Employment versus Contract Employment

Contract Employment is not a new concept in India. It has been prevalent for quite some time now, prevalent enough that an Act was passed as long back as 1970 called the Contract Labour (Regulation and Abolition) Act. This caused a huge shift to permanent employment and a meteoric rise in trade unionism and labour activism.


The Internet has ushered in a gig economy within the last decade that constitutes an increasingly large proportion of all gainful employment. In this blog, we take a broad look at the advantages and disadvantages of contract employment and permanent employment in the legal sense.

However, over the last half-century, the clock has turned full circle. Young people joining the workforce today don’t even dream of being in the same job for the whole of their working lives, something that was the norm just a generation (say 25 years) ago. There is a clear shift of focus towards more freedom and flexibility in employment, and the current generation of first-time entrants to the workforce is more inclined towards what is today popularly called as the gig economy. Uber, Ola, Zomato, Swiggy, Dunzo – all these new age logistics-driven businesses have mind-bogglingly large number of ‘gig workers’, and very few full-time employees. For example, as of Oct 2019, Bengaluru-based Swiggy had over 200,000 active ‘delivery partners’, who are not directly employed by the food aggregator. Ola claims to have over 1.5 million driver-partners in India. These numbers change depending on natural attrition, new recruits and seasonal peaks (festival, especially). Similarly, there are personal skilled and semi-skilled services offered by large numbers of partners affiliated to Urban Company and other such aggregators, who call themselves ‘freelancers’.

The “gig” economy

This concept is more or less an American one. A rough estimate by Forbes suggested that in  2018, 36% of total workforce in the US are contractual labour, which equals to 57 Million people.

The phrase "gig economy" describes a free market environment in which conventional companies employ independent contractors, freelancers, and temporary employees to complete specific projects, assignments, or employment. The word comes from the world of the performing arts, where singers, comedians, and other entertainers are paid for their individual performances, which are referred to as "gigs." The main reason for flourishing gig economy is accessibility to internet. In several ways, the gig economy represents and encourages the desire of millennial workers for greater flexibility in juggling their work-life demands, with many of them changing jobs several times throughout their lives, or even working on multiple jobs contemporaneously. Regardless of what motivates gig workers, the internet's popularity, coupled with its ability to allow for remote work, has fueled the gig economy's development.

The growing impact of gig economy in India:

The concept "freelancer" has recently gained popularity in India. Nowadays, everybody claims to be a freelancer, working on a number of projects. The Digital Revolution has aided this by lowering tariff prices by competing companies and increasing the penetration of smart devices in the hands of individuals. A report titled ‘Future of Jobs in India’ was published in 2017 by one of the Big Four consulting firms. They reported that over 24% of the global workforce relies on Indian freelancers to complete their tasks.

Big aggregators (like Ola, Uber, Zomato, Swiggy, Food Panda etc) use the services of millions of ‘gig workers’ at any given point of time. 

Permanent employment also is rarely permanent, (which people realise when their employer faces financial troubles). Each type of employment has its own set of pros and cons.

Permanent Employment- Pros and Cons

Permanent workers, also known as permanent employees or directly employed people, work for a company and are paid directly by them. The essence of employment in the Indian context is the existence of a master-servant relationship – where employer can dictate what the employee does, and how and when he does it. 

Pros:

  • This is often considered a more stable version of employment, and the resultant financial security reduces stress and makes employee more efficient (or so some believe).
  • There is less financial uncertainty for employees.
  • They often enjoy benefits such as paid sick leave, paid maternity leave, paid overtime, etc. – which gig workers don’t – they get no money if they don’t work on any day. 
  • In addition, permanent employees get benefits such as Provident Fund, Gratuity etc.  which gig workers cannot look forward to.
  • Employee are often rewarded with bonus, increments or promotions for their hard work but gig workers rarely get such annualized blandishments.

Cons:

  • The pros of permanent employment for employee are often seen as ‘cons’ for employers. Employer also need to provide training, office space, and many other benefits which are seen as costs by the companies – absent for contractually employed persons.

Contract Employment- Pros and Cons:

The essence of contract employment in the Indian context is the absence of a master-servant relationship – the superior can dictate what the employee does, but not how and when he does it, so long as he delivers desired results. For most employers, the gig economy or contract employment is a win-win scenario. 

Pros:

  • Gig employees, unlike typical employees, have the freedom to choose the types of jobs they do, as well as when and where they do them. Working from home, moreover, often allows gig workers to better align work and family responsibilities.
  • Gig workers have flexibility in work hours.
  • The more a gig worker works, the more he/she can earn (or at least that is the theory). They often see themselves as their own bosses. They can even work for more than one employer at given point of time giving them choice to try different skill sets and benefit of not being tied to a single employment.
  • The pros that benefit the employer in case of contract employment is that the pay is a fixed piece rate which means there is no risk of having paid employees sitting on a ‘bench’. Working conditions and costs however tend to work in favor of the employer/ aggegator as they can reduce costs which they pay towards employees.

Cons:

  • The biggest ‘con’ of Contract Employment is that there is no financial security whatsoever for gig workers. Employers deduct less income tax and no Social Security payments from contract gig workers’ checks because they are not technically listed as “employees”. They can manage their own taxes – but that is theoretical if they earn less than the taxable limit. Furthermore, most gig employees must purchase and maintain their own work-related equipment, such as vehicles, computers, and smartphones. Most of these costs are tax deductible. 
  • Contract Employees often do not get any ‘benefits’ such as office space and accommodation, Provident Funds, Gratuity, Paid Sick and Maternity leaves, Bonuses and increments which permanent employees get in addition to their salaries, which heavily works in favor of employer because their people costs fall sharply.
  • The business does not pay for holidays or time off, so gig workers must be careful about their finances. They have to stretch every rupee. 
  • Working hours and pressure to meet targets are usually very high for gig workers.
  • Collective bargaining power with the organization they mostly work for is very low. 

Endnotes

Both types of work contracts are inevitable and has its pros and cons. Important thing is that if there were only permanent workers, the number of jobs available would be (and are) very few. Gigs are often easier to come by, and if one is offering skilled services such as carpentry, plumbing, etc, where competition is less, and demand is relatively high, gig workers can earn handsomely.

 

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Author

A qualified lawyer enrolled with Bombay High Court, Nayan is an enthusiastic reader, mostly of Indian Mythology and World History. Also a binge watcher and enjoys travelling to new places.


Co-Author
Rajesh Haldipur
Rajesh Haldipur

Founder, Law Gyani

Rajesh is a qualified CA & CWA. He has served as a Director of PricewaterhouseCoopers, a Director of a large urban co-operative bank and Dean of a B-School over the years. He has taught Finance for over 20 years & trained participants from several Companies and B-Schools. He is an educator and a learner (he believes both are inextricably intertwined), and a knowledge product developer. Law Gyani, which he has founded to help Law Students with their exam preparations, and to understand nuances of the law.


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