INTRODUCTION

Outsourcing mostly creates permanent or longer-term, fixed contract employment based on the
outsourcing period (usually three or five years), and hired workers are put on the outsourcing
service provider’s payroll in most cases. The service provider is bound by the country’s labour
legislation and is liable for terminating such employment in any unforeseen circumstances.1

Outsourcing is the business practice of hiring a party outside a company to perform services and
create goods that traditionally were performed in-house by the company's own employees and
staff. Usually done as a cost-cutting measure, it can affect jobs ranging from customer support to
manufacturing to the back office.

Outsourcing was first recognized as a business strategy in 1989 and became an integral part of
international business economics throughout the 1990s.

The practice of outsourcing is subject to considerable controversy in many countries. Those

opposed argue it has caused the loss of domestic jobs, particularly in the manufacturing sector.
Supporters say it creates an incentive for businesses and companies to allocate resources where
they are most effective, and that outsourcing helps maintain the nature of free
market economies on a global scale.2

POSITION OF OUTSOURCING UNDER THE REPORT OF THE SECOND INDIAN

NATIONAL LABOUR COMMISSION.
After the gap of almost 72 years the Second National Labour Commission has been constituted
and submitted its report in the year 2002 to the Government of India. At the outset the terms of
reference to the commission are as under:
To suggest rationalisation of existing laws relating to labour in the organised sector, and

1
Sandile Gwala, ‘Labour Broking and Outsourcing’
<https://www2.deloitte.com/content/dam/Deloitte/za/Documents/process-and-operations/ZA_Labour
%20broking%20and%20outsourcing%20-%20FP.pdf> accessed 09 November 2017.
2
Laura Abramovsky and Rachel Griffith, Journal of the European Economic Association Vol. 4, No. 2/3, Papers and
Proceedings of the Twentieth Annual Congress of the European Economic Association (Apr. - May, 2006), pp. 594-
601
To suggest an umbrella legislation for ensuring a minimum level of protection to the workers in
the unorganised sector.
Outsourcing has found mention in the report of Labour Commission while discussing the
changing world under globalization and the social stigma attached to it.
“The study on industrial subcontracting shows the extent to which major private sector and even
public sector companies have resorted to outsourcing work, including homebased work, in recent
years. Although this has increased work opportunities for women, it is unfortunate that the
earnings are very low, sometimes well below the minimum wage. The average monthly earnings
in technical trades like electricals are reportedly Rs. 450 per month; strangely, no different from
aggarbatti making or leaf plate making. Nor do the workers engaged by sub-contractors, have
access to social security systems. Due to the low piece rates in home-based work, women take
the help of their children, thus leading to a situation where the incidence of child labour seems to
be increasing in the home-based trades. The ILO adopted a Convention on Homework in 1996.
The Commission recommends that the Government formulate a National Policy on Homebased
Work, in conformity with the provisions of the ILO Convention.”3
Further while discussing the challenges of labour:
a) Challenge of Globalisation: The Indian economy has opened up in the last decade. India has
also become a member of the World Trade Organisation (WTO). In order to remain competitive,
the organised sector has commenced outsourcing. The use of casual and contractual labour has
increased for meeting varying production levels. Globalisation has also thrown up a challenge in
the form of exposure to new technologies and products, which are perceived as a threat to the
traditional areas, particularly in the unorganised sector. The lessons from this exposure need to
be assimilated by the workforce.4
Critics on the Report
The commission has used the term "outsourcing" but has not defined the term anywhere in the
report.

