Contractors, Employees and Malafide Outsourcing (Civil Petitions No.525-K to 541-K/2023)

Chronology of Events:

1. Initial Filings and Allegations: The case began with the respondents, who were employees of IFFCO Pakistan (Private) Limited, filing petitions under Section 54(e) of the Industrial Relations Act, 2012, before the National Industrial Relations Commission (NIRC), Karachi. The respondents claimed that despite being regular employees, IFFCO had been treating them as contract workers, thereby depriving them of benefits like annual increments, bonuses, medical facilities, and the right to join a trade union. The respondents sought a declaration from NIRC that they be declared permanent employees of IFFCO.
2. NIRC’s Decision: The Single Member of the NIRC ruled in favour of the respondents on 9th November 2020, holding that they were indeed employees of IFFCO. The NIRC allowed them to participate in trade union activities and restrained IFFCO from committing any unfair labour practices against them.
3. Appeal to the Full Bench of NIRC: IFFCO, dissatisfied with the decision, appealed to the Full Bench of the NIRC, which on 13th September 2021, upheld the Single Member’s decision, thereby dismissing the appeal.
4. High Court Proceedings: IFFCO then approached the Sindh High Court, challenging the NIRC’s decision. The High Court, however, dismissed all the constitutional petitions on 14th February 2023, reaffirming the concurrent findings of the NIRC.
5. Supreme Court Appeal: Subsequently, IFFCO filed Civil Petitions for leave to appeal before the Supreme Court of Pakistan against the High Court’s decision. The primary argument advanced by IFFCO was that the NIRC had no jurisdiction over cases involving workers employed through a contractor, as there was no direct employer-employee relationship between IFFCO and the respondents.
6. Supreme Court’s Consideration: The Supreme Court thoroughly examined the evidence presented during the original proceedings, noting that the respondents had produced documents such as attendance records and requisition sheets issued by IFFCO, demonstrating a direct employment relationship. IFFCO’s defence relied on agreements with contractors, but these agreements were found to have expired, rendering them ineffective in establishing a contractual employment arrangement.
7. Dismissal of Civil Petitions: On 4th April 2024, the Supreme Court dismissed IFFCO’s petitions, refusing to grant leave to appeal. The Court noted that the concurrent findings of fact by the NIRC and the High Court were based on substantial evidence and did not warrant interference. The Court also observed that the alleged contractors never challenged the judgments, which further weakened IFFCO’s position.
8. Final Judgment: The Supreme Court’s final order reflected the legal principle that sham agreements cannot be used to circumvent labour laws and deprive workers of their rights. The Court upheld the NIRC’s decision, confirming the respondents as permanent employees of IFFCO with all attendant rights, including the right to participate in trade union activities.

This Supreme Court case provides a detailed examination of several legal concepts related to labour laws and outsourcing arrangements, particularly in the context of the Pakistani legal system. Below is an analysis addressing each of your specified points:

1. Concept of Outsourcing of Tasks through Contractor & Toll Manufacturing: The Supreme Court distinguishes between legitimate outsourcing and Toll Manufacturing versus sham arrangements designed to bypass labour laws. The judgment explains that outsourcing is a common business practice where a company contracts out tasks to an external entity, such as a contractor. In Toll Manufacturing, a company may provide raw materials to a third-party contractor to produce goods, thereby avoiding the need for heavy investments in infrastructure. However, the Court emphasised that such arrangements should not be used to evade labour laws, particularly where the control and supervision of workers rest with the company itself.
2. Circumvention of Labour Laws to Save Money: The judgment addresses the issue of circumvention of labour laws, describing it as a tactic often employed by companies to reduce costs. The Court discusses how companies may create sham agreements with contractors to avoid their obligations under labour laws, thereby depriving workers of their rights and benefits. The Court condemned such practices, noting that labour laws are designed to protect workers’ rights and that any attempt to bypass these protections through contrived contractual arrangements is unlawful.
3. ILO Conventions No. 87, 98 & Section 91 of I.R.A., 2012: The judgment refers to Pakistan’s obligations under International Labour Organization (ILO) Conventions No. 87 and 98, which deal with freedom of association and the right to organise and engage in collective bargaining. Section 91 of the Industrial Relations Act (IRA), 2012, reinforces these international obligations by protecting workers’ rights to form unions and engage in collective bargaining. The Court highlighted that any arrangement or contract that impedes these rights is in violation of both domestic law and international obligations.
4. Sham Arrangement for Supply of Labour with Outsource Contractor: The Court scrutinised the agreements between IFFCO and the contractors, ultimately determining that these agreements were sham arrangements. The evidence showed that the workers were under the direct control and supervision of IFFCO, even though they were formally employed by contractors. The Court ruled that such sham arrangements are a clear violation of labour laws, as they are used to disguise the true nature of the employment relationship and deprive workers of their rightful benefits.
5. Effect of Employer’s Control or Supervision on Contractor Employees: The judgment emphasised that the degree of control and supervision exercised by an employer over workers is a critical factor in determining the true nature of the employment relationship. The Court noted that even if workers are formally employed by a contractor, if the employer exerts significant control over their work, including supervision, the workers should be considered employees of the employer. In this case, the evidence showed that IFFCO had substantial control over the respondents, leading the Court to conclude that they were effectively employees of IFFCO, despite the formal agreements with contractors.

