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Teamlease Labor Report 2005 2Confidential for private circulation

SUMMARY

INDIAS LABOR MARKETo Labor force participation is a low 400 million of a 1 billion populationo Organized employment has been stagnant at 30 million for thirty years (22

million in public sector, 8 million in private sector)o Unorganized employment is the bulk of the labor force (340 million)o Given that 269 million people are below the poverty line, even the majority

of those employed can barely sustain themselveso Given Indias employment elasticity (0.15) and ICOR (3.75), the 8 million

new jobs needed to freeze unemployment require an impossible annualGDP growth rate of 13.6% and investments of $125 billion

LABOR REFORM BACKGROUNDo Labor laws are a prisoner of a vocal minority of organized labor (mostly

not poor, middle-aged, men) against the majority (poor, low skilled,

women, self-employed, young and unemployed)o Unorganized employment is exploding with its low productivity, investment

and lack of labor law enforcemento Unemployment, at 30 million, is more than organized employmento Jobless economic growth since 1990 has weakened grassroots social

and political support for economic reforms

CASE FOR LABOR REFORMo The coming unemployment explosiono Indias labor environmento Global trends in work

CASE FOR TEMPORARY STAFFINGo Temp jobs form up to 10% of employment in some countrieso Ineffective public sector matching (of the 40 million people registered with

employment exchanges in 2004 only 100,030 got jobs)o Globally 40% of temps find permanent jobs within one yearo The International Labor Organization reversed its fifty-year-old position

opposing temporary staffing in 1997 (Convention 181)o Temporary staffing accounted for 50% of the reduction in US

unemployment and 11% of job creation in the EU in the 1990so A study of US firms found that earnings, margins and stock returns

improved with the increased use of temporary staffingo Temping gives outsiders (women, young, old, lower skilled, lower

educated, poor, and unemployed, etc) access to labor markets.

JOB POTENTIALo A survey finds that reform to the Indian Contract Labor Act could create

an additional 12 million temp jobs in five years.


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Indias Labor Market

Population1 billion

Organized Employment30-50 million

Agriculture 60%Manufacturing 13%

Construction 5%Services 24%

Unorganized Employment

340-360 million

Unemployed30-50 million

Agriculture 5%

Manufacturing 26%Construction 4%Services 59%

Agriculture, Construction,

Retailing

Not literate 0.2%

Literate upto primary 1.2%Middle 3.3%

Graduate and above 8.8%

Temporary Staffing0.08 million

0.01% of employment relative to10% in some countries

Labor Force

400-420 million

Low or no labor law enforcementLow productivity

Low wagesLow Skills

Largely Sales, Technology,Admin, HR

Age 15-30 12.1%

Female 10%Men 7.2%

ELASTICITYAgriculture 0

Manufacturing 0.26Construction 1Services 0.57

Overall 0.15


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India'sLabor Market

PolicyIssues

RegulatoryIssues

Education and Skill development

Industrial Relations Framework

Mandatory Payroll Deductions

Working condition provisions

Job Security provisions

Wage determination Framework

Gender Issues

Temporary vs. Permanent

Lack of ability to afford broad social security

Demographics

UNEMPLOYMENT

30 milion officially,more than organized employmentand growing rapidly

POVERTY REDUCTIONGiven 269 million below the poverty line, even

employed barely sustain themselves

PUBLIC VS. PRIVATE SECTORThe organized private sector is only 3% ofemployment

ORGANIZED VS. UNORGANIZED SECTORSmall Organized (large scale) with low employmentand large unorganized (small scale) with low capital

AGRI. VS. MANUFACTURING VS. SERVICESNegative elasticity of agriculture and labor saving

bias of manufacturing

OUTSIDER ACCESS

Bias against outsiders (poor, low skilled, women,and young) by insiders (not poor, middle-aged, men)

