Outsourcing, sub-contracting, casualization and the independent contractor

GLOBALIZATION and Liberalization that overrun the world during the last three decades have created new forms of employment, like outsourcing, subcontracting, and casualization.

The need to be competitive in the open market has resulted in these new forms of employment.- outsourcing, casualization and in subcontracting arrangements.

These arrangements are preferred by the manufacturers, as they are cost effective and help them to effect speedy deliveries of quality goods, to the consumers.

Globalization had made it essential that if an enterprise is to survive or better still to make profits, its products and services, should be of attractive quality and available at an affordable and satisfactory price and in time.

Small and medium sized companies are today, gradually substituting for big industries, particularly to the extent that production processes have developed from mass production to services, tailored to consumer demand and taste, with zero margins of error and prompt deliveries.

You find Multi Nationals like Daimler Benz, and Microsoft shedding their excess weight and outsourcing part of the production from various parts of the world.

You find software developers in Bangalore (now Bangalooru) and Hyderabad engaged in processing data and coding text for Banks in the west, the Benz Daimler in Germany getting parts for the Benz car from Companies in Brazil, and the Philippines and the Air Bus Corporation in France getting parts of the Airbus manufactured in U.K. and in Spain. Outsourcing today had become a necessity in order to survive in the competitive market.

In the period of general technological progress, employment tends to be unstable, because of the necessity to adopt itself to the changing demands of the market. A changing market creates a demand for flexible employment based on the principle that the companies and the employers cannot give job security and only the customers can.

Life long security a staple of the post war era, is rapidly making way for short term benefits than full timers enjoy. Between 12 to 15% of workers in France, Germany, Italy and Netherlands are currently employed in short term contracts according to the data compiled by the Organization for Economic Cooperation & Development in Paris.

Job security is becoming difficult to guarantee, as establishments have to adapt to changes in the market not only to grow but even to exist. This raises the question: How far does outsourcing, subcontracting and casualisation endanger job security?

One of the prime conditions necessary for workers security is the existence of a contract of employment. How far do the new forms of work arrangements - outsourcing, sub contracting, and casualization ensure contracts of employment and employer employee relationship?

The Industrial Disputes Act No.43 of 1950 defines an employer as "any person who employs or on whose behalf any person employs, any workman and includes a body of employers (whether such body is a firm, company, corporation or trade union) and any person who on behalf of any other person employs any workman. Justice Samarakoon C.J in S.C. Appeal 10/83 stated that this definition deals with three types of persons;

* Any person who employs a workman,

* Any person on whose behalf any other person employs a workman,

* Any person on behalf of any other person employs any workman.

The Act defines a "workman" as "any person who has entered into or works under a contract with an employer in any capacity, whether the contract is expressed or implied, oral or in writing, and whether it is a contract of service or of apprenticeship, or a contract personally to execute any work or labour and includes any person ordinarily employed under such contract, whether such person is or is not in employment at any particular time and includes any person whose services have been terminated".

The existence of a contract of service is essential to determine employer employee relationship. A common law contract of service must subsist between the employer and the workman before the two persons can be regarded as employer and workman'

A contract of employment is an agreement by which two or more persons regulate their relationship recognized legally. Not every contract to provide service creates employer employee relationship.

It is created only when the contract is a contract of service and not when it is a contract for services. (A person with a contract for services is usually referred as an Independent contractor)

Outsourcing may create a contract of service or a contract for services depending on the facts of each case. The circumstances and facts of each case have to be considered on its own merits, before a decision could be made.

The distinction between an employee and an independent contractor, the tests to be applied are vague and may, in a borderline case be difficult to apply.

"A number of conditions are necessary to, and be sufficient for, the existence of contact of service "The most that can profitably be done is to examine all the possible factors which have been referred to in these cases as bearing on the nature of the relationship between the parties concerned.

Clearly no magic formula can be propounded for determining which factors should, in any given case, be treated as the determining ones. The plain fact is that in a large number of cases the Court can only perform a balancing operation weighing up the factors which point out in one direction and balancing them against those pointing in the opposite direction"

For example the Garment factories in the EPZ out sourcing their cleaning services and garbage disposal to firms like Abans Environmental Services Limited or to Carekleen Limited would not create contracts of services and employer employee relationships.

The two cleaning firms are not "intrinsic" to the working of the two garment factories and are not "integral part" or are they "part and parcel" of the two garment factories.

If however Abans exists only for supplying cleaning staff to a particular garment firm only, then it may be said that there is a contract of services between the employer of the particular firm and the cleaning staff of Abans.

Before the advent of the technological revolution the test of being an "independent contractor' and an "employee" lay in the "control test". ie. Could the employer control "not just what the person was to do, but also the manner of his doing it? - if so, that person is his employee ?.

With increased sophistication of industrial process and the increase in number of professionals and skilled personnel 'the test of being a servant does not rest nowadays on submission to orders.

It depends on whether the person is part and parcel of the organization" and the view of the Judges of the U.S. Supreme Court in U. S. v Silk that "the test to be applied was not power of control, whether exercised or not, over the manner of performing service to the undertaking but whether the men were employees as a matter of economic reality".

The U.S. Supreme Court went on to say that if "the person who has engaged himself to perform these services, performing them in business, on his own account ? If the answer to the question is in the affirmative then the contract is a contract for services. If the answer is negative then the contract is a contract of services.

A recent development in case law in this regard is the idea of "mutuality of obligations' as a possible factor i.e. whether the course of dealings between the parties demonstrates sufficient such mutuality for there to be an overall employment relationship"

Thus outworkers making garments at home, on a piece work basis, for the garment factory, were held to be employees of the garment manufacturer, because of the regular, longstanding arrangement, which showed the necessary mutuality of obligations in practice, even though the out workers were not covered by a formal contractual obligation to undertake a particular quantity of work.

