What is Contract labour? Advantages, Best Practices, Trends

Human resources is a major contributor to a country’s GDP growth and staying competitive on the international stage. As the business landscape is expanding, the need for contract labour is also exponentially rising giving employment opportunities to individuals from all backgrounds.

Most companies find it challenging to manage their operations with just permanent employees and hence always need the support of contract workforce to achieve the desired outcomes. Let’s learn all the aspects and trends related to labour contract so that we can informed decisions on how to manage contract labour in a better way and improve their working experience.

What is Contract Labour?

The contract labour definition states that ” Contract labour is a form of temporary or part-time employment where an individual is hired under a contract by a contractor to perform a specific task or a project for fixed duration”.

A labour contract is a formal agreement made between the contractor and the workers to describe the type of employment, working duration, facilities like food, water and accommodation, wages provided, terms of employment, etc.

Contract labour is regulated by the Ministry of Labour and Employment under the Contract Labour (Regulation and Abolition) Act, 1970. The features of the Contract Labour Act 1970 include:

• The CLRA Act applies to establishments and contractors that hire 20 or more individuals to perform a particular task for a fixed duration.
• The act ensures the prevention of contract labour exploitation.
• The act mandates contractors and principal employers to provide safe and habitable working conditions.
• The act ensures the contract labour management process is transparent and fair wages are provided to the labourers working under the contract.
• The act lays down rules and regulations for the labour contract license process applied by the principal employer or contractors to run contract employment.
• The act regulated the activities of the advisory boards.
• The act ensures appropriate penalties and legal actions are initiated in case of any violations committed under the CLRA Act.

Contract Labour vs Regular Employees: Key Differences

Contract labour meaning is quite straightforward, and it says, “Individuals or groups of individuals hired by a contractor for a fixed period to perform core or non-core activity for a project are termed as contract labourers”. On the other hand, regular employees are hired for a longer duration to perform tasks for an employer with numerous benefits and growth opportunities.

The key differences between contract labour vs regular employees are listed below:

What are the Advantages and Disadvantages of Contract Labour?

Here are the advantages and disadvantages of labour contracts:

What are the Advantages of Contract Labour?

1. Reduced costs: Contract labour wages are fixed and usually not very high when compared to permanent employees. Additionally, employers are not liable to pay health insurance and other benefits which significantly reduces costs to the company.
2. Flexibility: Employers can hire contract labour when there is a high demand and for the duration of their choice. When there is less demand, the employers can inform the contractor and stop the services.
3. Access to a wider talent pool: Employers can hire highly skilled professionals with specialised expertise to work for them on a contract basis.
4. Easy termination: If the employer or contractor is not satisfied with the performance, termination of employment is relatively easy when compared to terminating permanent employees.
5. Reduced liability: Typically, contractor has the most responsibilities of ensuring safety and good working conditions for contract labourers as per contract labour rules. This reduced liability on the part of employers in case of workplace accidents or mishaps.

What are the Disadvantages of Contract Labour?

1. Lack of job security: As per labour contract details, employers and contractors are not liable to offer permanent employment. It creates a lack of job security for contract labourers leading to uncertainties for the future and financial instability.
2. High chances of exploitation: Most labour contract sample surveys show that most contractors take undue advantage of contract labourers by offering them lower wages, unsafe work conditions, no benefits, etc.
3. Limited opportunities for career advancement: When we define contract labour, there is no mention of career advancement since contract labourers are hired for a specific task and then laid off after the task or project is completed.

What are the Best Practices for Managing Contract Labour?

The best practices for effective management of contract labour and preventing liabilities include:

1. Always Choose reputable contractors

Choosing the right contractor plays a vital role in ensuring contract labour is treated and managed effectively. Conduct thorough research and due diligence and opt for reputable contractors with a clean track record and good reviews from references.

2. Create a detailed contractual agreement

Before proceeding with the hiring of the labour contract, employers must develop a well-defined and detailed contractual agreement that clearly outlines the involved parties’ responsibility and liability in case of violations. These labour contract details must be reviewed periodically and updated to match the compliance requirements.

3. Ensure welfare requirement standards are met

Principal employers must ensure contract labourers have access to all the basic facilities like canteen, drinking water, restrooms, and protective equipment similar to permanent employees. Conduct frequent inspections to ensure welfare requirements are met and shortcomings are rectified on priority.

