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Abolition and Absorption of Contract Labour

Info: 3944 words (16 pages) Essay
Published: 8th Aug 2019

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Jurisdiction / Tag(s): Indian law

A Contract labour is a workman employed in or in connection with the work of an establishment when he is hired in or in connection with such work by or through a contractor, with or without the knowledge of the principle employer. [1] This system of employment is not new to India even though globalisation has strengthened its roots in recent times. However, it is interesting to note that from very early times the critiques of contract labour system were in plenty. [2]

Employers prefer contract labour as it promotes labour market flexibility and increases competitiveness of the enterprises. Contract labour is more productive as they work for longer hours, are cheaper, can be more easily deployed in work situations that are more hazardous and the cost to the company and the liability in cases of accidents is lower. Such a system provides flexibility in the working of the establishments as terminating a contract with the contractor offers a much simpler course than retrenching their own workers who may take recourse to the Industrial disputes Act. Also, employers save money by engaging labour without having to extend social welfare benefits such as leave wages, Employees’ State Insurance or Provident Fund contributions, and bonus. However, in all this the welfare of contract labour is ignored and they become an exploited and deprived lot. Even with the enactment of the CLRA Act, 1970 the contract labour force has not received much respite. [3]

The 1970 Act provides for abolition of contract labour wherever possible and practicable and where it cannot, policy of the Act is that working conditions of contract labour should be regulated so as to ensure payment of wages and essential benefits. [4] It gave the prerogative of the Court to decide on the abolition of contract labour to the appropriate Government after consultation with the advisory Board. [5]

However, there were certain glaring omissions in the Act. One of them dealing with the fate of the erstwhile contract workmen after the contract labour is abolished. These lacunae led to the catena of conflicts between the management and the labour. On the abolition of the contract labour, the labour seemed to be in a worse position than before as they can neither be employed by the contractor nor is there any obligation cast on the principle employer to engage them in his establishment. Even the courts left the decision of absorption on the industrial adjudicator who also could take a decision only if an industrial dispute in this regard was raised by the regular employees!

This research paper shall attempt to answer the following research questions while analyzing judicial position on absorption of contract labour which is abolished under section 10 of the 1970 enactment.

What are the problems faced by the contract labour due to the present judicial position?

What are the options available at present to contract labour once contract labour is abolished in a particular industry?

How can the position of contract labour be improved and what type of policy should the government adopt in this regard?


Initially, the judiciary seemed reluctant to interfere in giving an appropriate relief to contract labour through their absorption whenever they approached the court through a writ petition. For instance in B.H.E.L Workers Association, Hardwar v. UOI [6] the court observed that to abolish and absorb labour was a legislative activity with which the court was not entrusted under the constitution. In Catering cleaners of southern railway v. UOI [7] , the court held that writ of mandamus directing central government to abolish the contract labour system cannot be issued because section 10 had vested the power in the appropriate government. In the circumstances, the appropriate order to make according to Court, was to direct the Central government to take suitable action under sec. 10 of the Act within six months from the date of order. It was also observed that without waiting for the decision of the Central government, the Southern Railway was free on its own motion to abolish the system and regularise the services of the employees.

However, in Sankaran Mukherjee v. UOI [8] the Supreme Court which had earlier refused to interfere in cases to abolish and absorb contract labour directed the abolition and subsequent absorption of employees stressing on the fact that the CLRA Act,1970 should be construed liberally so as to effectuate its objects. Similarly, in R.K.Panda v. SAIL [9] , the court held that normally it would not exercise its jurisdiction under Article 32 or 136 to adjudicate over matters of absorption but in this case it directed that the contract labour as were continuing in respondents’s employment for the last 10 years in spite of change of contractors should be absorbed as regular employees. Also, in National Federation of Railway Porters, Vendors & Bearers v. UOI [10] , the court gave directions to regularise employees based on a report by Central Assistant Labour Commissioner.

The next major case was the Gujarat Electricity Board v. Hind Mazdoor Sabha [11] where it was held that only the appropriate government can abolish contract labour in accordance with section 10 and no court or industrial adjudicator has jurisdiction. On the matter of absorption, the Supreme Court observed that on the abolition of the contract labour, the labour seem to be in a worse position than before as they can neither be employed by the contractor nor is there any obligation cast on the principle employer to engage them in his establishment by the CLRA Act, 1970. They tried to gauge the legislative intent in this regard and concluded that no provision for automatic absorption must be out of the fear that such a provision would amount to forcing the contract labour of the principle employer. The court concluded that in this regard the industrial adjudicator could be of help. He has the jurisdiction to change the contractual relationship and also make new contracts between the employer and employees under the Industrial disputes Act 1947.

