Contract Labour and Casualisation

Why Indian factories increasingly hire workers through contractors instead of directly, and what this means for wages, security and productivity.

Walk into many Indian factories and you will find workers doing the same job side by side, but on very different terms. Some are permanent employees; others are contract workers hired through a third-party contractor.

What is contract labour?

Contract workers are employed by a contractor, who supplies them to the factory or company. The principal employer does not directly employ them. The Contract Labour (Regulation and Abolition) Act, 1970 regulated this arrangement, and its provisions have been folded into the Occupational Safety, Health and Working Conditions Code, one of the new labour codes.

The rise of contract labour

Data from India’s Annual Survey of Industries show that the share of contract workers in organised manufacturing rose substantially from the early 2000s, from roughly one in five workers to around two in five by the late 2010s.

Why firms use contract labour

Flexibility: firms can reduce the workforce easily when demand falls, avoiding strict layoff rules.
Lower costs: contract workers often earn less and receive fewer benefits.
Avoiding unions and permanent obligations.

Effects on workers

Lower wages for the same work.
Less job security.
Weaker access to social security, such as provident fund and health insurance, though laws require contractors to provide them.
Limited training and career progression.

Effects on productivity

Some research suggests that heavy use of temporary and contract workers reduces firms’ investment in training and may lower productivity over time. However, flexibility can also help firms grow and respond to demand.

Tensions

The gap between permanent and contract workers has led to industrial disputes. A notable example was the violent unrest at Maruti Suzuki’s Manesar plant in 2012, where disputes over contract labour were among the issues.

Reform debates

Some economists argue that if permanent employment rules were more flexible, firms would hire more workers directly. Unions argue for equal pay for equal work and limits on contract labour.

Same job, different deal

Two workers operate identical machines on the same assembly line. One is permanent, earning 35,000 rupees a month with health insurance and job security. The other, hired through a contractor, earns 15,000 rupees with no guarantee of work next year. The factory benefits from flexibility; the contract worker bears the risk.

Thinking contract workers do different work from permanent staff

Contract workers often do the same jobs as permanent workers, but with lower pay and less security.

Key takeaways

Contract workers are hired through contractors rather than directly.
The share of contract workers in organised manufacturing has risen substantially.
Firms gain flexibility and lower costs; workers face lower pay and security.
Reform debates balance flexibility with fair treatment.