In the case under discussion, the Supreme Court of Pakistan addresses this longstanding conflict by referencing multiple judgments that have shaped the legal landscape regarding the distinction between a direct employee and one who is employed through an outsourced contractor.

1. Fauji Fertilizer Company Ltd. versus National Industrial Relations Commission & others (2013 SCMR 1253 = 2014 PLC 10): The Court held that ordinarily, the relationship of employer and employee does not exist between a company and the workers employed by a contractor. However, if the company retains or assumes control over the means and methods by which the contractor’s work is carried out, the relationship of employer and employee can be said to exist between the company and the contractor’s workers. This case emphasized that employees directly involved in a company’s operations, under its supervision and control, should be considered as employees of the company, irrespective of the formalities of their contractual arrangements.
2. Abdul Ghafoor and others Vs. The President National Bank of Pakistan and others (2018 SCMR 157): This judgment highlighted that companies often describe their workers as “contractors” or “contract employees” to exploit them and avoid regularization obligations. The Court ruled that workers who serve a company regularly, and perform tasks under the company’s direct supervision, must be recognised as the company’s employees. The judgment underscored the judiciary’s role in preventing companies from using sham arrangements to evade their responsibilities under labour laws.
3. Messrs State Oil Company Limited vs. Bakht Siddique and others (2018 SCMR 1181): The Court reiterated that it is a common tactic among companies to create a façade of outsourcing to evade labour laws. In this case, the employees had been working for the company for many years, performing permanent tasks under the company’s control, which led the Court to conclude that they were, in reality, employees of the company rather than of any contractor. The judgment further stressed that when a company outsources tasks that are permanent in nature, it must still uphold the rights of workers, treating them as its own employees.
4. Messrs Sui Southern Gas Company Limited Vs. Registrar of Trade Unions and others (2020 PLC 153): The Court reaffirmed that any arrangement between a company and a contractor that deprives workers of their rights to form or join a trade union, or to benefit from labour laws, is unacceptable. The decision in this case was consistent with earlier rulings that exposed sham arrangements intended to bypass legal obligations. The Court dismissed the petition, highlighting that the workers had been performing duties for the company’s benefit for many years and were entitled to the protections afforded to employees.

These judgments illustrate the judiciary’s approach to resolving the “tug of war” between employers and employees concerning the true nature of their relationship. The consistent theme in these cases is that when an employer exercises control and supervision over workers, even if they are formally employed by a contractor, those workers should be recognised as employees of the company. The judiciary has been clear in rejecting arrangements that are crafted to circumvent labour laws, ensuring that workers receive the protections and benefits to which they are rightfully entitled.

In the judgment, a foreign case which was referenced is Nilgiri Coop. Mkt. Society Ltd. v. State of T.N. [(AIR 2004 SC 1639) = (2004) 3 SCC 514] from India. This case was cited in relation to the Fauji Fertilizer Company Ltd. case (2013 SCMR 1253), to further elaborate on the criteria used to determine whether workers employed by a contractor should be considered employees of the principal employer (the company).