But, who could raise such an industrial dispute? Section 10 applies only where there exists a genuine contract. If contract is not genuine then the workers of the so called contractor can raise an industrial dispute for declaring that they were always employees of the principle employer and can ask for subsequent absorption. However, in case the adjudicator decides that the contract was genuine he may refer the workmen to appropriate government for abolition under section 10 but only if the dispute is espoused by the direct workmen of the principle employer. [12] (as otherwise the dispute will not be an industrial dispute under sec 2(k))

The above judgment neglects practical realities and has three fold limitations. Firstly, the court does not define in practical sense what a genuine or a sham contract is. Secondly, inestimable thrust has been imposed on regular employees of the principle employer to espouse the cause of the contract labour, which is highly unimaginable in the real sense. Lastly, there is a long experience of existence of inordinate delays in the reference of industrial disputes by the appropriate government for adjudication. In this regard once industrial adjudicator refuses or rejects the reference on the ground that the dispute is not an industrial dispute, the contract labour cannot dream of resolving their grievances.

Subsequently, Air India Statutory Corporations v. United Labour Union [13] ruled that on the abolition of the system of contract labour the workmen were entitled for absorption, and the court had powers under the Art.226 to direct the employers to absorb such workers. There is no need to make a reference under Sec.10 of ID Act for adjudication of dispute for absorption on abolition of contract labour in the industry. The raising of industrial dispute by the contract labour which is to be espoused by the regular workmen once the system is abolished was done away with.

However, soon post-globalisation and liberalisation period showed the judiciary wavering from its earlier stand. The judiciary was lead on this path by a series of government initiatives to simplify labour laws and to provide more flexibility to employers to ‘hire and fire’. In order to encourage investment and expansion by employers they felt justified in their actions. [14]

Unfortunately, Air India decision was overruled by Steel Authority of India Ltd v. National Union Waterfront Workers & Others [15] a five judge bench, wherein the court held that even in the cases where the system of contract labour is abolished, the erstwhile contract labour who might have put up years of service as contract labour under the same principal employer cannot be absorbed as a matter of right as there was no such provision in the Act. However, if it was a sham contract the contract labour could raise an industrial dispute and deserve absorption. Thus prospectively it became fruitless for the contract workers to approach either court or the appropriate Government to abolish the system of contract under the sec.10 of the Act.


The SAIL judgment is very harsh on contract labour in the establishment where it is abolished. On abolition, the contract of the principle employer with contractor in regard to contract labour comes to an end. Though the contract labour is still employed under the contractor, he can as well be terminated as a consequence of the notification, without payment of retrenchment compensation or following provisions of Industrial dispute act. [16]

In this situation the contract labour have limited options:

They may try to prove the initial contract between the contractor and principle employer was a sham or a camouflage essentially rendering them direct employees.

If Contract workers were engaged to discharge statutory duties, they may be absorbed.

They may raise an industrial dispute espoused by direct workmen to ask for their absorption.

Here 1 and 2 are very special situations and cannot be used in every case. The third option is also impractical. Though sub-contracting operations reduce the work of the permanent employees and contribute to high profits which contribute towards high bonus, the regular employees are hardly sympathetic to the interests of contract labour as they argue that sub-contracting hampers creation of job opportunities. So, essentially a notification for abolition leaves a labour unemployed and helpless for the lack of any judicial remedy. [17]

Another major resulting trend of SAIL case was that progressively more and more employers requested for registration for employing contract labour and an unprecedented increase in Contract labour. [18] Prior to this judgment there was always a threat and chance that courts may rule such contract as sham or illegitimate and direct for its abolition thus paving the way for the absorption of such contract workers. But as this judgment removed all hopes of regularization of the contract workers after the abolition of the contract labour it became futile for the workers to seek any such abolition. Thus, The CLRA in effect started to protect the employers and not the employees in terms of avoiding any long term employment relationship and consequent liabilities including the benefits of working condition, collective bargaining and rightful compensation package.


The SAIL judgment has overruled the Air India judgment, thus leading to the position that on the abolition of contract labour the principal employer is under no obligation to absorb them, though the judgment enjoins the principal employer to give preference to the erstwhile contract labour while recruiting fresh workers. Interpreting automatic absorption into Section 10 will be far beyond the principle of ironing out the creases and the scope of interpretative legislation and as such clearly impermissible. The arguments given in support are as follows-

The CLRA Act is a beneficial legislation, the benefits which the Parliament wanted to confer on the contract labour are specified in the Act and the Court by way of interpretation cannot add to those benefits.

Though this is a valid argument, it should be kept in mind that this is not the first time that judiciary has been creative in interpreting a statute and CLRA is no exception. Furthermore, by reading absorption into the statute the Court is only forwarding the objectives of the Act.

Absorbing the contract labour would amount to opening a new channel of recruitment and it could not have been the intention of the Parliament in enacting CLRA Act to provide for appointment to the posts in various Government / non-Government establishments by circumventing the service rules.

If the government has abolished Contract labour in a certain establishment, it has been done so after consultation of advisory board by an appropriate government. Thus, a lot of thought has gone into making this decision and it would hardly matter if after abolition the labour force in absorbed. This can be done on seniority basis or based on other qualification required to become a direct employee.

