Now employer can change permanent employees in to contract employee - a point of worry for most permanent employees. Is this true?

Now, the employer can change permanent employees into contract employees. This has been a point of worry for most permanent employees. Is this true?

Dear member,

Yes, it is a matter of worry. Nevertheless, from the business point of view, keeping manpower on the contractor's roll is not advisable.

The departments that function at the tertiary level like security or housekeeping do not play a major role in developing the products or providing services to the customer. Hence, these are considered suitable for outsourcing. In contrast, the employees from the core department or the employees that are in the support function are directly or indirectly involved in satisfying the customers. Therefore, it is not advisable to put these employees on the contractor's roll.

Let us do costing for keeping the employees on the contractor's roll. Imagine "X" number of employees are on the direct roll of the company. The company contemplates putting them on the contractor's rolls. What are the financial implications? These are as below:

a) Suppose the monthly salary bill (including PF, ESI, etc.) = Rs 10,00,000/-

b) Service charge by the contractor @ 10% = Rs 1,00,00/-

c) Total (a) + (b) = Rs 11,00,000/-

d) GST @ 18% on (c) = Rs 3,24,000/-

e) Total amount payable to the contractor = (c) + (d) = Rs 14,24,000/-

Therefore, there is a whopping increase of Rs 4,24,000/- in the salary bill, which works out to a 42% increase! Which company can afford to do that?

In case one thinks that the 10% service charge by the contractor is too high and the contractor can provide service at 7%, then also the amount payable to the contractor works out to Rs 11,92,600/-, which is an 11.92% increase. Which company can afford to do that?

In fact, today we are passing through the COVID-19 pandemic, and a reduction in backend costs is a primary requirement of any business person. Amidst this, if some business person thinks of putting the employees on a contractor's roll, then it is nothing but "aa bail mujhe maar" (inviting trouble).

Thanks,

Dinesh Divekar

Dear colleague,

Even before the present amendments in law, the deployment of contract workers was rampant. Now that the law is in the offing, it is going to permit replacing permanent jobs with contract workers, creating a free-for-all situation. Employers will continue to exploit two prominent advantages - cost reduction and the ease of shedding labor at will. The latter is so difficult today, often resulting in drawn-out legal tangles.

I don't believe the new law will immediately replace existing permanent jobs with contract workers. It will likely happen gradually and perhaps in a phased manner. However, in the future, it will surely pose a threat and be a cause of concern for job seekers. This shift is expected to provide a significant boost to the emerging gig economy but will adversely impact aspiring future job seekers.

Regards,
Vinayak Nagarkar
HR and Employee Relations Consultant

Dear HR buddy,

Engagement of manpower through a contractor and directly hiring manpower on a contract (Fixed Term Employment) are prevalent practices across industries. However, the labor codes are likely to give more momentum to these practices as the obligations are made lighter for employers.

Regards,
Shailesh Parikh
99 98 97 1065

In another debate, I mentioned that even regular permanent employees are transitioning from contract labor. Why do some advocates give false hope to innocent contract laborers by suggesting that they will become permanent through legal challenges?

When it comes to the present scenario, the business world is dynamic and ever-changing. We must adapt to these changes in the world. This trend is common in the U.S., where a significant majority of employees are temporary recruits rather than permanent. Australia follows a similar pattern.

Similarly, many Indians work in foreign countries on two to five-year contracts. Hence, we need to adjust within our own country as well, despite the initial unease.

Having served as a government employee in a supervisory role, I have often questioned why non-performing, substandard, worthless, devalued, corruptive employees have secured jobs through compensation or reservations. The government ends up burdened with such employees unnecessarily.

I hope and suggest that the government sector should also consider implementing contract employment on a larger scale nationwide, along with compulsory retirement for underperforming employees, based on public opinion.

Dear friends,

An analysis on the subject attached is worth reading and debating in the backdrop of the ongoing discussion in our forum.

Good Evening,

Further to Mr. Divekar's post on the financial implications of transitioning from permanent to contract employment:

1) Is the bonus amount lower for a contract worker?
2) Is the gratuity amount any different?
3) Is the principal employer responsible for the working conditions, application of fair and just rules of minimum wage, date of payment, PF, etc.?

Effectively, I want to evaluate the differential impact of transitioning from permanent to contract employment. Looking forward to your responses.