3
National Labour Commission, Second Report of National Labour Commission(Law Com No 2, 2002) paras 9.56.
4
National Labour Commission, Second Report of National Labour Commission(Law Com No 2, 2002) paras 10.19.
CONTRACT LABOUR (REGULATION AND ABOLITION) ACT 1970
The Object of the Contract Labour (Regulation and Abolition) Act, 1970 is to prevent
exploitation of contract labour and also to introduce better conditions of work. A workman is
deemed to be employed as Contract Labour when he is hired in connection with the work of an
establishment by or through a Contractor. Contract workmen are indirect employees. Contract
Labour differs from Direct Labour in terms of employment relationship with the establishment
and method of wage payment. Contract Labour, by and large is not borne on pay roll nor is paid
directly. The Contract Workmen are hired, supervised and remunerated by the Contractor, who
in turn, is remunerated by the Establishment hiring the services of the Contractor outsourcing
industry. The term ‘establishment’ has been defined under the Contract Labour Act
Under section 2(e) "establishment" means-- (i) any office or department of the Government or a
local authority, or (ii) any place where any industry, trade, business, manufacture or occupation
is carried on, which means any place where any industry, trade, business, manufacture or
occupation is carried on.
Under the Contract Labour Act a workman who has been outsourced is deemed to be employed
as an ‘outsourced labourer’ in terms of work done in an establishment when he or she is hired by
or through a service provider, with or without the knowledge of the principal employer.
Further, the Contract Labour Act defines ‘service providers’ as persons who undertake to
produce a given result for the establishment, other than a mere supply of goods of articles of
manufacture to such establishment, through outsourced labour or who supplies outsourced labour
for any work of the establishment.
The Contract Labour Act is applicable to:
• Establishments employing 20 or more working persons as outsourced labour on any day of the
preceding 12 months; and
• Service providers employing 20 or more working persons as outsourced labour on any day of
the preceding 12 months.
Also as per the provisions of the Contract Labour Act in the event the service provider fails to
make payment of wages within the prescribed period or makes short payment, then the principal
employer shall be liable for the same.
Also, there is a proposal to amend the Contract Labour Act to ensure that in the case of contract
labour performing the same or similar kind of work as the working persons directly appointed
by the principal employer, they shall be entitled to the same wage rates, holidays, hours of work
and social security provisions. Further, whenever a contract worker is engaged through a
contractor, the contract agreement between the principal employer and the contractor
shall clearly indicate the wages and contribution towards social security schemes and other
benefits to be paid by the contractor to the contracted working person. The contractor, if
contravening any provisions, can be prosecuted under the Contract Labour Act and can be levied
a fine. Contravention of any provisions of the Contract Labour Act shall be punishable
with imprisonment to the extent of three months or with a fine of up to 1,000 rupees, or with
both and, in the case of continuing contravention, with an additional fine of up to 100 rupees per
day.
In the case of Madurai Binders v State of Tamil Nadu5
Madras High Court was faced with the question of status of Outsourced workers under the
Contract Labour Act. In the present case the State of Tamil Nadu issued a tender and outsourced
the work binding of books and documents in the official press of the state. The question which
arose was whether these outsourced workers are protected under this act or not.
Analysis and Findings:
The main aim of ‘Outsourcing’ is the process of contracting a job war function to some other
person. No wonder, it is just opposite to ‘Insourcing’. Ordinarily, ‘Outsourcing’ is resorted in
regard to ‘non-core to the business'. To put it differently, ‘Outsourcing’ is entering into a contract
with other person/company to undertake the performance of a specified work. Also that,
‘Outsourcing is the use of extraneous business relationship to fulfil necessary business activities
and processes instead of internal capabilities. The persons who provide the ‘Outsourcing’
facilities are described as Outsourcing Partners, Outsourcing Suppliers and Providers. Those who
go to purchase Outsourcing services are described as “Buyer” and “Users” in ordinary language.
Indeed, in Outsourcing work, the Buyer generally does not issue instructions to the Supplier how
to turn out its work. However, the Buyer concentrates on communicating what results it desirous
to purchase/buy. The Supplier is to produce the results in regard to the work that he is entrusted
to perform.
It is to be borne in mind that ‘Outsourcing’ is not a matter recruitment as per rules and
regulations. The ‘Outsourcing’, in the present case on hand before this Court, is nothing but a

5
AIR 1995 Mad 147
method of supply of work force through an individual contractor or service provider or labour
supplier. In effect, it results in introduction of a ‘Middle Man’ for providing services in binding
operations in the Stationery and Printing Department at the Branch Presses in Chennai and
Mofussil. Undoubtedly, for the contractual arrangement for a period of one year for entrusting
the services in binding operations in the Stationery and Printing Department at the Government
Presses in Chennai and Mofussil, the monetary amounts would be disbursed, which in turn, may
not same the cost.
On a careful consideration of respective contentions and the Court took note of the fact that the
policy decision of the Government in regard to the employment of persons from various sources
including through ‘Outsourcing’ does not bar the applicability of Contract Labour act and all the
benefits pertaining out of it.

