Encouraging Investment & Business in India: The Need to Clarify Employment Laws Relating to Outsourcing – By Cauveri Birbal

Amid the coronavirus pandemic, several countries across the world resorted to lockdowns to “flatten the curve” of the infection. These lockdowns meant confining millions of citizens to their homes, shutting down businesses and ceasing almost all economic activity. India is one of the most impacted countries, not only on the number of people being infected but also on the front of loss and lack of employment due to the lockdown. 

Despite the current situation, economically this is an opportunity and can become a blessing in disguise for the Indian market. It is well known that China is the hub of product manufacturing for companies across the globe. However, with the current scenario, the global market is now exploring other countries to outsource their manufacturing. The disruption caused by COVID-19 may offer India the opportunity to reinvent itself as a manufacturing powerhouse. But in order to encourage business in India, it is essential to bring in clarity in employment-related laws especially in the field of outsourcing. 

Outsourcing in the global economy is a much wider term now. Not just the non-core and incidental activities, but even the core and basic ones are being delegated to smaller firms and factories outside. Over a decade ago, outsourcing implied only call centres and BPOs, whereas now even multinational companies and big brands like Google, Apple, Facebook, Microsoft, CISCO etc. are outsourcing their jobs to various agencies across the world. The advantage of outsourcing is that not only does it save time of these big brands but also makes a powerful impact on the growth of smaller firms by generating more employment.

The outsourcing contracts are on principal-to-principal basis. One of the main reasons for entering into an outsourcing contract is to prevent employee-related issues apart from other factors. Since outsourcing is the future and will help boom India’s economy, therefore, it is essential that laws in India are made more compatible to the needs of outsourcing. The grey area which needs to be covered is distinction of genuine principal-to-principal arrangements, where the total manufacturing or the service is outsourced, from the age-old contract labour system of the country.

Under the contract labour system, a part of the process, such as finance, administration, human resources, housekeeping, security, catering, etc. is outsourced. It is a tripartite arrangement where there is a principal employer for whom the work is being done, a contractor who undertakes to carry out the work, and the workers of the contractor who carry out the work at the principal employer’s premises. In such an arrangement, Courts may have to dive deep and examine the nature of arrangement in case of employee-related claims. Courts in such cases are required to see that the arrangement is not sham or camouflage, meant only to flout laws, especially the termination-related procedures. 

However, unlike the contact labour system, in modern-day outsourcing the entire product manufacturing is outsourced. In order to encourage the incoming of outsourcing in India, it is very much essential and the need of the hour that such contracts be clearly kept outside the web of contact labour litigation.  Since the principal employer has entirely outsourced the entire manufacturing of the product to another, there is no reason for the principal to be held liable/responsible. 

Under the Indian laws, the key question in most of the litigations pertaining to outsourced contracts is whose baby is the employee. Cases are generally filed by employees seeking reinstatement after termination and also seeking regularisation, higher pay scales, etc. Courts have been given immense power to lift the veil and see the real nature of arrangement. Some of the major factors considered by the Courts are as to who is the appointing authority, who is paying salary, who takes disciplinary action, who has the power of supervisions and control, etc. The party which is seen to be taking care of these factors is saddled with the responsibility. Further, it is also seen if the particular entity to which work is outsourced, is catering to only one company or is it catering to a number of them. 

Even with respect to compliance of provisions such as minimum wages, provident fund, employees’ state insurance and other statutory benefits, as is the case of the three-tier contract labour system, the law is clear that even during non-compliance by the contractor, the principal employer shall be responsible. In the case of complete outsourcing, however, there is no reasonable justification for the brands to face such liabilities when they are not even remotely connected with the employee.

It is due to such litigation in India that the companies outside fear to outsource and invest in India. Laws on this aspect are ambiguous and often confused with contract labour arrangements. Therefore, it becomes crucial that the arrangement of outsourcing is clearly kept immune and outside the scope of such litigations. The crux of the issue is that if our laws are clarified, we can surely expect more foreign investments and growth of business houses, thereby generating income and creating large source of employment. Clarifying and easing out outsourcing laws would lead to a rapid growth in the number of companies outsourcing to India. 

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Cauveri Birbal is an advocate practising primarily in the areas of labour and service laws. 

Disclaimer: The views or opinions expressed are solely of the author.