Difference between contract workers & workers through outsourcing?

What is the main difference between workers hired as contractors and workers hired through outsourcing? Which option is more beneficial for the principal employer?

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Your question does not actually reveal your doubt. However, in my view, both essentially mean the same. In legal terms, it is called getting the work done through workers hired by a contractor. In common parlance, it is called outsourcing activities to a third party or agency because you can outsource your own activities. In both cases, there will be a contract with the third party or agency. So, there is no difference in legal implications and degree of benefits between the two. In either case, the contract workers will remain as employees of the contractor/third party but not of the principal employer.

There is another class of employees called fixed-tenure employees who are appointed for a fixed term by means of a contract. They are direct employees of the principal employer but for a fixed term, on the expiry of which they cease to be in the employment of the principal employer.

B. Saikumar HR & Labour Relations Adviser Navi Mumbai

I agree with Mr. Saikumar to the extent that both the engagement of contract labor for the works of the establishment and outsourcing the works of the establishment arise from a contract for service only. However, while the objective and the purpose for the adoption of the two by an establishment is the same:

- Contract labor reflects primarily the manpower supplied by the contractor in the work zone of the contractee, whereas outsourcing reflects the job or activity carried out by the contractor in his own premises elsewhere.

- Contract labor enables the contractee, who is called the Principal employer, concurrent supervision and control over the operations contracted out, whereas it is limited to the quality check of the end product or services outsourced.

- Contract labor enjoins vicarious liability of certain important conditions of employment of the labor on the part of the PE as per the provisions of the CLRA Act, 1970 in India or any other similar law if in force elsewhere, whereas no such statutory liability on the contractee in the case of outsourcing his activities or job.

- While the contract labor system involves only the local indirect labor, outsourcing activities may be offshore, and as such, it may be despicable to the locals.

Thus, the preference of one to the other from the points of economy and convenience of a PE/Contractee is dependent on various factors such as the nature of the activity, time, space, and so on.

Contracting or outsourcing are almost similar activities in the sense that the applicability of labor laws remains the same. It involves the appropriate liability of the principal employer, as well as the vendor or contractor.

Please let me know if you need further assistance or clarification.

From a legal standpoint, there is a huge difference between the two. Getting the work done through the contractor in the establishment of the Principal Employer attracts a host of legal provisions, which are not applicable in the case of outsourcing. However, the disadvantage of outsourcing is that the control over the work or the raw materials used, etc., is absent.

Hi Mr. LawBadri, sir.

Agreed with your point of view. Legislative norms apply in both cases, but if you outsource everything to another party, then the other party becomes equally responsible for abiding by the legal provisions. It is essential to understand that when it involves human resources, labor law applies in any case, whether it's manpower used in outsourced activities or contracts.

For example, a company as a client outsources its project to a Facility Management company. In this scenario, the FM company does not act as a contractor but sublets the activities under a contract to other vendors. The FM company then becomes the Principal Employer and has to ensure complete compliance. However, the client pays and remains indemnified. The advantage of outsourcing is, therefore, no hassles for the main client as the FM company handles everything on their behalf.

Dear Shri Bijay Majumdar,

There is a difference: the principal employer remains liable if the contractor works in the establishment of the principal employer. But this is not the case when the Principal Employer outsources the work, as the work is performed in the outsourced entity, which is another establishment for the purposes of labor laws, especially PF, ESI, Employees' compensation, etc.

Dear Lawbadri,

It is a mistaken notion that it is the location where the work of PE is done that determines the applicability of the Contract Labour Act. It is not so. It is also not correct to say if the work is done in PE's premises, it presupposes the existence of supervision and control by the PE who thus is required to regularize the contract worker. There are no such inferences provided by the provisions of the CLRA.

So long as the PE engages a third party/contractor/agency under a contract to procure labor to get his work done either at PE's premises or at his own premises under the supervision and control of the contractor, the CLRA is attracted irrespective of whether you call it outsourcing or by any other name.

B. Saikumar
HR & Labour Relations Adviser
Navi Mumbai

Shri B Saikumar,

I disagree. The labor laws in India maintain a difference. The position regarding PF and ESI laws is quite clear. Concerning the contract labor laws, the various definitions make it clear about the centrality of the concept of establishment. Additionally, when a particular task, such as the manufacturing of goods, is outsourced, the contract with the contractor becomes a contract for a specific task, clearly falling within the exemption provided in Section 2(1)(c) of the 1970 Act. There are established precedents on this issue. Let me know if you are interested in reviewing those precedents.

Best regards.

Thank you for all the positive comments from all experts. However, I would like to share an issue with you - we are a global manufacturing company and currently have 200+ employees on permanent rolls and about 60 on a contract roll engaged in various departments such as production, labs, tech support in sales, office boys, horticulture, etc. These 60 workers are under 3-4 contractors, and most of them have been working for many years. If someone leaves from these contract workers, each time we need to seek approval for a replacement from global management (similar to what we do for permanent employees). However, the global management now wants us to explore an arrangement with a third party/outsourcing company under which we could place these 60 workers, and if there is any turnover, that company would handle the replacement process. Please suggest accordingly.