Relevance of the Nilgiri Coop. Mkt. Society Ltd. Case:

The Nilgiri Coop. Mkt. Society Ltd. case provided a framework for assessing whether workers engaged through a contractor are actually employees of the principal employer. The Supreme Court of Pakistan referenced this Indian case to draw parallels and support its analysis on how to evaluate such employment relationships. Specifically, the Nilgiri case laid down a multi-factor test that includes:

1. Appointing Authority: Who has the authority to appoint the workers?
2. Paymaster: Who pays the wages to the workers?
3. Dismissal Authority: Who has the power to dismiss the workers?
4. Control and Supervision: What is the extent of control and supervision exercised by the principal employer over the workers?
5. Nature of Work and Establishment: Whether the work done by the workers is integral to the business or functions of the principal employer.
6. Right to Reject: Who has the right to reject the workers’ work?

These criteria help determine whether a worker is genuinely employed by a contractor or if the contractual arrangement is a mere facade to avoid recognising the worker as an employee of the principal employer.

Application in the Case:

In the Supreme Court of Pakistan’s judgment, the relevance of the Nilgiri case lies in its utility as a guiding principle to assess the facts of the case at hand. The Court used this precedent to evaluate the extent of IFFCO’s control and supervision over the workers in question. The judgment concluded that despite the formal contractual arrangements with contractors, the workers were effectively under IFFCO’s control and were performing tasks integral to its operations, thereby making them employees of IFFCO rather than of the contractors.

The distinction between bona fide and mala fide outsourcing is crucial in the context of labour law, particularly when evaluating whether the practice of outsourcing is being used as a legitimate business strategy or as a means to exploit workers and circumvent labour laws. The Supreme Court of Pakistan, in the judgment discussed in the attached case, clearly articulated this distinction, emphasising that outsourcing, when used improperly, can become a tool of oppression against workers.

Bona Fide Outsourcing:

Bona fide outsourcing is a legitimate business practice where a company contracts out certain tasks or operations to an external entity to improve efficiency, reduce costs, or focus on core competencies. This practice is generally acceptable when it is done transparently, and the outsourced workers are not deprived of their lawful rights. In such cases, the relationship between the employer and the contractor is genuine, and the contractor is responsible for the employment and welfare of the workers. The workers are fully aware of their employment terms and are not misled about their rights or status.

Mala Fide Outsourcing:

Mala fide outsourcing, on the other hand, is characterised by deceitful practices where the outsourcing arrangement is merely a facade to avoid compliance with labour laws. This type of outsourcing is not done for genuine business reasons but rather to exploit workers by denying them the rights and benefits they would be entitled to if they were recognised as direct employees of the company. In such arrangements, the company often retains significant control over the workers, effectively making them employees, but uses the outsourcing label to evade legal obligations, such as paying benefits, ensuring job security, or allowing unionisation.

Supreme Court’s Observations:

The Supreme Court, in this case, condemned the use of outsourcing as a “weapon of oppression” to deprive workers of their legitimate and fundamental rights. The Court observed that when outsourcing is employed in bad faith, it serves to undermine workers’ rights, particularly their right to form or join a trade union. The judgment noted that the alleged outsourcing arrangements in the case were designed to create a false impression that the workers were not direct employees of IFFCO, thereby depriving them of their rights under labour laws.

Right to Form a Union:

One of the fundamental rights at stake in cases of mala fide outsourcing is the right to form or join a trade union, as guaranteed by both national and international labour laws. The Court pointed out that denying workers this right through sham outsourcing arrangements is particularly egregious because it strips them of a key mechanism to collectively bargain and protect their interests. The Court’s judgment emphasised that any outsourcing arrangement that serves to prevent workers from exercising this right is inherently mala fide and cannot be legally sustained.

Practical Implications:

The Court’s ruling underscores that while outsourcing can be a legitimate business strategy, it must not be misused to exploit workers. Companies must ensure that their outsourcing practices are transparent and do not infringe on the rights of the workers. If a company exercises significant control over outsourced workers, those workers may legally be considered employees of the company, entitling them to all the rights and benefits that come with such a status.

In conclusion, the Supreme Court’s decision sends a clear message that outsourcing should not be used as a tool to bypass labour laws or to oppress workers. Instead, outsourcing should be conducted in good faith, ensuring that all workers, whether direct or outsourced, are treated fairly and are able to exercise their legal rights, including the right to form and join unions. The judgment serves as a strong reminder to employers that the law will scrutinise the true nature of outsourcing arrangements and will not tolerate any attempt to disguise employment relationships to the detriment of workers.