CREATING VS. PRESERVING JOBSShift from employment to employability

REGULATION VS. SUPERVISIONReverse current over-regulation and

under-supervision

RURAL VS. URBAN SECTORRural job growth 25% of urban and fallen more than

half since 1980

COSTS/ ENFORCEABILITYEnd legislating ahead of enforcement capacity and

payment capability

SKILL DEVELOPMENT44% of labor force is illiterate and only 5% estimated

to have vocational skills

Equity-Growth trade-off


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Case for

Labor Reform

Inability to affordsocial security

Low Employment Elasticityof GDP

Labor saving bias ofmanufacturing

Negative employment elasticity of

agriculture

End of public sectorjob machine

Demographics; growing youth

Effective & IncentivizedHR industry

Changed Role ofGovernment

Nature of job opportunities

Offshore markets/ FDI

Internal & ExternalCompetition

Unorganized employmentexplosion

Flexible work structures

Changing workerexpectations

Internationalization

Rising female workforce

participation

Intellectuallization

Organizational and Supplychain deconstruction

Coming Unemploymentexplosion

India'sLabor environment

Global trends inwork

China's reformLow Skill levels Role of Employer


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Case for

Temporary Staffing

Economic Value and

job creation

Unemployment Reduction

Stepping Stone role

Liquidity provider; Better matchingof demand and supply

Limited Permanent jobsubstitution

Outsider Access

Matching expertise and

Diversity Access

Just in time labor; handling

fluctuating demand

Differential pay for

special skills

Strategic Flexibility

Improved Competitiveness

Auditioning permanentcandidates

Employer Access

Keep in touch with the

job market

Supplemental income

Lifestyle choice

Improved employability; skilldevelopment and experience

Springboard to permanentemployment

Public Policy

Perspective

Employer

Perspective

Employee

Perspective

Handling planned and

unplanned absencesCompetitive economy Training


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Recommendationsfor

Temporary Staffing Reform in India

Definition of PrincipalEmployer

High Mandatory PayrollDeductions

Compliance philosophy &decentrallization

Minimum wage rules

for part-time work

Core, Perenial, industry, timingand location restrictions

Increased outsourcing to theunorganized sector

Lower job creation

Contract rotation

Outlocation

Sham consultingagreements

Barriers for first-time job seekersand labor markets outsiders

Evasion, Unorganized jobcreation, employee losses

Over-regulation and under-

supervision, enforcementconsistency, transparency, costs

Amend Section 2(g), 7 of CLRA

Recognize Contract StaffingCompanies as the principal

employer

Amend EPFO ActESI Act

Only after 6 months, 18 monthsfor employees with salary greater

than Rs 6500 p.m.

Amend Section 7,12 of CLRA

Create national licensing forcontract staffing and move away

from contract-by-contract

Amend Sec 15 of MWA

Allow pro-rata salary paymentsunder the Minimum Wages Act

Amend Section 10 of CLRAAmend Sec 25B of IDA

Allow contract/ temporary staffingin all durations, functions and

industries

Issue Consequence Recommendation

Lack of part-time work

options


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Table of Contents

Page No.

1. Preface 11

2. The Case for Labor Reforma. The coming unemployment explosion 14b. Indias employment environment 15c. Global trends in work 16

3. Indias Labor Marketa. Policy/ Regulatory Listing 18b. Historical Perspective Three eras 20c. Key Issues 21

4. The Case for Temporary Staffing in Indiaa. Public policy perspective 24b. Employers perspective 26c. Employees perspective 27

5. The Temporary Staffing Industrya. Background 29b. Global markets 33c. Geo-Historic evolution 37d. Global regulation 38e. Negative Perception vs. Reality 41

6. Results of Temporary Staffing Survey 42

7. Recommendations for Temporary Staffing Reform in India 45

8. Annexuresa. Indian Labor Market Facts 52b. Indian Labor Laws 60c. Previous Indian Labor reform proposals 73d. Labor Reform in China 79e. Labor Reform in other Asian countries 97f. Bibliography 111g. About Teamlease 119


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PREFACE

Indias economic reforms are on track and she has a new appointment to meet a heavily

delayed tryst with destiny. However, there is justifiable disappointment with the lack ofnew job creation or shift from unorganized employment since reforms began in 1991.

Labor reforms are controversial but equating them with firing workers is wrong. Themuch debated exit policy should be forgotten for now in the interest of moving forward;incremental steps are better than no progress.

