Compliances and precautions that need to be taken care of while engaging of contract labour

Labour reforms seem to be moving from pro labour to pro capitalists. This has led to impact on labour system in India. Liberalization of Indian economy and increasing globalization and foreign companies interested in Investment in India , Global market uncertainty making corporations unsure of the workforce they would need has led to rise in contract based labour system and out sourcing.

From assembly line workers to Information technology workforce, contract labourers have become a popular staffing option in today's market.

As businesses poke their heads out of the recession of year 2008, although they are finding the courage to hire, but don't want to lay off new hires if the economy sours. The solution is to hire Contracted workers, or more specifically, temporary workers on contract.

Contracted workers solve several HR staffing issues: They provide flexible hiring for major projects and seasonal spikes in demand of the product, as they provide specific expertise; and they let HR induct new employees without actually hiring them, and in the long run, they save money because many expenses, from salary to benefits, are managed by the staffing firm.

Industrialists express concern that customers have become pretty aggressive, the competition is very tough and rapidly changing technologies constantly entail learning and upgrading skills. There is a need for continuous training because of constantly changing nature of businesses. The time to bring product or a service into market is shrinking which leads to devicing aggressive planning  stratagies and scheduling of delivery of goods and services competitive, and hence delivering the right quality in a time bound manner has become imperative and extremely challenging. Further, cost cutting and budget constraints on human resource costs, today's situation is such that in many organizations the issues of human resource management creep up frequently;further, getting the right manpower with the right skill sets is becoming a big challenge that many companies are facing today.

The commercial models are also changing. The entire industry is is moving towards a 'delivery based model'/ Just-in-time principle. This concept is based on the motto - pay for results only and not for the efforts/time/manpower that go into it in achieving outcomes. The focus is on tangible, measurable results. This means deliver quickly through reduced cycle time, innovative, light weight, accelerated practices and pimproved processes. We many a times hear that building teams and developing the right mindsets and culture of open collaboration is getting difficult hence there arrives the need to hire labour through a contractor. 

A contract Labourer is defined in the The Contract labour(R&A) Act, 1970 as the person who is hired in connection with the work of an establishment by a principal employer (who is the firm owner or a manager) through a contractor.

NEED FOR FLEXIBILITY IN LABOUR MARKET AND LABOUR LAWS

There are 3 primary reasons for which this need is being emphasized:

1) Emphasis on need for labour force to change according to the market fluctuations which happens because of increase in specialized products that requires firms to quickly change the size, composition, and at times the location of the workforce.

Employers view flexibility in the labour markets as essential because in the era of economic liberalization and growing competition between firms and countries, production should be organized to suit market conditions. Even Second national Commission on Labour and Deputy Chairman of Planning Commission Mr. Montek Singh Ahluwalia advocates the need for flexibility in the labour markets saying that it would promote competitiveness and efficiency in the current wake of globalization and rapid technological progress.

An underlying wave of change in Laws can be because of foreign investors who are keen on investing in labour intensive countries are deterred from investing in India presently due to provisions in Industrial disputes Act 1947 especially Ch V-B, and Section 9-A, and of Section 10 and complications of Contract Labour (regulation & Abolition) act 1970, can be a probable reason to favour changes pro contract labour, which is not fully proved yet.

2) Emphasis on lowering labour costs and increasing productivity because of rising competitiveness.

3) The political economy perspective which advocates free markets where there would be no government intervention and interference of trade unionism.

While Speaking in favour of Contract labour policy we can say that it permits employers to have

(i) Staffing Flexibility, that is to say, there may be certain positions whose futures are unsure. Hiring a contractor to fill the position for a particular time frame is a good alternative to hiring someone permanent if you are not certain of the position's stability. Independent contractors are also useful for companies that have fluctuating workloads and need short-term staff to help out for a specific project. Once the contract term is fulfilled, there is no obligation for either party to continue the relationship.

(ii) Trial Evaluation: Even though a company has vacancy for a permanent position available, but hiring on fixed term contract can facilitate evaluating a potential employee first before taking the employee on company's payroll. This can enable the company to assess the person's abilities and skills as to the candidate meets up to the organization's standards. If the organization is  unsatisfied with the contractor's performance, it can simply choose not to call him back for future work. If, however, organization is satisfied  with the standard of the work done by the candidate, then the organization can offer to hire that individual as a permanent employee who is already trained for the work.