Dear Friends,

It is a matter of concern, but not for those employees who are permanent as of today, as no one can change their terms and conditions of employment. This will have an impact after the applicability date for new recruitment.

The new development is the provision of a "Reskilling Fund," which can be utilized for skill development in the case of technological changes.

The provision for fixed-term employment or contractual employment already exists in the current labor laws.

This will help change the mindset of both employees and employers in many positive ways. Accountability and responsibility will be more clearly defined in public sector companies and government organizations.

There are no major changes in social welfare rules and regulations such as ESI, PF, Payment of Bonus, and Payment of Gratuity.

These codes will provide more support to employees who are currently not covered under existing laws.

These codes will also support employers in enhancing employee productivity and will make compliance easier in the future.

Please feel free to reach out for further discussions or clarifications.

Thanks,

Dear colleagues,

The type of employment will undergo a great transformation in times to come with the 'gig economy' dominating the scene. The concept of a permanent employee will be largely given a go-by, and more and more gig workers will fill the scenario. This means the engagement of Fixed-Term Employees, Temporaries - whether full-time or part-timers, freelancers in niche areas/competencies will occupy workplaces, or those who will continue to work from home. The outsourcing of non-core operations will also increase.

The manufacturing sector in India will continue to engage contract labor and will be the major taker. The conversion or replacing of existing permanent workers/staff by contract workers will be at a gradual pace, but future recruitment will be predominantly non-permanent, except for a very minuscule core/niche/critical staff required to run essential operations.

Largely, employees will be engaged for a specified duration, moving from projects to projects, employer to employer, one location to another, with all the benefits like Bonus, PF, Gratuity, ESI, etc. Between two consecutive jobs, there could be a short break or in continuation under the same employer or different. But all dues will get settled on completion of the previous job, and it will be a fresh start in a new project. This will be the scene largely in non-manufacturing sectors like service, banks, insurance, hospitality, healthcare, to name a few.

With government laws tending to favor gig workers, I attempted a bit of crystal gazing of the future employment scenario. I don't believe it to be complete in all its aspects and implications. I would appreciate further churning of thoughts on this subject from the learned colleagues.

Regards, Vinayak Nagarkar HR and Employee Relations Consultant

Yes, Mr. Vinayak,

With the advent of the new Labour Codes and the reformed labour laws in the country, India will start looking westward for adopting labour practices for engaging labour across semi-skilled and skilled portfolios. With gig employees set to become the norm in India, thoughts of Hollywood, especially Agent 007 movies featuring experts like James Bond, John Rambo, or Rocky, who undertake jobs for a fee without being permanent employees, come to mind. Although it may seem far-fetched, what if employers increasingly turn to engaging more gig employees, starting with minor repairs and maintenance works in the plant? This concept has already made its way into our establishments in areas such as housekeeping, utilities, and the like. It is uncertain how long it will take to fully implement this approach and overcome all obstacles in the process.

The thread starter has aimed at Fixed Term Contract and not contract labor, I presume. The apprehension was whether the permanent workers be converted into fixed-term contract workers? The answer is No. That was what was given in the notification issued some two years back when the Govt issued a notification allowing FTC employment across industries and amending the Standing Orders Act. The notification (GSR 235(E) dated 16-3-2018 in clause 3 has provided for an amendment rule 3 of Industrial Establishment (Standing Order) Rules by inserting section 3A as follows:

"No employer of an industrial establishment shall convert the posts of the permanent workmen existing in his industrial establishment on the date of the commencement of the Industrial Employment (Standing Orders) Central (Amendment) Rules, 2018, as fixed-term employment thereafter."

However, when the bargaining power of employees becomes less, the permanent workers may have to accept any offer given by their employers. Fixed-term Employment per se is an attempt to make the labor market more elastic. For an employer, it is not the EPF, ESI, or gratuity that is hindering his decision to hire people but the permanency or the 240-day clause or the restrictions for FIRING that disallows him to hire people. When you have the option to hire people for one year, he will hire and fire them if not fit or if he is found "anti-employer" in attitude. He is okay with contributions like PF or even Gratuity. If he can terminate an employee without undergoing the formalities of retrenchment that gives a lot of relief, and that is what is called 'ease of doing business'! FTE gives the employee flexibility. If the employee is not okay, the maximum the employer has to do is to keep him until the period ends. Then his contract will not be renewed, and obviously, the employee has to go.