We need a thought world shift from employment to employability; from preserving jobsto creating them and from giving fish to teaching how to fish. This white paper is ourattempt to create background for a debate on one of the many possible solutions tounemployment; temporary staffing.

While a permanent, full-time job may still be the norm, labor markets are changing. Thejob-for-life is being replaced with life-long learning, multi-skilling, and a working life withmultiple careers and flexible hours.

However, for a significant part of public opinion and policy makers, temporary staffingstill has the negative connotations of precarious employment. But there is another side ofthe coin, namely the positive dimensions of flexibility; outsider access, lowerunemployment, greater employability, and increased labor mobility.

Current temporary staffing laws in India, as with broader labor legislation, favors a vocalminority (largely not poor, middle-aged men in organized labor) against the majority(young, old, poor, lower skilled, women, unemployed, unorganized, and self-employed).This is unfair and needs to change.

We make the case that temporary staffing companies address the flexibility needs ofworkers and companies, and create jobs. In this way, staffing companies build strongersocieties.

Indias progress will not be worth the trip if we do not give a majority of our people thestrength and self-esteem that comes with a job. Let the journey begin.

The Teamlease Team


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CHAPTER 2: THE CASE FOR LABOR REFORM

Indias economic reforms have produced results but the jobless growth of the 1990sneeds to change; the case for deeper labor reform can be built on three grounds:

Case for

Labor Reform

Inability to affordsocial security

Low Employment Elasticityof GDP

Labor saving bias ofmanufacturing

Negative employment elasticity ofagriculture

End of public sectorjob machine

Demographics; growing youth

Effective & IncentivizedHR industry

Changed Role ofGovernment

Nature of job opportunities

Offshore markets/ FDI

Internal & ExternalCompetition

Unorganized employmentexplosion

Flexible work structures

Changing workerexpectations

Internationalization

Rising female workforceparticipation

Intellectuallization

Organizational and Supplychain deconstruction

Coming Unemploymentexplosion

India'sLabor environment

Global trends inwork

China's reformLow Skill levels Role of Employer


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The coming unemployment explosion

1. Low employment elasticity of GDP Indias labor force growth of 2% ayear needs 8 million new jobs just to keep unemployment frozen where it is. With anemployment elasticity of GDP of 0.15 and an Incremental Capital output Ratio

(ICOR) of 3.75, 8 million jobs need a sustained GDP growth of 13.6% andinvestments of $125 billion. These numbers are practically impossible and we will nothave massive job creation unless we raise our employment elasticity of GDP.

2. Demographics; growing youth India is the only country in the world growingyounger and more than 60% of our unemployed are youth. Current labor laws arebiased against first -time job seekers and we will have a social catastrophe if theyouth are not channelized into productive and self-esteem creating employment.

3. End of public sector job machine Public sector employment forms the majorityof organized, formal employment. However, with an informal freeze or heavy slowdown on recruiting and a tight fiscal situation, this sector is shrinking. Reinforced byprivatization of PSUs, deregulation of government monopolies and overall

liberalization, this sector cannot drive job growth.

4. Negative employment elasticity of agriculture The employment elasticity ofGDP for agriculture is negative i.e. we could increase production by reducing thenumber of people employed. This represents massive underemployment due to thelack of alternative in rural areas and is not expected to change soon.

5. Labor saving bias of manufacturing The expectations of huge jobcreation from manufacturing are at odds with the labor saving bias and capitalintensity of manufacturing of the last few years. For e.g. Bajaj Auto produced 2.4million vehicles last year with 10,500 workers; in the early 90s they made 1 millionvehicles with 24,000 workers. Also Tata motors made 311,500 vehicles with 21,000workers in 2004; in 1999 it made 129,400 vehicles with 35,000 workers.

6. Inability to afford social security There are no formal social security benefitsand Indias demographics and fiscal situation will not allow them in the future (evenpaying 26% of the population below the poverty line a social security benefit equaling50% of the per capital income would need 13% of GDP; close to total tax receipts).The best and only viable social security is massive job creation.

7. Low skill Levels The percentage of the Indian labor force with skills/vocational training is among the lowest in the world at 5.06%. Poor skills reduceworker productivity and also makes them less likely to fit into the service/ knowledgeeconomy. More than 40% of the labor force is illiterate and only 5% are estimated tohave the vocational skills for credible employment.