(iii) Reduced Costs: The cost of hiring temporary contract workers is a lot less than hiring an employee. temporary workers may not be provided with company's benefits such as health insurance, and organization need not spend on the candidate's cost towards social Security . Also, in many cases, contract workers bring their  own equipment to do the job they're contracted for and may also at times work remotely hence save upon the cost to company towards floor space towards such employees as don't need company office space to get the company's work done.

Labour market flexibility, especially employment flexibility, is an essential requirement of structural adjustment process. It allows managements to have the necessary leverage to fine-tune organization structure, marketing of products and services, pricing, technology, human resource competencies with micro-economic changes to achieve financial viability and competitive efficiency. Opposition to flexibility , emanates more from ideological considerations than on careful study of market conditions, compulsions of technology and imperatives of good management. Global experiences have clearly suggested that though flexibility in labour market, in the initial stages, does cause employment drift and social tensions but it ultimately facilitates employment generation. However, opinions about how much flexibility is actually required for spurring economic growth differ very widely from country to country and situation to situation.

As a prime mover of economic growth and the custodian of people's interest, the government can neither allow free licence to employers nor permit the ideologues of trade unions to impede national economic development. However, this demand for humanitarian impulse, social insurance and other protective covers merits very serious consideration and support from all quarters.

Precautions be taken while engaging Contractors

While engaging contract labour through contractor, the following precautions be taken by the PRINCIPAL EMPLOYER under Contract Labour (Regulation & Abolition) Act, 1970 hereinafter referred to as Act.

• At the first instance, it must be ensured that there is no notification prohibiting contract labour system by the appropriate government for the employment of contract labour in any process, operation or any work of the establishment.
• The work for which contract labour is engaged is preferably not of perennial nature;

However, in the absence of notification by the appropriate government prohibiting or abolishing such type of contract system, then there is no bar in engaging contract labour.

• Before identifying a contractor, it is desirable to advertise in the local newspaper inviting offers from the contractors.
• The principal employer gets the registration certificate and the contractor obtains the licence from the competent authority as provided under section 7 of the Contract Labour (Regulation and Abolition) Act, 1970 before proceeding to engage the contract labour.
• The establishment must ensure that it issues certificate in Form V to the contractor for obtaining licence as provided under section 12 of the Act;
• The payment of wages to the employees employed by the contractor is disbursed to his employees by the contractor himself or his nominee and principal employer has to depute his representative to be present and sign the payment register in token of having disbursed the salary in his presence by the contractor; [Rule 72 & 73]
• There should not be any supervision and control by the principal employer in respect of employees employed through the contractor to fulfill the obligation of the contract;
• Amongst other workers as provided by the contractor, there must be at least one supervisor through whom the officials of the principal employer shall communicate, preference be given to a contractor who has such type of work at other locations also.
• Discipline of the employees of the contractor in the discharge of duties must be regulated by the contractor and not by the principal employer;
• If possible, the contract should not specify the number of persons required but must quantify the work itself;
• Leave to the employees of the contractor must be sanctioned by the contractor or by his authorised person and not by the principal employer;
• No advance should be paid by the principal employer to the contractor’s employees directly. Only contractor must regulate the same;
• Maintenance of all types of record in respect of the employees employed by the contractor should be his own responsibility and principal employer should not intervene in such matters;
• Dictum of the Supreme Court judgment in Hussainbhai’s case (contractor not to be termed as middle man) must be adhered to in drafting the agreement for the contract;
• If the establishment is covered by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees’ State Insurance Act, 1948 then preference should be given to those contractors who have their own code numbers under these Acts;
• The establishment must ensure compliance of the obligation pertaining to the various provisions regarding amenities and benefits as prescribed under the Act;
• The establishment must ensure the submission of annual return to the prescribed authority in the prescribed form under the Act.

An insight into the imperatives for a Premise to be called 'factory'

An illustrative analysis

of

the definition of ‘Factory’

in

The Factories Act, 1948.

The definition of ‘Factory’ is given in section 2(m) of the Factories Act,1948. Section 2(m) defines the term ‘Factory’ as: - ‘Factory’ means: any premises or precincts thereof –

(i) whereon 10 or more workers are working, or were working, on any day of the preceding 12 months, and in any part of which a manufacturing process is being carried on with the aid of power, or is ordinarily so carried on; or

(ii) whereon twenty or more workers are working, or working on any day of the preceding 12 months and in any part of which a manufacturing process is being carried on without the aid of power ,or is ordinarily so carried on, but does not include (i) a mine subject to the operation of the Mines Act 1952, or (ii) a mobile unit belonging to the armed forces of the Union of India, (iii) a railway running shed, or (iv) a hotel , (v) a restaurant, (vi) eating place., (vii) poly house or (viii) Green house engaged in the activity of floriculture or pomology or high value crops.

