From contract labour to fixed term employment: Scope, limits and emerging risks

contract labour in core operations. The principal trigger for this shift is the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code).

The OSH code defines “core activity” as any activity for which the establishment is set up, including any activity essential or necessary to such activity, while excluding certain specified support activities where the establishment is not set up for those functions.

Further, Section 57(1) of the OSH Code provides that contract labour shall not be engaged in core activities, subject to limited exceptions, such as where the work is ordinarily done through contractors, where full-time workers are not required for the major part of the day or period, or where there is a sudden increase in workload requiring completion within a specified time.

The provision also contemplates determination by the appropriate government or designated authority in the event of a dispute as to whether a particular activity is core in nature.

The practical implication of this provision, however, requires careful articulation. It may not be correct to read Section 57 as automatically invalidating every existing contract labour arrangement in core work overnight. However, for new operations, expansions, and future manpower planning in core processes, the legal space for routine engagement of contract labour will undoubtedly become narrower and more contest-prone.

In that sense, industries will increasingly find it difficult, and in many situations impermissible, to continue relying on contract labour as the default manpower model in the core process of the establishment.

The immediate gap: flexibility without contract labour in core work

Industry will, nevertheless, continue to need flexibility. Most employers will be reluctant to replace contract labour in core activities entirely with permanent headcount because of uncertain demand cycles, fluctuating business requirements, and long-term employment liability. Workforce agility, therefore, will remain a business necessity. It is here that Fixed Term Employment (FTE) emerges as the most workable legal alternative.

Under the Industrial Relations Code, 2020 (IR Code), FTE is expressly defined as engagement on the basis of a written contract for a fixed period, with a statutory guarantee that the worker’s hours of work, wages, allowances, and other benefits shall not be less than those of a permanent worker doing the same or similar work. The IR Code further provides that such a worker is entitled to proportionate statutory benefits and gratuity if he renders service under the contract for one year. The Code on Social Security, 2020 (SS Code) similarly recognizes fixed term employment and preserves the principle of equal treatment, including proportionate statutory benefits.

Therefore, once contract labour engagement in core operations becomes substantially constrained under the OSH Code, FTE may well become the only legally sustainable tool for flexibility in many industrial settings, whether for skilled manpower or even for unskilled labour.

FTE is not new in principle, but it is now codified and strengthened

The concept of fixed-duration employment is not entirely new to Indian labour law. Even under the Industrial Disputes Act, 1947 (ID Act), the law had recognized such engagements through the definition of retrenchment. Section 2(oo) excludes from retrenchment the non-renewal of a contract upon its expiry or termination in terms of a contractual stipulation. This provision formed the foundational legal basis for fixed-term hiring even before the Labour Codes. The Supreme Court in Punjab State Electricity Board v. Darbara Singh accepted this principle and treated termination upon expiry of contractual tenure as distinct from ordinary retrenchment protections that may otherwise arise merely on completion of 240 days of service.

At the same time, a significant concern always existed under the ID Act. The Fifth Schedule, dealing with unfair labour practices, treats as impermissible (Clause 10) the practice of employing workmen as temporaries for years with the object of depriving them of the status and privileges of permanent workmen. Consistent with this provision, judicial decisions have repeatedly held that prolonged temporary engagement, where the underlying intent is to avoid regular employment, may amount to an unfair labour practice.

It is against this backdrop that the IR Code addresses fixed term employment with greater explicitness. In the definition of retrenchment under Section 2(zh), the IR Code retains the exclusion relating to non-renewal of contract and further makes it clear that termination upon completion of the tenure of fixed term employment does not constitute retrenchment. This indicates a clearer legislative design to provide employers a lawful flexibility mechanism, while simultaneously preserving statutory protections for this category of employees through parity of wages and benefits.

Besides, the legislative intent becomes clear in the Objects and Reasons (Clause 5(ii)), wherein it legitimises fixed term hiring across sectors “on the basis of requirement”, while ensuring FTE receive benefits comparable to permanent workers (including gratuity), though without end-of-term notice pay or retrenchment compensation. Read together, the explicit retrenchment exclusion and this stated policy objective underscore the Legislature’s attempt to balance business flexibility with protection of workers’ rights.

The Caveat

There is little doubt that the legislative scheme seeks to confer a measured degree of flexibility upon employers by recognising fixed term employment as a lawful mode of engagement, linked to business requirement. However, the question remains whether, and to what extent, the earlier body of precedent where courts disapproved repeated renewals of temporary engagements used as a device to deny permanency will be diluted in the post-Code regime. That question cannot be answered in the abstract; it will depend on judicial interpretation of the IR Code on the facts of each case and on whether prior principles are held to survive or to stand modified under the new framework.

Two aspects of the IR Code suggest that the recognition of FTE is not intended to operate as an unqualified licence. First, the objects and reasons underscore that fixed term employment is to be adopted “on the basis of requirement,” which indicates a requirement-linked justification rather than an unrestricted managerial discretion. Second, the IR Code continues to retain an unfair labour practice norm in the Second Schedule (Item 10), in terms broadly similar to the ID Act Fifth Schedule (Clause 10), which proscribes employing workmen as badli workers, casuals or temporaries and continuing them for years with the object of depriving them of permanent status and privileges.

The coexistence of an enabling FTE framework and a retained unfair labour practice proscription may give rise to interpretative questions in application, and whether this is resolved by treating FTE as outside the mischief of Item 10, or by subjecting repeated FTE renewals in perennial work to closer scrutiny, remains to be seen.

In any event, two settled doctrinal anchors are unlikely to disappear from the judicial approach. One is the substance-based doctrine of permanency: where the work is of a perennial character and is continued for years through temporary arrangements, industrial adjudication has historically been willing to draw an inference that the requirement is permanent and to test the employer’s true intent behind serial renewals. The other is the beneficent rule of construction applicable to welfare legislation.

In Workmen of American Express International Banking Corporation v. Management (1985) 4 SCC 71, the Supreme Court held that where two interpretations of a welfare statute are reasonably possible, the interpretation that furthers the policy of the Act and is more beneficial to workmen ought to be preferred. A similar approach is reflected in Workmen of Firestone Tyre & Rubber Co. v. Management (1973 AIR 1227), where the Court emphasised a beneficent rule of construction in labour law.

These principles suggest that, notwithstanding the statutory recognition of FTE, judicial scrutiny will ultimately determine whether fixed term arrangements are being used in good faith to meet genuine requirement, or as a mechanism to circumvent security of tenure in work that is, where the work is permanent in character.

Conclusion

The Labour Codes, particularly the OSH Code and the IR Code, indicate a clear policy movement towards restricting routine engagement of contract labour in core processes at least prospectively for new operations, expansions and future workforce design and simultaneously legitimising FTE employment as a principal mechanism for providing flexibility to establishments while ensuring parity of wages, benefits and statutory protections.

However, the long-term legal sustainability of FTE as a dominant workforce model will depend on how industrial adjudication reconciles the Code’s enabling recognition of FTE with the continued proscription of unfair labour practices, and how courts apply settled welfare principles such as substance-over-form and beneficent interpretation in cases where fixed term arrangements are repeatedly renewed for work of a perennial nature.

In practice, therefore, FTE is likely to emerge as an important alternative to contract labour in core processes, but its acceptance as a stable norm will be ultimately determined by judicial scrutiny of whether its deployment is genuinely requirement-based or is being used as a device to avoid permanency obligations in substance.

DISCLAIMER: The views expressed are solely of the author and does not necessarily subscribe to it. will not be responsible for any damage caused to any person or organisation directly or indirectly.