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Indias employment environment

1. Changed role of government Indias labor laws were written after independencewith the philosophy of state domination in business and legislation. The processbegun in 1990 of deregulation, privatization and liberalization has changed the

economic and financial landscape but the assumptions underlying the laborregulatory regime have not been updated.

2. Unorganized employment explosion Unorganized employment is to be 93% ofworkforce. The explosion of the unorganized sector is largely to avoid irrational laborlegislation but comes at the expense of benefits of the formal economy; creditaccess, training, benefits, etc. From a public policy perspective, the formal sector ismore desirable because it offers better working conditions, improves employability,pays taxes and has higher productivity.

3. Internal and External competition Indian industry grew up in a protectedenvironment but global competition and technological uncertainty have changed theirhabitat. Companies must respond quickly when new products are launched, new

technologies are assimilated, new competitors emerge and old ones die, prices ofproducts fall, cost of input materials rise, interest rates and exchange rates fluctuate,and so on. Companies need flexibility to handle all this change; the end of textilequotas creates a unique need for labor flexibility for Indian companies.

4. Offshore Markets/ FDI India has become an offshore services hub and is showingincreased prowess as a manufacturing base. The globalization of supply chains andincreased foreign investment offers a unique opportunity for India but needs anenabling environment of relevant and flexible labor regulations.

5. Nature of job opportunities Indias labor laws have been written for a time whenagriculture and manufacturing were the main sectors of the economy. Furthermore,the off shoring revolution had not yet begun. A majority of new jobs in the next

decade will be entry-level jobs in service and manufacturing. This fits well with ouryoung population but current labor laws are stacked against first time job seekers.

6. Effective and incentivized HR industry An increase in HR firms has led toimproved demand and supply matching in Indias labor markets. Their efficiency willonly increase as global majors enter the country and raise competition. Temp staffingcompanies are particularly economically incentivized to keep people at work sinceany gap or delays in matching candidates and jobs represents losses.

7. Chinas reform China has modified its labor laws to create an exceptionalenvironment for investment and job creation. It is our biggest competitor for jobsarising out of global FDI and the globalization of supply chains ; we need to worryabout our relative attractiveness which seems to have weakened. This is particularly

relevant in labor intensive industries like toys, textiles, machine tools and many more.


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Global trends in work

1. Changing worker expectations A study by Spherion Corp identified what itcalls the emergent workforce, workers who need to feel more in control of theircareers and want an employer who rewards them based on performance, versus

traditional workers who believe that an employer is responsible for providing a clearcareer path and in return deserves an employees long-term commitment. Emergentworkers are more concerned about opportunities for mentoring and growth and areless focused on the traditional arrangements of job security, stability and tenure.

2. Organizational and supply chain deconstruction The traditional boundaries ofa company are being redefined by technology but the driving forces are strategy andfocus. Charles Handy talks about the shamrock organization where the corestructure of expertise consists of essential managers, technicians, and professionalsforming the nerve center of the organization. Embodied in this first leaf are theorganizations culture, its knowledge and direction. The second leaf of the shamrockcomprises the non-essential work that may be farmed out to contractors. The thirdleaf is the flexible workforce; temporary and part-time workers who can be called onto meet fluctuating demands for labor.

3. Intellectualization Globally, regardless of labor force composition by age orgender, the chance of finding a job rise with education. The underlying forces includea decline for unskilled and semi-skilled labor driven by technological innovations thatgreatly increase the productivity of skilled workers. Further, the transition to a serviceeconomy demands higher socials skills and accelerates skill obsolescence.

4. Rising female workforce participation The huge entry of women into theworkforce, particularly married women with children is a major driver towards moreflexible labor markets. The huge participation dip by women when families wereformed (the children break) around age 30 is no longer significant. The labor force isin transition from a uniform male breadwinner society towards a multiplicity ofhousehold working arrangements.

5. Internationalization Labor markets are globalizing in two ways; labor mobility(physical movement of people) and job mobility (offshore manufacturing and servicedelivery). Given the demographics and cost structures of developed countries, thismay accelerate but specifics will depend upon politics and non-economic factors.