Explanation I: For computing the number of workers for the purposes of this clause, all the workers in different groups and relays in a day shall be taken into account.

Explanation II: For the purpose of this clause, the mere fact that an electronic Data Processing Unit or a computer Unit is installed in any premises or a part thereof, shall not be construed to make it a factory if no manufacturing process is being carried out in such premises or a part thereof.

Explanation III: For the purpose of this clause, the term, “ High Value Crops”, shall mean and include – (i) Plantation of fruits , vegetables, flowers in a green house or shed-net house;(ii) Plantation of exotic fruits, flowers and vegetables, (iii) Plantation of crops for the use of bio-technology, (iv) plantation of medicinal and aromatic plants and processing industry; (v) Production of mushroom and processing industry; (vi) Production of fruits by micro drip irrigation by use of plastic and mulching; (vii) Nurseries and processing industries where vegetables are produced in green house; (viii) Nursery of ornamental plants.

In addition to the above stated definition of Factory; the section 85 of Chapter IX of the Factories Act, 1948, extends the application of the term factory; the Section 85 titled “Power to apply the Act to certain premises”. This section is contained in Chapter IX which is titled, “special provisions”.

Section 85 states that,

(1) The State Government may, by notification in the official gazette declare that all or any of the provisions of the act shall apply to any place wherein a manufacturing process is carried with or without the aid of power or so is ordinarily carried on , notwithstanding that – (i) the number of persons employed therein is than 10, if working with the aid of power and less than 20 without the aid of power , or (ii) the persons working therein are not employed by the owner thereof but are working with the permission of, or under agreement with, such owner: provided that the manufacturing process is not being carried on only with the aid of his family,

(2) After a place is so declared, it shall be deemed to be a factory for the purpose of this Act, and the owner shall be deemed to be the occupier, and any person working therein, a worker.

Explanation: For the purpose of this section “Owner” shall include a lesser or mortgagee with possession of the premises.

According to Black’s Law dictionary, factory is a term that includes all buildings and premises wherein, or within the cartilage of which, steam, water, or any mechanical power is used to move or work any machinery employed in preparing , manufacturing, or finishing cotton, wool, hair, silk, flax, hemp, jute or tow.

This definition seems to be confined to defining expanse of term only to textile and its related industry. Further referring to the definition stated in section 2(m) of the Factories Act,1948, which is discussed earlier, it can be inferred, that the following ingredients are mandatory to constitute a premises as “ factory” which are as follows: -

(i) If the premises is using power or working without the aid of power , the number of workers required to constitute a factory differ as follows –

(a) with the aid of power – 10 or more workers,

(b) without the aid of power – 20 or more workers.

(ii) A manufacturing process should be carried on,

(iii) Work should be carried on in precincts.

The case law of K.V.V.Sharma AIR , 1953, Mad 269, stated precincts as; “a space enclosed by walls or fences. A place solely used for some purpose other than the manufacturing process carried on in a factory or a workshop does not constitute a factory.”

In the case of Ardeshir /Vs/ State of Bombay , AIR 1962, S.C.29, it was held that the word ‘premises’ is a generic term meaning open land or land with buildings or building alone. The expression, “premises including precincts” does not necessarily mean that the premises must always have precincts. Even buildings need not have any precincts. The word ’including’ is not a term restricting the meaning of the word ‘premises’ but is a term which enlarges its scope. The use of the word ‘including’, therefore doesnot indicate that the word ‘premises’ must be restricted to main building and not to be taken to cover open land as well. Though some of the provisions of the Act cannot be applicable to salt works where the process of converting sea water into salt is carried on in the open, there is nothing in the Act which makes it uniformly compulsory for every occupier of the factory to comply with every requirement of the Act. An occupier needs to comply with such provisions of the Act which applies to the factory he is working, hence, salt works should come within the meaning of the word ‘premises’ used in the definition in section 2(m). For any premises to be called a factory, the following conditions must be fulfilled:-

(1) As decided in the case of ‘Workmen, Delhi electricity Supply Undertaking /vs/ Management, AIR 1973 SC 365; “Factory” is a premise where manufacturing process is carried on.”. No manufacturing process was held to take place either in the sub-stations or in the zonal stations of the Delhi Electricity Supply Undertaking, because the workmen employed therein have no part in any manufacturing process”.

