Sunday, October 28, 2012

Why you should be very careful while selecting vendor for contract staffing

Hi Friends,

Last few weeks had been too busy to post anything on my blog.  There were many things to write and finally I decided to write a case and discuss on it. It is really important for every HR and business manager, entrepreneurs and people in business.
Last week, one of my very close friend made a call to me. We usually discuss about certain things- official and personal however this call was little different. He stuck in a problem, in fact a major problem related to statutory compliance (Yes, I know many people suffer the labour law compliance issue due to corrupt governance, red tapism and outdated law). Let us look into the case.

My friend ABC joined one of the leading multi national year back and was a SBU head, he is also head for human resources and administration department.

They have lot of sales activities across India and for the same purpose they regularly take services of contractor or the manpower agencies providing contractual staffing. They do not have any intention to violate any labour law compliance and my this friend is very cautious about this. He ensured that all the vendors comply with the labour laws.

Last week, a PF inspector visited to his office and scrutinized all the files including PF challans and annual returns.He checked data for last 5 years. Everything was alright but the inspector found that one of the vendor has not provided documents related to PF (Provident Fund).
The history of this vendor: This vendor is no more providing any services to my friend's company for past 2 years. All the people who worked for my friend's organisation also left with the termination of the contract so nobody bothered to check. By going through the historical documents of the vendor, my friend found that the contractor had signed service agreement that he will undertake the work. It was not the manpower service agreement.

What happened then?
The PF inspector did not agree and asked him to visit next week to his office with all the required documents.

Key questions
1. Is this organisation still liable to pay arrear PF?
2. What will be the implication?
3. Is it a labour law violation?
4. What is the solution?

1. Yes, the organisation is still liable to pay arrears for PF. Although the people who worked for my friend's organisation were not the company employee, it is organisation's liability by purview of the  Contract Labour (Regulation and Abolition) Act, 1970.
The Act says that
Every organisation and contractor employing 20 or more contract labour in a year fall under purview of the Act anywhere in India. Even if they are employed in different branch of the same organisation and exceed 20, the Act applies then.

Only organisation whose work does not last more than 60 days in a year are exempted from purview of the Act.

In Maharashtra, only exempted organisation are in SEZ (Special Economic Zone)

The Act further make it obligatory to principle employer (i.e. organisation employing labour/ s and if not, the principle employer should deduct it from the payment payable to the vendor and deposit the same with concerned authority. Through various cases in high court and our Supreme court, it is validated further that the ultimate responsibilities is of principle employer and nobody else.

So by he virtue of Contract Labour (regulation and abolition) Act, yes the organisation i.e. principle employer where my friend is working liable.

Yes, it is true that his organisation had a service agreement with the vendor, the labour officers and inspectors are clever enough to detect this and such type of strategy does not stand in the court of law. If my friend decide to protest and go in the court, chances are rare that he will get relief.

The second question is what will be the implication?
As per the section 14 of the Employees Provident Fund and Miscellaneous Provisions Act, The penalty is as follows:

Default period           Penalty
for 0-2 months-          5% p.a. on arrear amount
for 2-4 months           10 % p.a. on arrear amount
for 4-6 months            15 % p.a. on arrear amount
For above 6 months    25% this 25% should not exceed 100% maximum of the defaulted amount

Only those companies declared sick by BIFR can get penalty waiver. So it is clear that organisation has to bear a huge cost.

So suppose my this friend's organisation hired services of the contractor for 2 years and he hired 30 people. Considering the maximum limit of Rs. 6500 basic + DA the PF amount @ 12% comes to 780 per month per contract labour (The organisation's share) then the liability comes = 780 X 30 = 23400 per month so for 2 years the total amount is 561600
Now the penalty @ 25% p.a. comes to
For 1st year 280800  + 25 % =  280800 + 70200 = 351000
For second year 351000+ 25% = 351000+87750 = 438750 (For previous years arrear) + 351000 for current year's arrear = 838750

Finally the organisation (first, the contractor and if organisation cannot find them themselves) liable to almost Rs. 3 Lakhs additional.

3. The question  is it labour law violation?
The answer is yes. Violation of Contract Labour Act as well as PF and Misc Act.


4. What is the solution?
The solution is to catch the contractor and ask him to pay the contribution as well as the penalty and if it is not traceable the organisation has to pay it.

The second solution which I ethically and personally never recommends but practiced in our country is to meet the PF inspector and settle the matter with a small portion of money say 30-35 thousand (and most of the PF or labour inspector prefer this way) and nothing let come into the records.

This is a lesson for every business owner, HR manager while looking into compliance and as well as selecting vendor. We may save little money by allowing those vendor playing such tricks but for long term it is not good for the organisation, its brand value and reputation.

1. The example is a real business case scenario
2. Calculations are indicative only however the penalty charges are factual.

I hope you liked this posting. Would love to receive your comments

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