On abolition of contract system in an establishment, the contract labour nonetheless remains as the workforce of the contractors who get contracts in various establishments where the contract labour could be engaged and where they would be extended the same statutory benefits as they were enjoying before.

The contract labour may not find employment again for a long time or they may be retrenched, hence this argument holds no water.

Section 10 is intended to work as a permanent solution to the problem rather than to provide a one time measures by absorbing the existing contract labour.

This argument is baseless as even after absorption no more contract labour shall ever be allowed in the industry.

It could as well be that a contractor and his contract labour that were with an establishment for a number of years were changed just before the issuance of prohibition notification. In such a case there could be no justification to prefer the contract labour engaged on the relevant date over the contract labour employed for longer period earlier. This refers to a mere possibility which might or might not occur.

The Act clearly gives the penal consequences of violation of Sec.12 and Sec.7 in Sec.23 and Sec25 but it is not up to the Court to substitute for penal consequences it no absorption. Such an interpretation of provisions will be overstepping boundaries.

Keeping in mind the larger scheme and objects of the Act, this argument is petty and inconsequential.

What SAIL has overlooked is how a social welfare legislation aimed to prevent exploitation of labour leave contract labour unemployed on abolition under Sec.10? Surely, the legislature meant to eliminate the intermediary from the equation and not render the contract labour unemployed by the operation of section 10. Shedding more light on legislative intent, the Air India case refers to the preamble of CLRA Act. The Act regulates contract labour and its abolition in certain circumstances covered under Sec.10(2) but also “matters connected therewith”. The phrase “matters connected therewith” in the Preamble would furnish the consequence of abolition of contract labour.

Also, such an interpretation to the statute is not in harmony with the provisions of the Constitution. i.e the ratio falls foul of the constitution goals of the trinity-the preamble, directive principles o state policy and the fundamental rights. [19] When the principle employer is enjoined to ensure basic human rights and payment of wages while the contract labour system is under regulation, the question arises whether after abolition of the system workmen should be left in lurch denuding them of means of livelihood [20] and enjoyment of basic fundamental rights. It is further required that interpretation of the constitution by the Court is done to further socio-economic improvement of the poor and to sustain equality of opportunity and status and the law should constantly meet the needs and aspirations of society in establishing the egalitarian social order. [21]

Also, due to economic constraints, though right to work was not declared as a fundamental right and right to employment cannot, as a right, be claimed but after the appointment to a post or an office, be it under the State, its agency instrumentality, juristic person or private entrepreneur it is required to be dealt with as per public element and to act in public interest assuring equality, which is a genus of Article 14 and all other concomitant rights emanating there from are species to make their right to life and dignity of person real and meaningful. [22]


The SAIL judgment reflects the sentiments of the new political-economy prevailing at that time and coincided with liberalization and globalization in India. [23] The abolition and automatic absorption of contract labour would discourage investments and expansion of labour intensive areas in this highly competitive market. This could be why the legislature was hesitant in including absorption into the Act. Here judiciary could have used some creativity and continued with the Air India position but it is rather unfortunate that such a landmark decision which could have had far-reaching consequences for the labour market was overruled. Now it is upto the legislature to amend the Act suitably to incorporate automatic absorption in the scheme but what shall really benefit the labour class will be removing the intermediary from the equation. Also, contract labour should be sufficiently empowered to raise industrial disputes without taking the help of direct employees.

In this regard, the Second National Commission has recommended that the decision to abolish contract labour should not be an executive one based on the recommendations of Contract Labour Advisory Board concerned but must be a judicial one. It is unable to agree with the recommendation of the Study Group that the judicial body vested with the responsibility for making recommendation on abolition should also be empowered to order absorption by the principal employer of such numbers of contract labour as considered just and reasonable. [24]

The employment of contract labour has been condemned [25] and been referred to as archaic by the Supreme Court. [26] The courts have called it an improved version of bonded labour and sought to abolish it. [27] One of the greatest achievements of civilization in the 20th Century was the accomplishment of human rights as an integral part of Governance of the State. Even then rights such as the Right to Freedom of Association including the Right to form and join trade unions for the protection of interests, and collective bargaining, equality at work, protection against forced labour etc., all remain unattainable for the contract labour. Constitutional mandates in the directive principles to the state policy, enunciating – “Right to secure just and humane conditions of work(Article-42); Right to just and favourable remuneration, conditions of work, ensuring a decent standard of life and full enjoyment of leisure(Article-43); and Right to a standard of living adequate for him and his family(Article-39(a) and 47)”; remains a dream for these hapless workers. [28]

The attitude of the State, Employer, Trade Union and the Judiciary has to be sympathetic to the contract workers, to enable them the enjoyment of their human and constitutional rights. An early positive action in this direction is imperative.

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