India has a secular economy, and it will be very difficult for a permanent employee to work under a contractor. In general, many dominant factors will be visible. As of now, employers were aware that these employees are permanent and cannot be sacked easily; however, now, for small reasons or arguments, they can take action. India cannot be compared with other states or international bodies where the salary and wage scale is much higher compared to India. Now, only skilled and educated employees can survive; others will have to hunt for jobs or beg for their livelihood. The situation is going to be crucial as unemployment and burglary will increase. India will go on the back foot after implementing this bill effectively.

Dear Deenajag sir,

Under all labor enactments, all such benefits of bonus, gratuity, minimum wage principal, employer's liability for the safety of all workers irrespective of temporary, permanent, contract, daily trainee, etc., in payments, salary, PF, ESI benefits are as usual with permanent employees. The only difference is contract employees are monitored by a contractor authorized by the principal employer with the prior approval of the Government of India and state-level Labor Departments. Whereas permanent employees are directly monitored by the company itself by managerial cadres. Managers do the same monitoring through the contractors on contract labor. For contract labor employees, all labor laws are one and the same as the Employees' Compensation Act (W.C.) Act. Industry disputes act equally applicable as usual, the same with regular permanent employees. Ok

The gist of the question is whether the new Labour Code will accelerate the conversion of permanent jobs to that of contractual jobs lasting for a fixed period. The answer is an inevitable 'YES' only.

At the outset, I would like to answer the three questions raised by Mr. Deenajag.

1) It is the common practice across all industries that contract labor is paid only the minimum bonus of 8.33%. It is going to continue as the bonus is taken out of the definition of wages under the Codes.

2) FTC employees are going to get gratuity proportionate to their length of service. It would be equally applicable to contract labor as well.

3) The PE is responsible for such welfare amenities and other statutory periodical dues.

Regarding contractualization of permanent jobs, it would be in a phased manner only as opined by some of the friends. The amendment to the rule of the Standing Orders Act pointed out by Mr. Madhu had a protective clause to keep the ratio of the FTE at a level to the cadre strength of permanent positions. The conspicuous absence of such a clause in the Code actually instills fear psychosis in the minds of all.

The gradual universal change in the pattern of employment highlighted by Mr. Vinayak and the counterargument advanced by Mr. Dinesh Ahuja based on the Indian situation are equally plausible.

Anyway, I hope that the working of the Codes over a period of time will certainly necessitate the bringing of appropriate amendments.

Dear Mr. Umakanthan,

Dear Mr. Gannahope,

Dear Mr. Madhu,

Many thanks for your replies and insights.

Dear Deenajag,

Thank you, sir. Please note that any employee engaged by the employer, manager, or through a representative like a contractor, who has joined just an hour ago, is entitled to all protections under the Labor Acts. This includes situations where the employee may work within the company premises or be engaged in work outside the company such as marketing, bringing or delivering materials to faraway or nearby places, or following temporary instructions from a superior. It is essential to ensure that all safety laws are applicable to the employee in these circumstances.

Thank you.

Coming again to the fear of scot-free conversion of permanent jobs to that of FTE Contracts in the long run, the Standing Committee recommended certain limitations on the FTE Contracts like limiting the period of the contract to a maximum of three years including extensions. But this issue was not only not addressed but also the restrictive clause in the amended provision of the standing order rule was done away. For instance, Italy has limited this FTC arrangement only to a maximum of 20% of the total number of permanent jobs. The drafting of the Rules is said to have been entrusted to a panel of external experts. Let us wait and see anything that comes out from the Rules.

In a country like India where rules are made and amended for the benefit of employers, you cannot expect any change in it. In my opinion, we should have a balance between investment and the welfare of workers, but this kind of legislation aims at investment (attracting investments) at the cost of health, safety, and welfare of workers. It appears that investors did not come to India solely due to labor laws and their restrictive clauses relating to retrenchment. I am afraid that even in the present scenario, no employer retrenches their employees, and everyone follows the rules relating to the safety, health, and welfare of their workers!

The saving clause in the amendments to the central rule of 16th March 2018 is deleted in the IR Code 2020. This shows the changed intention of the legislature/Government.

In many countries where FTE is allowed, there is a cap on the number of times a person can be on FTE. Actually, the fixed-term contract was already in Section 2(oo) of the ID Act.

Varghese Mathew