World Bank’s Enterprise Survey 2012-13, only 27 per cent firms have cited labour regulation as a major constraint, whereas more than 63 per cent of firms have reported lack of access to credit, poor infrastructure and corruption as main worries to conduct a business in India.

Capital intensity of industry

The contract labour debate may well take note the dynamics underlying the use of contract labour system. For example, data from the Annual Survey of Industries during 2000-2012 shows that capital intensive industries contributed much of the net rise in total employment during the period via the rise in contract labour employment.

The compound annual growth rate of directly employed workers in labour intensive industries was higher (4.5 per cent) than in capital intensive industries (3.2 per cent). Does this mean that firm-specific skills are more relevant for labour intensive industries than in capital intensive industries?

Finally, the Survey cleverly argues for adding employers’ provident fund contribution of 8.33 per cent to take-home pay, as workers like contract workers want more “take-home pay” for various reasons. Contract workers primarily are averse to social security payments for two reasons, viz. difficulty to access PF money due to operational failure (now being rectified) and fraud committed by contractors /principal employers in denying PF contributions to them.

The EPF was introduced primarily to promote thrift and provide for some modicum of security for future in the wake nil old-age support. The Survey cleverly uses workers’ data to destroy the last frontier of labour rights, namely social security.

Shyam Sundar is Professor, XLRI, Jamshedpur; Sapkal is Assistant Professor, Maharashtra National Law University, Mumbai