THE MINIMUM WAGES ACT 1948

The Minimum Wages Act 1948 provides for fixing wage rates for any industry that has at least
1,000 workers. The definition of an ‘employee’ as per the Minimum Wages Act, 1948 covers in
its aspect a working person employed as outsourced labour. Hence the Minimum Wages Act
1948 is applicable to outsourced labour. The Minimum Wages Act 1948 requires the principal
employer to pay wages to outsourced workers.
In the state of Maharashtra, the Maharashtra Contract Labour (Regulation and Abolition) Rules
1971 necessitate that the outsourced working person shall not be paid less than the minimum
rates of wages fixed under the Minimum Wages Act. Where rates have been fixed by agreement,
then the rate of wages payable shall not be less than such rates so fixed. The higher of the two
above-mentioned rates shall be considered for the purpose of making payment to outsourced
labour. The Act provides for imprisonment of up to six months or a fine of up to 500 rupees, or
both, for contravention or non-compliance.6

6
S.S. Rana & Co. Advocates, Maharashtra Shops And Establishments (Regulation Of Employment And Conditions Of
Service) Act, 2017<
http://www.mondaq.com/india/x/634912/employee+rights+labour+relations/Maharashtra+Shops+And+Establish
ments+Regulation+Of+Employment+And+Conditions+Of+Service+Act+2017> accessed on 07 November 2017.
THE SHOPS AND ESTABLISHMENT ACT
The Shops and Establishment Act is a state legislation act and each state has framed its own rules
for the Act. Its object is to provide statutory obligation and rights to employees and employers in
the unauthorized sector of employment, namely, shops and establishments.
The Shops and Establishment Act of different states extends to the whole of the state and within
each state, and covers such areas as the state government may designate from time to time.
For example, the Punjab Shops and Commercial Establishments Act 1958, which extends to the
whole of the state of Haryana, defines the term ‘employee’ as covering outsourced labour in its
scope, but it does not include a member of the employer’s family.
Also, the Punjab Shops and Commercial Establishments Act 1958 lays down the provisions
concerning the safety of female employees and directs the establishments registered under the
Punjab Shops and Commercial Establishments Act 1958 to provide adequate
security and proper transport facility to the female workers during the evening night shift.

THE PAYMENT OF BONUS ACT 1972

Payment of Bonus Act 1972 (Bonus Act) is applicable to every factory and every other
establishment in which 20 or more persons are employed on any day during an accounting year.
The definition of ‘establishment’ under the Bonus Act includes commercial establishments and
establishments registered under the Bombay Shops and Establishments Act 1948.
Hence, the manager, managing director or managing agent or any person who has the ultimate
control over the affairs of the establishment of a service provider registered under the Bombay
Shops and Establishments Act 1948 can be considered as an ‘employer’ under the Bonus Act.
A service provider is liable to pay bonuses as accrued to working persons who are employed as
outsourced labour by him or her subject to the following conditions:
• if the establishment is new it is not liable to pay a bonus for a minimum of five years, if it does
not make any profit in the first five accounting years following the year in which it sells goods
produced by it or renders services; and
• an employee drawing a salary of more than 10,000 rupees is not entitled to a bonus.
An employee who has worked fewer than 30 working days in the relevant accounting year is not
entitled to a bonus. In the event of noncompliance or violation, the Act provides for
imprisonment of up to six months or a fine of up to 1,000 rupees or both.
In the case of a transfer of a business undertaking, the law effectively enforces a transfer of
employees. The Industrial Disputes Act 1947 deals with the situations where an employer
transfers a business undertaking and the employees move as a consequence of that transfer. In
terms of the provisions of the Industrial Disputes Act, where employees transfer in the case of a
transfer of business undertaking, the employer is liable for severance compensation, unless the
new employer is able to provide both continuity of employment and similar or better benefits
than were available with the original employer.

CONCLUSION
The time in which we live we cannot ignore the importance of outsourcing in the business and
industries because outsourcing has enormous benefits, increasing efficiency, business strength
and transfer of technology. Country like India has to accept the realities of globalization and
formulate a comprehensive strategy to deal with its different facets. An exciting time ahead for
outsourcing to India.
Rapid, robust rise of the outsourcing sector has to be supplemented with further legal provisions
relating to data protection, confidentiality and other related laws.
The report of National Labour Commission is also not inspiring in this regard because the
concept of outsourcing has not been dealt by the commission and is left in shambles.
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