(2) As decided in the case of “New Taj Mahal Cafe ltd Mangalore /vs/ Inspector of Factories, Mangalore,(1950) I.LLJ,273. that, “In order that any premises may be held as a factory , the following conditions must be fulfilled :-

(a) a manufacturing process must be carried on in any part of the premise of the establishment and ,

(b) where a manufacturing process is carried on with the aid of power, ten or more workers must be working and where manufacturing process is carried on without the aid of power, twenty or more workers must be working in that establishment. But, the mere fact that the power is used in the premises is not sufficient, but power must be used in the aid of manufacturing process.

An important necessity for any premises to be regarded as a ‘factory’ is, that a “manufacturing process” should be conducted within the premises. In the factories Act,1948, according to section 2(k) defines manufacturing process as:- “Manufacturing process” means process for –(i) Making, altering, repairing, oiling, washing, cleaning, ornamenting, finishing, packing, breaking up, or otherwise treating or adapting any article or substance with a view to its use, sale transport, delivery or disposal, or

(ii) Pumping oil, water, sewage or any other substance or,

(iii) Generating, transforming or transmitting, power, or

(iv) Composing types for printing the letter press, lithography, photogravure, or other similar process or book binding, or

(v) Constructing, re-constructing, repairing, refitting, or breaking up of ships or vessels ; or

(vi) Preserving or storing any articles in cold storage;

In this regard it becomes necessary to discuss some special circumstances that came up in some court cases :

(1) Preparation of food with aid of various electrical appliances in kitchen of a hotel is a manufacturing process: As decided in the case of “Poona Industrial Hotel /v/s I.C. Sarin , 1980, Lab IC 100.

(2) Selling of petrol or diesel by a petrol dealer or repairing of motor vehicle will not come within the term “manufacturing process”, as noted in the case of : “ National Service Centre and Petrol Pump /vs/ E.S.I Corporation , 1983 labI.C. 412(P&H) .

(3) The work of mere packing cannot be called as a manufacturing process; {ref-AIR 1955 NUC 2710}.

(4) The business of sale of diesel oil, motor spirit, lubricant, servicing of cars and lorries, repairing vehicles and charging batteries with the aid of power, by employing more than 20 workers / labourers amount to manufacturing process, as noted in the case of “Baranagar Service Station /vs/ E.S.I Corporation (1987) 1 L.L.N 912(Cal)(Divisional Bench).& Lab I.C. 302.

(5) Decorticating groundnuts in electric mill is a manufacturing process (AIR 1959 Madras 30).

(6) Breaking up of boulders is a manufacturing process – as decided in case of “Larsen & Toubro /vs/ state of Orissa , 1992 Lab IC 1513 (Orissa- Divisional Bench).

(7) Transportation of goods on contract basis from one place to another by road with the assistance of transport carriers is not a manufacturing process- as decided in the case of regional Director E.S.I.C /vs/ Jaihind Roadways, Bangalore(2001),1 L.L.J 1187(Karnataka).

(8) Reading the definition of ‘Manufacturing process’ in the light of Supreme Court in “Workmen”, Delhi Electricity Supply Undertaking /vs/ management”, (1974) 3 SCC 108, the word ‘or’ in section 2(k) (iii) must be read as ‘and’.

In other words, to satisfy the definition of “manufacturing process”, there should be a process of generating, transmitting, and transforming of power. So a sub-station where only transforming and transmitting of power is done is not covered. A contradictory judgement was passed by Bombay High Court and it has laid down in the definition of “manufacturing process’, that , in this definition , each of the words have got independent meaning which itself constitutes the manufacturing process.

Therefore we can conclude from these cases & definition that if a manufacturing process is not carried on within the premises it cannot be regarded as a factory, and to regard an establishment or premises as a factory, it should fulfill certain conditions as mentioned above and mainly manufacturing process should be carried on.

THE CONSTITUTIONAL VALIDITY OF “ THE MINIMUM WAGES ACT,1948”

 THE CONSTITUTIONAL VALIDITY

OF

“ THE MINIMUM WAGES ACT,1948”.