4. Conduct regular internal and external audits

Conducting regular audits is crucial to ensure the contractor is complying with regulatory requirements like providing exact contract labour wages as per contract, maintaining payment records and other documentation, EPF and ESI fillings, etc.

Partnering with a top compliance agency like ALP Consulting can be a great initiative to ensure compliance audits are done with expertise and compliance issues can be fixed on priority.

5. Try to avoid using labour contracts for core activities

Employers must define core and non-core activities and try to engage contract labourers only in non-core activities whenever possible. This will reduce dependency and prevent errors since most contract labourers are unskilled or semiskilled.

6. Keep accurate records to prove compliance

Documentation is vital to prove compliance with government agencies. Use compliance software or some automated mechanism to save records of transactions, contractor licenses, labour contract details, proof of contract labour wages, welfare measures provided to labour, EPF and ESI contributions, etc.

What are the Future Trends in Contract Labour?

1. Public or Private Companies prefer contract labour over regular employees.

With fluctuating business markets and stringent regulations, most companies across India prefer to hire more contract workers than permanent employees. As per the Public Enterprises Survey (FY24), From 2013 to 2024, the permanent employee hiring rate has dropped to 27.6% whereas labour contract hiring has significantly risen from 17% to 46.3% in PSUs.

This indicates that in the coming years contract labour hiring will surpass regular employee hiring and it will become a majority.

2. Data-driven decision making

Companies are using staff data analytics software to make informed decisions on managing their contractual staff hiring needs. This will not only help in making better planning, but also companies make better utilisation of contract labourers to improve productivity and profitability.

3. A diverse workforce in contract staffing

Diversity and inclusion policies are also being applied to contract staffing to ensure hiring is done from all backgrounds. This will improve employee branding and create a work environment with equal opportunities.

4. Emphasis on providing better employee experience for contract labour

Companies are seeing a lot of potential in involving contract labour in most of their departments to improve productivity and create an inclusive work environment. Hence, to provide a better working experience for contract employees even though it is short-term, companies are offering better compensation, training and development opportunities, better amenities, and a better working environment.

Are you looking for Contract Labour Partner?

To hire the best and most highly skilled contract labour and utilise their potential to the maximum extent, companies must choose a reputable contract labour partner. ALP Consulting, a leading contract staffing solutions company offers end-to-end contract staffing services for startups and Fortune 500 companies.

From identifying and shortlisting to onboarding and offboarding, ALP will take full responsibility for managing contract staff enabling their clients to focus on core activities for more productivity and enhancing brand reputation. Connect with us if you are looking for a trusted contract staffing partner.

Frequently Asked Questions (FAQs)

1. What is the meaning of contract labour?

Contract labour meaning is simple and states that ” an individual or group of individuals hired by a contractor or principal employer to perform a task for a project for a fixed wage and duration.”

2. What is the difference between contract labour and permanent employees?

Contract labourers are employed for a limited time with less to no benefits by the contractor. On the other hand, permanent employees are hired directly by the employer and enjoy a host of benefits like long-term employment, high income, medical insurance, ESI, PF, etc.

3. Who is responsible for contract labour compliance?

The principal employer is ultimately responsible for ensuring labour contract compliance even though the contractor manages the contract workforce.

4. What benefits should contract workers get?

Contract labourers are entitled to earn fixed wages (contract labour wages should be as per contract terms), amenities like canteen, drinking water, restrooms, first aid, etc., defined working hours, legal protection, safe working conditions, etc., under CLRA Act 1970.

5. What is the CLRA Act?

CLRA Act or The Contract Labour (Regulation and Abolition) Act, 1970 regulates the conditions of labour contract and safeguards the rights of contract workers under the Indian constitution. Both principal employers and contractors must comply with the regulations prescribed by the CLRA Act 1970 failing to which may lead to penalties, fines, lawsuits, and imprisonment.

Contact Us For Business Enquiry

Hariharan Iyer

Associate Director - HRO

Hariharan Iyer is the Vice President – Operations at ALP Consulting, bringing over 40+ years of experience in HR outsourcing and labour law compliance. He leads end-to-end HRO operations, ensuring process efficiency, statutory compliance, and seamless service delivery for clients across industries. With a strong background in labour law governance and workforce management, Hariharan plays a key role in driving operational excellence and compliance-led HR solutions at ALP Consulting.