Outsourcing is the contracting out of an organization’s business activities (functions and processes) to an outside service provider where the provider is responsible to carry out the activity that was currently, or could be, undertaken by the organization. Earlier outsourcing was usually carried out for organization’s non-core activities to save money but now outsourcing is omnipresent. Firms are outsourcing a wide range of activities ranging from research and development to marketing, from production to assembly, distribution to after sales service.
Today, even activities like security and public relations are outsourced. Predominantly, there are two kind of outsourcing:
With manpower – where the service provider’s employees work inside the premises of the organization. For example, company X has outsourced its security department to company ABC, then ABC’s employees operate at the location of company X. Without manpower – the service provider’s employees do not work inside the organization premises. For example, if company X is an electronics company and has outsourced the after sales services of its products then the service
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provider’s employees work need not work at the parent organization’s location but will extend services at the customer’s location.
Save Costs: To save the costs associated with defined benefits for permanent employees in labor-union contracts and as guaranteed by various labour laws in the
Increased Effectiveness: Companies by outsourcing non-core activities can focus their resources on the management of the core activities leading to enhanced organization effectiveness
Access to world class experts: Outsourcing to specialized companies gives organization access to experts and the latest technologies for limited time frame for specific project related work leading to improved quality
Increased flexibility: Outsourcing business functions to external service providers, the organization doesn’t need to maintain fixed assets and invest on infrastructure. This gives the organization flexibility to meet changing business needs and respond to the dynamic environment. Laws related to outsourcing Outsourcing, as already discussed, is of two types: Outsourcing with manpower, and outsourcing without manpower.
Outsourcing without manpower
When outsourcing is done without manpower, it is essentially a contract between two parties and only the Indian Contract Act, 1872 (hereinafter referred to as the ICA) becomes applicable. Both the parties are bound by the ICA and the terms of the contract agreed upon by them.
Outsourcing with manpower
Outsourcing with manpower is also essentially a contract between two parties and hence ICA becomes applicable. However, because the activities are carried out on the premises of the outsourcing party, the Contract Labour (Regulation and Abolition) Act, 1970 (hereinafter referred to as CLRA) also becomes applicable, provided twenty or more workmen are employed as contract labour in the establishment.
Thus in a nutshell, we can say that ICA becomes applicable in all cases of outsourcing, whereas, CLRA becomes applicable only in case of outsourcing with manpower, provided that the establishment (outsourcing party) employs or had employed in the preceding twelve months, twenty or more workmen as
Relation between players In case of outsourcing without manpower, the only relation providing the service is the second party. The outsourcing organisation has no relation with the employees of the second party.
However, in cases of outsourcing with manpower where CLRA becomes applicable, there are three players, vis-à-vis, Principle Employer, Contractor and Contract Labour. The outsourcing organisation is the Principal Employer, the organization providing the service is the Contractor, while the employees of the Contractor working on the premises of the Principal Employer are the Contract Labours. The Contractor is responsible for the health, welfare and payment of wages of the Contract Labour.
It is only when the contractor fails to meet those responsibilities does the Principal Employer become liable. However, the Principal Employer, as per section 20 and 21 of CLRA, can recover the costs incurred for meeting such liability from the Contractor.
Employer-Employee Relationship Looking at the present scenario, with outsourcing activities increasing exponentially, it can be said that the employer employee relationship is becoming more of a myth. The contract labour, who carry out the activities in the premises of the Principal Employer, are not the ‘employees’ of the Principal Employer. The Principal Employer does not hire, fire, or control the contract labour. Neither is it directly responsible for their health, welfare and wages. Thus, we can say that there is no direct relationship between Principal Employer and Contract Labour.
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