India introduced the Minimum Wages Act in 1948, giving both the Central government and State government jurisdiction in fixing wages. The act is legally non-binding, but statutory. Payment of wages below the minimum wage rate amounts to forced labour. Wage Boards are set up to review the industry’s capacity to pay and fix minimum wages such that they at least cover a family of four’s requirements of calories, shelter, clothing, education, medical assistance, and entertainment. Under the law, wage rates in scheduled employments differ across states, sectors, skills, regions and occupations owing to difference in costs of living, regional industries' capacity to pay, consumption patterns, etc. Hence, there is no single uniform minimum wage rate across the country and the structure has become overly complex.

(A): The act is not unreasonable:

It can scarcely be disputed that securing of living wages to labourers which ensure not only bare physical subsistence but also the maintenance of health and decency is conducive to the general interest of the public. This is one of the directive principles of the state policy embodied in Article 43 of the constitution.

Individual employers might find it difficult to carry on the business on the basis of minimum wages fixed under the Act but this must be not be the entire premise and reason to strike down the law itself as unreasonable.

“ The restrictions, though they interfere to some extent with the freedom of trade or business guaranteed under Article 19(1)(g) of the constitution, are reasonable and , being imposed on the general interest of the general public, are protected by the terms of the clause (6) of the article 19.” This quote is a part of judgement in the case “ Gulmuhommad Tarasaheb , a bidi factory by its proprietors Shamrao /VS/ State of Bombay , AIR 1962 Bom 97: AIR1955, Sc33:1963, Ker 115: 1964 Tri 32.

An another important judgement that favours and supports the constitutional Valitity of the Minimum Wages Act,1948 is , “ V. Unichonoy /VS/ State of Kerala,1962, SC12. This case raised the same questions which were raised in the case of Gulmuhommad Tarasaheb /vs/ State of Bombay, AIR 1962 Bom 97”., which were , “that , can a state be prevented from making any law, in the interest of general public, where it creates restrictions and interferes to some extent with the freedom of trade or business guaranteed under Article 19(1)(g) , of the Constitution of India, and it was held that , “ Fixation of minimum wages is for preservation of public order , and if no minimum wage is fixed then it shall lead to arbitrariness by the employers and that shall lead to clashes of interest between employer and labour which shall cause friction in society”.

The article 14 of the Indian Constitution which relates to equality before the law, it must be noted that minimum wages are not fixed equally across the whole nation but they vary from occupation to occupation and industry to industry and from place to place.

The case of ‘Uchinoy /vs/ State of Kerala ,1962 SC12, further quotes the following , “ As regards to the procedure for fixing of the minimum wages, the ‘appropriate government’ has undoubtedly been given very large powers , but it has to take into consideration, before fixing wages, the advice of the committee if one is appointed on the representations on proposals made by persons who are likely to be affected thereby. The various provisions constitute an adequate safeguard against any hasty or capricious decision by the ‘appropriate government’. In suitable cases, the ‘appropriate government’ has also been given the power of granting exemptions from the operations of the provisions of the Act. There is no provision undoubtedly, for a further review of the decision of the appropriate government , but that itself would not make the provisions of the act unreasonable”.

(B) The Act doesnot violate Article 14 of the Indian Constitution.

“On a careful examination of the various of the Act and the machinery setup by this Act, Section 3(3)(iv) neither contravene Article 19(1) of the constitution nor does it infringe the equal protection clause of the constitution. the Courts have also held that the constitution of the committees and the Advisory Board did not contravene the statutory provisions in that behalf prescribed by the legislature”,- this was held in the case of ‘Bhikusa Yamasa Kshatriya /vs/ Sangammar Akola Bidi Kamgar Union”, AIR 1963 SC306. Further , as decided in the case “C.B. Boarding & Lodging, Re(1970) II LLJ 403: AIR 1970: SC 2042 : 38 FIR I .” , it added to the above mentioned case that , “... nor the reason that two different procedures are provided for collecting information.” .

(C) Notification fixing different rates of minimum wages for different localities is not discriminatory.

where the fixation of rates of wages and their revision were manifestly preceded by a detailed survey and enquiry and the rates were brought into force after a full consideration of the representations which were made by a section of the employers concerned, it would be difficult in the circumstances to hold that notification which fixed different rates of minimum wages for different localities was not based on intelligent differentia having a rational nexus with the object of the Act, and thereby violated article 14. when the Government issued notification improving upon the existing minimum wages as revised minimum wages disregarding the contrary report of the committee appointed under Section 5-1(a) ; such notification was bad under the law and was to be made inoperative.”.