6. Flexible work structures Many work relationships are different from thestandard; a full time job (38-40 hours a week) with a permanent, open-endedcontract with an employer. New forms of labor demand and supply have emerged asa consequence of the changing and more heterogeneous preferences of bothemployers and employees. There is more frequent use of self-employment, part-timework, limited duration contracts and temporary staffing.

7. Role of Employer Employers are no longer viewed as paternalistic providersof lifetime employment and benefits. This has also led to the monetization of benefitsand a move to CTC (Cost-to-Company) in compensation.


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CHAPTER 3: INDIAS LABOR MARKET

Population1 billion

Organized Employment30-50 million

Agriculture 60%Manufacturing 13%

Construction 5%

Services 24%

Unorganized Employment

340-360 million

Unemployed30-50 million

Agriculture 5%

Manufacturing 26%Construction 4%Services 59%

Agriculture, Construction,

Retailing

Not literate 0.2%

Literate upto primary 1.2%Middle 3.3%

Graduate and above 8.8%

Temporary Staffing0.08 million

0.01% of employment relative to10% in some countries

Labor Force

400-420 million

Low or no labor law enforcementLow productivity

Low wagesLow Skills

Largely Sales, Technology,Admin, HR

Age 15-30 12.1%

Female 10%Men 7.2%

ELASTICITYAgriculture 0

Manufacturing 0.26Construction 1Services 0.57

Overall 0.15


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India'sLabor Market

PolicyIssues

RegulatoryIssues

Education and Skill development

Industrial Relations Framework

Mandatory Payroll Deductions

Working condition provisions

Job Security provisions

Wage determination Framework

Gender Issues

Temporary vs. Permanent

Lack of ability to afford broad social security

Demographics

UNEMPLOYMENT

30 milion officially,more than organized employmentand growing rapidly

POVERTY REDUCTIONGiven 269 million below the poverty line, even

employed barely sustain themselves

PUBLIC VS. PRIVATE SECTOR

The organized private sector is only 3% ofemployment

ORGANIZED VS. UNORGANIZED SECTORSmall Organized (large scale) with low employmentand large unorganized (small scale) with low capital

AGRI. VS. MANUFACTURING VS. SERVICESNegative elasticity of agriculture and labor saving

bias of manufacturing

OUTSIDER ACCESS

Bias against outsiders (poor, low skilled, women,and young) by insiders (not poor, middle-aged, men)

CREATING VS. PRESERVING JOBSShift from employment to employability

REGULATION VS. SUPERVISIONReverse current over-regulation and

under-supervision

RURAL VS. URBAN SECTORRural job growth 25% of urban and fallen more than

half since 1980

COSTS/ ENFORCEABILITYEnd legislating ahead of enforcement capacity and

payment capability

SKILL DEVELOPMENT

44% of labor force is illiterate and only 5% estimatedto have vocational skills

Equity-Growth trade-off


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HISTORICAL PERSPECTIVE

Indias labor markets have gone through three distinct phases:

THE COLONIAL ERA (BEFORE 1947) Government policy on industrial relationsunder the British was one of laissez faire and selective intervention. The Bombay millslabor association was formed in 1890 but the association did not organize workers astrade unions and only petitioned the government on behalf of the workers. Gandhijifounded his Textile labor association in Ahmedabad in 1917 and was active in trying tosettle labor disputes. The formation of the ILO in 1919 gave a boost to the idea of anational organization and in 1920, the All India trade union congress was formed withLala Lajpat Rai as its first president. Later, a number of labor acts were initiated theTrade Union Disputes Act of 1929, the Government of India Act of 1935, and theBombay Trade Disputes Act of 1934. However, labor actions were localized and theemphasis was on adjudication and settlement of disputes rather than promotion of soundlabor management relations or collective bargaining.

