How India’s contract labour framework is changing

The Labour Codes are beginning to redefine the relationship between outsourcing and contract labour
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BHAWIKA CHHABRA

The evolution of labour law rarely happens overnight. More often, it mirrors the changing needs of the economy.

Over the past three decades, India’s approach to contract labour has undergone a quiet but fundamental transformation. What began as a law intended to regulate the engagement of contract labour is gradually evolving into a framework that examines the circumstances in which core business activities may legitimately be performed through contract labour.

The recent notification issued under the Occupational Safety, Health and Working Conditions (OSH) Code, 2020 illustrates that shift. Although the notification presently applies only to establishments under the Central Government’s jurisdiction, its significance extends beyond its immediate coverage. By prescribing a process to determine whether an activity constitutes a core activity, it offers an early indication of the direction in which India’s contract labour framework is evolving.

To understand why this matters, it is useful to revisit how India’s contract labour framework has evolved.

Industrial economy

When the Contract Labour (Regulation and Abolition) Act (CLRA Act) was enacted in 1970, India was predominantly an industrial economy. The concern before Parliament was not outsourcing as a business strategy.

The CLRA Act therefore regulated the engagement of contract labour while empowering the Government to prohibit its engagement in specified activities after considering several statutory factors, including whether the work was perennial and ordinarily performed by regular workmen. The underlying assumption was clear.

Economic liberalisation changed that assumption. Outsourcing gradually evolved from an operational necessity into a business strategy, extending well beyond manufacturing into service sectors such as banking, insurance, telecommunications and information technology. Business models evolved rapidly. The law was only beginning to catch up. Questions that were once confined to labour departments increasingly reached boardrooms.

Judicial developments accelerated that transition. In Steel Authority of India Ltd. v. National Union Waterfront Workers (2001), the Supreme Court held that the prohibition of contract labour did not automatically result in absorption by the principal employer. As legal uncertainty reduced, the debate gradually shifted from the consequences of engaging contract labour to the legitimacy of outsourcing particular activities through contract labour.

That shift is reflected in the OSH Code.

Examining the circumstances

The earlier framework required the Government to consider several factors, including whether the work was perennial and ordinarily performed by regular workmen. The OSH Code adopts a different starting point. For establishments covered by its contract labour provisions, it generally prohibits the engagement of contract labour in core activities, while recognising specified statutory exceptions where business realities justify such engagement. In many ways, the law has moved from regulating contract labour to examining the circumstances in which core business activities may legitimately be performed through contract labour.

The recent notification gives practical effect to that philosophy. It prescribes a structured process through which employers, contractors, workers, trade unions and other stakeholders may seek a determination on whether an activity constitutes a core activity. Applications are examined by a designated authority before the appropriate Government takes a final decision after following the principles of natural justice.

The consequences, however, extend well beyond procedure. Once an activity is determined to be a core activity, organisations may need to revisit existing workforce arrangements unless one of the statutory exceptions applies. Decisions regarding outsourcing through contract labour therefore become not merely questions of operational efficiency, but of legal sustainability.

Having spent a significant part of my career handling employee relations in the banking industry, particularly in Kolkata, I have seen how organised national unions have consistently questioned the outsourcing of banking operations and the engagement of contract labour. Those concerns are not new. What is changing is the legal framework within which they may now be examined. Banking and insurance may therefore become among the earliest sectors where this evolving framework is tested.

None of this suggests that the Labour Codes signal the end of workforce flexibility. The recognition of fixed term employment, together with the statutory exceptions permitting contract labour even in certain core activities, demonstrates that flexibility remains an important policy objective. The objective appears to be not the elimination of outsourcing, but the adoption of workforce models that are more consistent with the evolving philosophy of the law.

The significance of this shift therefore extends well beyond one notification. The CLRA Act regulated contract labour. The Labour Codes are beginning to redefine the relationship between outsourcing and contract labour.

For business leaders, that is no longer merely a labour law issue. It is increasingly becoming a question of corporate governance.

The writer is a senior Human Resources and Employee Relations leader

Published on August 4, 2026