As pointed out by one of the India’s Union Labour and Employment Minister Shri Mallikarjuna Kharage ;, “The variation of minimum wages between the states is due to differences in socio-economic and agro-climatic conditions, prices of essential commodities, paying capacity, productivity and local conditions influencing the wage rate. The regional disparity in minimum wages is also attributed to the fact that both the Central and the State Governments are the appropriate Governments to fix, revise and enforce minimum wages in Scheduled employments in their respective jurisdictions under the Act”.

Referring the case of “N.M.Wadia Charitable Hospital /VS/ State of Maharashtra , 1993”, it was decided by the Court that – “ Fixing different minimum wages for different localities is permitted under the constitution and under labour laws , hence the question that any provisio of the Minimum Wages Act is in any way against the provisio of constitution is wrong.

The constitution of India accepts the responsibility of the State to create an economic order, in which every citizen finds employment and receives a “fair wage”. This made it necessary to quantify or lay down clear criteria to identify fair wage. Therefore, a Central Advisory Council, in its first session in November 1948, appointed a tripartite Committee on Fair Wages. The committee consisted of representatives of employers, employees, and the Government. Their task was to enquire into and report on the subject of fair wages to the labour.

(D) Sanctity of The Minimum Wage Act

Supreme Court in three separate rulings, has held that non payment of minimum wages is tantamount to ‘forced labour’ prohibited under Article 23 of the Constitution. The Supreme Court holds that ‘forced labour’ may arise in several ways, including “compulsion arising from hunger and poverty, want and destitution”. In Sanjit Roy Vs. State of Rajasthan (1983), the Supreme Court held that the Exemption Act in so far as it excluded the applicability of the Minimum Wages Act 1948 to the workmen employed in famine relief work is “clearly violative” of Article 23. Thus even public works ostensibly initiated by the government for the sole purpose of providing employment are subject to the Minimum Wage Act.

Drawing on the Supreme Court rulings, Andhra High Court set aside the Government of India (GoI) notification mandating that prevailing state minimum wage be paid. This has been underscored in the legal opinion provided by Additional Solicitor General, Ms. Indira Jaising, to the Central Employment Guarantee Council (CEGC) Working Group on Wages where she made it clear that using Section 6(1) to allow a payment of less than minimum wage in MGNREGA works will amount to forced labour. 15 eminent jurists and lawyers of India too have asked Government of India to immediately revoke its unconstitutional notification and ensure that minimum wages are paid to all workers in India.

The Act and the judgements are in favour of equality provided under Article 14 of the Constitution and a judgement in the case namely, “Engineering Workers Union /vs/ Union of India(1994) I .LLJSup.942Bom.”, pronounces the judgement that , “The provision under Section 3(2)(A), that minimum rate of wages in scheduled employment fixed or revised, shall not apply to the employees during the period of adjudication, violated equality clause of Article 14 and hence that section is void”.

In the view of the Directive Principles of State Policy as contained in the Article 43 of the Indian Constitution, it is beyond doubt that securing of living wages to labourers which ensures not only bare physical subsistence but also the maintenance of health and decency, it is conducive to the general interest of the public.

The Minimum wages Act was passed to fulfill the aspiration as contained in the following resolution:-

“ If the labourers are to be secured the enjoyment of minimum wages and they are to be protected against exploitation by their employers, it is absolutely necessary that restraints should be imposed upon the freedom of contract and such restrictions cannot be said to be unreasonable. On the other hand, the cannot be heard to complain if they are compelled to pay any minimum wages to their labourers even though the labourers , on account of their poverty and helplessness, are willing to work even at lesser wages”.

In the case of “PETITIONER: BIJAY COTTON MILLS LTD./Vs./

RESPONDENT: THE STATE OF AJMER.DATE OF JUDGMENT:

14/October /1954”,

The Constitutional validity of this Act was attacked on the ground that it violates the guarantee of freedom of trade or business etc., envisaged by Article 19(1)(g) of the Indian Constitution, (Constitution of India, Article. 19(1)(g), 19(6)-Minimum Wages Act (XI of 1948), sections. 3,4 and 5-Appropriate

Government-Fixing minimum rate of wages-Whether offends fundamental rights guaranteed under Art. 19(1)(g).)

, it was held that , the restrictions imposed upon the freedom of contract by the fixation of minimum rates of wages though they interfere to some extent with the freedom of trade or business guaranteed under Art. 19(1)(g) of the Constitution are not unreasonable and being imposed in the interest of general public and with a view to carry out one of the Directive Principles of State Policy as embodied in Art. 43 of the Constitution are protected by the terms of el. (6) of Art. 19. It can thus be said that the provisions of the Act are bound to affect harshly and even oppressively a particular class of employers, who for purely economic reasons are unable to pay the minimum rate of wages fixed by the authorities , but have absolutely dishonest intention of exploiting their workers.