THE PLANNING ERA (1951-90) This period saw rapid growth of trade unions in thecontext of the Nehruvian fascination with the Soviet model of heavy industry and inwarddevelopment. It was reinforced by an adoption of the British Labor party approach ofstrong trade unionism combined with the welfare state concept as developed by, amongothers, William Beveridge. The general labor mood was militant, geared to extracting alarger share of the value added, under the overall political perception of the privatesector as exploitative of labor. Over the years, industrial relations got politicized and theIndian National Trade Union Congress (INTUC) linked to the congress party, the All IndiaTrade Union Congress (AITUC), and Centre for Indian Trade Unions (CITU) with theCommunist movement.

During the 1980s, India had the dubious distinction of ranking first among developingcountries by losing 1900 workdays per 1000 non-agricultural employees; nearly three

times the second and third (Sri Lanka and Peru) with about 600. Also during thispoliticization phase of the 1980s, organized labor managed to achieve growth of realwages of 6.46% relative to unorganized growth of 1%. Thus reality was just the oppositeof the rhetoric for reducing income disparity and giving lower income greater increases.

The biggest weak ness of the model was low employment generation. The governmentsupported small industries through artificial constraints on larger businesses and ignoreddemand; this production focused model created excess capacity and low growth.

THE LIBERALIZATION ERA (1991-DATE) The stagnation and bankruptcy of socialismforced economic change; liberalization, deregulation, privatization and much else. But, inline with global experience, labor reform has lagged other reform. This is particularlydangerous because labor market constraints have held back job creation that creates

the broader social and political buy-in for reforms. In fact, labor reforms have become sopolitically sensitive that there have been no changes to legislation or political rhetoric onlabor since reforms began.


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KEY ISSUES

1. NEITHER EFFICIENCY NOR EQUITY Indias plethora of poor laborlegislation has led to an economy that is neither competitive nor a society that iscaring. We face the punishing combination of a globally uncompetitive laborenvironment with no effective social safety nets.

2. LABOR MARKET INSIDERS VS. OUTSIDERS Labor legislation has beenhijacked by a vocal minority at the expense of 93% of the labor force. Labor marketinsiders (mostly not poor, middle-aged, men) oppress outsiders (young, old, women,poor, lower skilled, unemployed, temporary workers, etc).

3. TWO TIERING Over time, labor laws have become applicable to a small categoryof enterprises in the organized sector. This creates a dualistic set-up in which theorganized sector remains limited in terms of aggregate employment and mostworkers, who are largely unorganized, have no protection. This dualism ischaracterized by a tiny organized (or large scale) sector with low employment, and ahuge unorganized (or small scale) sector, with low investment.

4. UNEMPLOYMENT/ JOBLESS GROWTH The number of unemployed is above30 million or equal to organized employment. The Indian economy has respondedwell to reforms but job creation has been a disappointment. With no explosion ofunorganized or organized job creation, unemployment is increasing and has led to alack of grassroots social or political support for reforms since 1991.

5. LEGISLATION AHEAD OF CAPACITY TO PAY AND CAPABILITY TO EXECUTELabor policies have been running ahead of implementation capacity and affordability.For e.g. Minimum wages, ESI, EPS of PF, etc. Most East Asian countries did notintroduce extensive social welfare provisions in the early stages of their development

thei r economies had not reached the point where they could handle the burden ofsocial welfare. We need a reality check in which legislation that is beyond

implementation capacity should be scrapped.

6. HIRE AND FIRE CAN WAIT There is a lot more to labor reform than firingworkers. In the interest of progress, the controversial exit policy should be left out ofany labor reform agenda for now. Any proposals presented as zero or hundred willget zero and lets make incremental steps; small progress is better than no progress.

7. SHIFT FROM EMPLOYMENT TO EMPLOYABILITY We need a policy shift fromemployment to employability; teaching a person to fish rather than giving him fish. Afirst step could be the creation of a Ministry of Employment by merging the Ministry ofHRD and Labor. Such a focus will also reverse the current labor law situation of over-regulation and under-supervision.

8. TEMPORARY JOBS ARE BETTER THAN UNEMPLOYMENT Temporarystaffing is an integral part of the labor markets and global experience shows a strongcase from all three perspectives; public policy, employers and employees.