Outsourcing - of personnel :

Very often we find the bilateral relationship is superceded partly or wholly by status which is contrasted with contract. Status is determined extrinsically by law and not by agreement between the parties.

Status can supercede contract by affecting either of the two parties to it, namely the master and the servant" The Labour Tribunal established under Section 31A of the Industrial Disputes Act has the right, to vary contracts of service of the employer and employee and impose it own conditions which it considers are 'just and equitable".

Thus, in a contract of employment entered in the U.S. the Court of Appeal held that, the Labour Tribunal, has the jurisdiction to hear and make its order which is just and equitable in the absence of any clause in the contract about the law that will govern the contract.

Where an establishment outsourced its requirements of daily manual labour through a particular contractor or an agent and the agent existed purely for the purpose of supplying labour to that establishment, the Supreme Court had held that there is employer employee relationship between the workers and the establishment where the workmen worked. It had held that the supplier is an agent and that the "workmen were intrinsic to the functioning of the establishment"

Subcontracting :

Subcontracting of part of the production, or the entire production, does not always lead to employer employee relationship. A garment manufacturing Company - Company A receiving an order for 5000 dozens of baby suits from Disney World, with the stipulation that Mickey mouse or Pooh be embroidered in the tops, subcontracting the embroidery work to another factory - Factory B, for a stipulated fee a piece, as Factory A hasn't any embroidery machines, does not create employer employees relationship between the factory A and the employees in factory B. Employer of Factory A would not in my opinion be liable under Section 45A of the Wages Board Ordinance (Cap136) for payment of wages due on the sub contract if the employer of Factory B fails to pay his embroidery workers for work done on the contract, as Factory B is not part and parcel of Company A and is not intrinsic to the functioning of Factory A. Factory B is an independent contractor, doing embroidery work for a number of other factories for fees. It is responsible for all statutory payments to its employees.

Section 59A of the Wages Board Ordinance provides for the Commissioner of Labour with the approval of the Minister to direct in writing " where any person by way of trade or for any commercial purpose, makes any arrangement, express or implied, with any other person for the execution by such other person of any work and where in pursuance of such arrangement such other person employs workers for the execution of such work, " after inquiry to refrain from having such work executed by such arrangements.

Although the Commissioner had to date not acted under this clause, it nevertheless remains a threat to employers contracting or subcontracting part of the work of the production which cannot be done in their workplaces to third persons or to other employers.

Casualization.

The term "casual" has been often been abused and misinterpreted by many an unscrupulous employer. A casual employee is one employed by chance or occasionally, like a person to fix the gutters in Ranjit's house or to paint Percy's house on the eve of the New Year or to fix the antenna in Kumar's house.

The Compact Oxford Dictionary defines casual as "occasional" or 'happening by chance" while the New Lexicon Webstor's Dictionary defines casual as "irregular or happening by chance" Mr. S.R. De Silva in his "Essays on Law, Management and Industrial Relations ( E.F.C publication) defines a casual employee as " one who is employed by chance on no contract to employ such as a window cleaner".

Where the nature of employment is of permanent nature and forms part and parcel of the employer's business, the employee who is employed on such work cannot be said to be a casual employee There can never be a casual employee engaged on work which is of a regular nature or which forms part and parcel of an employer's normal business".

Thus workers recruited and employed by estate Superintendents during the flush season in May ,June and July to pluck tea leaves cannot be called " casual workers" as their employment "plucking tea leaves is part and parcel" of the employers' business and as the workers are offered regular employment, during the flush season.

"Declaration by the parties, even if incorporated into the contract should be disregarded entirely if the remainder of the contractual terms point to the opposite conclusion ". Labels attached to a contract are not conclusive as to the nature of the contract.

Section 3 of the Service Contracts Ordinance (Cap.171) stipulates that "every verbal contract for the hire of any servant, except for work usually performed by the day, or by the job, or by the journey, shall (unless otherwise expressly stipulated, and not withstanding that the wages under such contract shall be payable at a daily rate) be deemed and taken in law to be a contract for hire and service for the period of one month, and be renewable from month to month, and shall be deemed to be taken in law to be renewed, unless one month's previous notice or warning be given by either party to the other of his intention to determine the same at the expiry of a month from the day of giving such notice".

These workers (the tea pluckers) are thus on monthly contract, having regular work and cannot therefore be called "casual "workers. "

The fact that workers are not employed on a monthly contract of service or that they are only paid for the days on which they work, also is quite insufficient to show that they are casual workers" Similarly hotels which employ additional hands during the Season -November to March cannot call those employees "casual".

They are seasonal workers and are entitled to all the benefits under the labour law of this country. Whatever label you may attach to the employment contract of the worker, casual, temporary or seasonal, - if the worker is in a scheduled employment and had worked for more than 180 days in a continuous period of 12 months, in an establishment under an employer, having 15 or more employees, the employee and the employer would be covered by the Termination of Employment of Workmen (Special Provisions) Act No 45 of 1971.

Where an employer recruits employees from a "pool" or otherwise to cover absenteeism of his regular employees on a particular day those employees may be designated as casual employees although the engagement of those workers is on work which is part and parcel of the employer's normal business.(If however the employer continues to employ such workers regularly without significant gaps those employees cannot be called "casual" employees )

Each situation will have to be determined on its own merits as to whether the employees are casual or non casual.

K. Wijayaratnam, Former Deputy Commissioner Of Labour, (S.L.A.S.).