The fact that employer might find it difficult to carry on business on settled principle cannot be a sufficient reason for striking down the law itself as unreasonable. The poverty of labourers is also a factor to be taken into consideration while determining the question whether a particular provision is in the interest of the general public.

A Shop or a factory : Tests for its determination

A Shop or a factory : Tests for its determination

In the age of digital manufacturing, the line between the physical and digital world is getting blurred Which is creating a whole new future for the industry.

Defining ‘Shop’-

A Discussion on limits and extent of ‘shop’ with reference to “The Maharashtra Shops and Establishments Act, 1948”.

 The Maharashtra Shops and Establishments Act, 1948, is a legislation to regulate the conditions of work in shops and commercial establishments and have been in force in the State of Maharashtra since last 57 years.

The first Shops Act was enacted in the year 1939.

The Application of the Maharashtra Shops & Establishments Act 1948 is confined to municipal areas specified in schedule I and State Government of Maharashtra has extended the operation of the Act to other areas having population of more than 25000 people.

In an important amendment on date 1st May, 1960, with the formulation of the Maharashtra state from the ‘Bombay State’, that the name of Bombay Shops Act was changed to ‘Maharashtra Shops & Establishments Act,1948 : and further this Act was extended to the State of State of Maharashtra state apart from Bombay from the year 1961.

From the commencement of the Maharashtra Shops & Establishments (Extension & Amendment) Act, 1960, all the provisions of this Act shall come into force in each areas in which the central provinces and Berar shops and establishment act, 1947, or the Hyderabad Shops & Establishment Act, 1951 which was in force immediately before such commencement.

The Expanse of the Act:

The Maharashtra Shops & Establishment Act, 1948 encompasses, covers, defines 3 different premises:

1) Commercial establishment (Section 2(4))

2) Establishment (Section 2(8))

3) Shop (Section 2(27))

 1) Commercial Establishment:

Defining Commercial establishment: A commercial establishment means, “ an establishment which carries on, any business, trade, profession, or any work in connection with or incidentally or ancillary to any business , trade, profession and includes establishment of any of the following: (i) Legal Practitioners, (ii) Medical Practitioners, (iii) architect, (iv) Engineering firm (v) tax consultant (vi) Society registered under Societies Registration Act 1866 and does not include (a) a factory, (b) Shop ,(c) residential hotel, (d) restaurant, (e) eating house, (f) theatre or other place of public amusement.

2) Establishment : In the definition of ‘Establishment’, it specifies: (i) Residential hotel, (ii) Eating Place, (iii) Theatre, (iv) Place of Public Amusement and encompasses shops and commercial establishment over and above it and includes such other establishment as the State Government may by notification in the official Gazette declare to be an establishment for the purpose of this Act.

3) Shop: According to definition of Shop, it is specifically mentioned that, (i) Office, (ii) Store room, (iii)Godown, (iv)Warehouse, (v) Workplace, (vi) Premises used for trade or business. Referring to the definition as per the Act: Shop means, “any premises where goods are sold or where services are rendered to customers, and includes an office, a store room, godown, warehouse, whether in the same business or otherwise mainly used in connection with such trade or business, but does not include a factory, a commercial establishment, residential hotel, an eating house, theatre, or other place of entertainment.

 The dilemma begins – whether a premise is a Factory or a shop:

Although according to the definition of shop, it is an establishment where goods are sold or an establishment where services are rendered to customers, but it remains as a shop or commercial establishment only until it is not connected with manufacturing process. If a shop is connected with any ‘manufacturing process’ then provisions of the Factories Act, 1948 will apply to it.

The Section 70 of the Maharashtra Shops and Establishments Act, 1948 has extended the operation of the Factories Act, 1948 and made it applicable to person working in the precincts of a factory to whom the Maharashtra Shops & Establishments Act, 1948 does not apply.