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CHAPTER 4: THE CASE FOR TEMPORARY STAFFING IN INDIA

Temporary staffing is an integral part of labor markets and a case for reform can bemade from three perspectives:

Case for

Temporary Staffing

Economic Value and

job creation

Unemployment Reduction

Stepping Stone role

Liquidity provider; Better matchingof demand and supply

Limited Permanent job

substitution

Outsider Access

Matching expertise and

Diversity Access

Just in time labor; handlingfluctuating demand

Differential pay for

special skills

Strategic Flexibility

Improved Competitiveness

Auditioning permanentcandidates

Employer Access

Keep in touch with thejob market

Supplemental income

Lifestyle choice

Improved employability; skill

development and experience

Springboard to permanentemployment

Public Policy

Perspective

Employer

Perspective

Employee

Perspective

Handling planned and

unplanned absencesCompetitive economy Training


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PUBLIC POLICY PERSPECTIVE

1. REDUCTION IN UNEMPLOYMENT Temporary staffing is an importantcomponent of the job market and hires almost 10% of the labor force in somecountries.

A detailed study by Lawrence Katz of Harvard University and Alan Krueger atPrinceton University found that temporary staffing was responsible for 50% of thereduction in unemployment in the US in the 1990s. The staffing industry increasedEuropean Union employment by 0.1% and accounted for around 11% of total new

job creation in the late 1990s. An Economic Report of the US President says,Permanent declines in the unemployment rate may have been caused by, amongother things, the development of the temporary help industry.

A symbolic and materially important recognition of role came with the passage ofConvention 181 by the International Labor organization in 1997. This conventionoverturned a fifty year opposition to temporary staffing (Convention 96) and explicitlynoted their constructive role in a well-functioning labor market. Following theconvention, legal recognition for private employment agencies was formally granted

in Italy (1997), Japan (1999), and Greece (1999) while related regulations wereliberalized in Belgium (1997) and Netherlands (1998).

2. OUTSIDER ACCESS/ INCREASED LABOR FORCE PARTICIPATION Mostlabor laws protect insiders; usually not poor, male, and middle-aged. Temporarystaffing companies are particularly effective in offering job access to traditionallydisadvantaged populations like students, retirees, mothers with young children,unemployed, etc. who would traditionally opt out of the labor force.

They act a portal for these outsiders by providing them not only with short-term job opportunities, but also with qualifying experience and training for longer-termpositions. A European study found that between 24 and 52% of first time agencyworkers were outsiders.

The Employment Policy foundation says Flexible work arrangements and schedulesencourage higher labor force participation by offering choices that fit the diverseneeds and preferences of potential employees.

3. LIMITED SUBSTITUTION OF PERMANENT JOBS The service offering of tempstaffing companies complement internal flexibility solutions and does not replacepermanent jobs. Small and medium enterprises (SMEs) have an especially strongneed for labor flexibility and they account for the bulk of employment and innovationin most economies.

A European study found that temporary workers are seldom a substitute forpermanent workers; companies would have hired permanent workers only for 14% ofwork now done by agency workers, had these not been available. Internal solutions

for flexibility that do not increase employment would have been used if temps had notbeen available.

4. BETTER DEMAND AND SUPPLY MATCHING Temp staffing companies actas liquidity providers in labor markets. Their core competence is matching of demand


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(jobs) with supply (people) increases the efficiency and speed of the job andcandidate search process.

A European study found that, on an average, the time between enrolment at astaffing company and assignment at a company was 4 weeks. About 35% of agencyworkers surveyed had been placed within a week while in Germany this was 54%.

Empirical evidence shows that the track record of temping firms is better at reducingfrictional unemployment (those unemployed between jobs) than public sectorinitiatives like employment exchanges, etc.

5. STEPPING STONE TO FULL-TIME WORK The bridge to permanentemployment performs a valuable lubricant role in labor markets by allowing workersto demonstrate their skills to prospective employers and to be tested and hired onthat basis. A global survey of temp workers finds that about 40% find a long-term jobwithin a year of starting temping.

6. ECONOMIC VALUE AND JOB CREATION Globally temp staffingcompanies have more than $200 billion in revenues and employ close to half amillion corporate staff. On average temping companies create one permanent

corporate staff position for every 50 workers placed on assignment.