Moreover, Section 70 makes it clear that a premise or precincts can either be a factory or a shop, and when conflict arises between defining the two. The Section 70 titled, “Persons employed in factory should be governed by Factories Act and not by this Act”. This section puts a limitation to the applicability to the Maharashtra Shops & Establishments Act, 1948 to a shop or a commercial establishment by the statement which quotes, “Nothing in this Act shall be deemed to be a factory to which the provisions of the Factories Act, 1948 apply” and “where any shop or commercial establishment is situated within the precincts of a factory and is not connected with the manufacturing process of the factory, the provisions of Maharashtra Shops & Establishments act, 1948 shall apply to it”. “Provided further that, the State Government by notification in its official Gazette, apply all or any of the provisions of the Factories Act, 1948 to any shop or commercial establishments situated within the precincts of a factory and on application of the Act to Shop or commercial establishment, the provisions of the Act namely The Maharashtra Shops & Establishments Act, 1948, shall cease to apply to it.”.

Do the Offices and Information Technology companies come under the purview of Shops?

The Factories Act, 1948 shall not apply to “Electronic data processing unit or a computer Unit”. In the definition of “Factory”, as defined in Section 2(m) of The Factories Act, 1948, the Explanation II states that, ‘mere fact that an Electronic Data Processing Unit or a Computer Unit is installed in any premises or a part thereof, shall not be construed to make it a factory if no manufacturing process is being carried on in such premises or a pert thereof;

The Section 2(m) of The factories Act, 1948, which defines ‘factory’ emphasises on the words, “manufacturing process”, and “industrial Establishments”. It has been held that on plain reading of explanation II ; which was added to Section 2(m) of The Factories Act,1948, with effect from 1st December 1987, it becomes abundantly clear that the Electronic data Processing Unit or a Computer Unit installed in any premises or a part of it, though may not satisfy the definition of Factory, as defined in Section 2(m) of the Factories Act,1948 but Explanation II grants exemption / immunity to Electronic Data Processing Unit or a Computer Unit , from being brought within the purview of the welfare legislations especially the Labour Laws. Thus, an establishment solely engaged as an electronic data processing unit or computer unit, though may be a factory, it would be exempted from the application of labour laws by virtue of Explanation II. This makes us think that it might be the Explanation II that might be the reason as to why the Information Technology companies that develop software or are into allied software services come into the purview of Shop Acts of the respective States. Further the question that might arise as to whether corporate offices –where no manufacturing process takes place – will they be covered under Shops & Establishments Act or under the Factories Act: What we can decipher from the discussion stated earlier above is that, if any corporate office is not in the premises or precincts of factory and is functioning separately, then it would be covered under Shops and establishments Act, but if the corporate office is within the premises / precincts of factory then it will be covered under the Factories Act,1948.

The Loophole:

A loophole that can be exploited which comes from the origin of the Shops Act – In most states, such as Maharashtra for instance, the act was passed in 1948, and in those times there was almost no internet, and the concept of virtual offices existed only in pages of science fictions. Since most start-up entrepreneurs today choose to initially work from home, or collaborate remotely with each other and virtual offices are not established under the Act, those remain out of the purview of registration.

Supreme Court pronounced its judgement in the Case of “Seelan raj /vs/ Presiding Officer, 1st. Additional Labour Court (2001) 4SCC 634(2001) I L.L.J 1335.” The question in the case was to whether Data Processing and preparation of Software for customers is a manufacturing process and whether the place from where such a service is rendered is a factory, was referred by the Judge Bench to a Larger Bench. As to the relationship between the main definition and explanation II, the court pronounced that“ Explanation II does not control the main provision of Section2(m) of the Factories Act,1948. It merely sets out an exemption to make an exemption to make certain things clear like for example, installation of an electronic data processing unit or a computer unit in an establishment. The explanation says that a place will not be regarded as a factory if it is not otherwise so. Moreover as the physical process of “manufacturing process”, if not taking place in a place where an electronic data processing unit is installed, it does not come under the purview of factory; Information technology companies come under Shops and Establishment Act, as the word “Services” is mentioned in the definition related to the Act.

Further in the era of E-Commerce, where goods are sold online through website and no physical shops exist on ground, the loophole that can be exploited is that there are no customers who are purchasing from any shop directly, hence no registration would be necessary. How true this will be is a question I put up to the readers of this article and leave it to them to ponder upon. If however, that e-commerce entity also entertains walk in clients and sell products and services to them, that loophole would no longer be available to such an entity.

Thus we can say that it is due to these reasons that “Shop” is essentially characteristically different than “Factory”, and further that the dilemma begins – whether a premise is a Factory or a shop appears to be clarified distinctly.

Refererred from: http://www.techmahindra.com/services/Integrated_Engineering_Solutions/Technology_Solutions/Connected-Factories.aspx