7. COMPETITIVE ECONOMY The US department of labor compares the just-in-time concept of inventory control in manufacturing with the use of flexible staffingarrangements to provide just-in-time labor and says Employers that have flexibility inadjusting labor requirements to meet product and service demands have acompetitive edge over those with less flexible human resources policies.


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EMPLOYER PERSPECTIVE

1. HANDLING FLUCTUATING AND UNCERTAIN DEMAND The ability of staffing

companies to provide just-in-time labor at a predictable cost offer companies aneconomically viable option to handle peak loads and seasons. Temping also allowscompanies to expand their manpower in the face of uncertain demand since

companies would be overly cautious if they could only hire full-time workers on apermanent basis or had to incur excess costs for surplus staff during lean periods.

2. AUDITIONING PERMANENT CANDIDATES The practice of taking on temps as away to audition or take employees for a test drive is the fastest growing segmentof the staffing industry, reflecting the desire to observe candidates for a trial periodbefore deciding whether they are fit for the job. These temp-to-hire arrangementsmay reflect a weakened confidence by employers in educational systems worldwideto prepare young people for the workplace in terms of quality, attitude and skills.

3. IMPROVED COMPETITIVENESS Companies have a clear and growing needfor flexibility because product lifecycles are shortening, consumer demand ischanging at an ever-faster rate, and new technologies are causing seismic shifts in

the economic landscape. Plus globalization of labor markets presents uniquechallenges to supply chain cost structures.

A study published in the Decision Sciences journal by economists Nandkumar Nayarof Lehigh University and G. Lee Willinger of the University of Oklahoma comparedfirms in a carefully constructed sample and found that earnings (before interest,taxes, depreciation, and amortization), gross margins and stock returns improvedafter the increased use of contingent labor.

4. STRATEGIC FLEXIBILITY For SMEs and start -up companies in particular,labor flexibility is critical. Relative to established companies, start-ups often face anuncertain financial future and to hedge this uncertainty, they typically organize theirworking practices in a flexible way. Start-ups use temporary workers to postponeincurring the high sunk costs of employing permanent workers until their financial

situation becomes secure. Steven Behm, former Cisco VP of global alliances said inthe late 90s We have 32,000 employees but only 17,000 of them work at Cisco.

5. DIFFERENTIAL PAY FOR SPECIAL SKILLS Temporary staffing companies allowcompanies to recruit people with specialist skills or for short -term projects atcompensation rates that are higher but do not create internal inequity.

6. MATCHING EXPERTISE AND ACCESSING DIVERSITY Temporary staffingcompanies are experts at matching demand (jobs) with supply (people). Theirexperience, technology and liquidity position them better than in-house HRdepartments for matching quality. Temporary staffing companies also allowemployers to access populations that have been traditionally disadvantaged in jobaccess. This includes geographical, racial, gender and age diversity.

7. HANDLING ABSENCES Temporary staffing companies enable employers tohandle both voluntary and involuntary employee absences. In the absence of atemping option, employers would suffer service discontinuities and productivitybreakdowns.


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EMPLOYEE PERSPECTIVE

1. KEEP IN TOUCH WITH THE JOB MARKET A job is a job and temporary staffing

companies offer a very attractive alternative to unemployment. Temp jobs keeppeople in touch with the job market and avoid resume gaps.

2. SPRINGBOARD TO PERMANENT EMPLOYMENT Almost 40% of tempemployees find permanent employment within a year. This stepping stone or bridgefunction of temp staffing companies is an attractive option for job candidates.

3. IMPROVED EMPLOYABILITY Many temp staffing companies offer training, skilldevelopment and experience that greatly increase the ongoing attractiveness ofcandidates as employees. Temp staffing companies in the US are estimated tospend about $800 million per year in offering training to candidates.

4. LIFESTYLE CHOICE Many people prefer the flexibility and independencethat temp jobs offer; a European survey found this in 33% of temp workers. It washigher among women (40% vs. 28% for men). A growing number of temps are highlypaid and highly skilled technical, computer and health care workers who choose

temping because of the flexibility, independence, and in some cases higher pay.

Temping offers working conditions others cannot the opportunity to try out differentemployers, a large diversity of jobs, time flexibility and short-term assignments. AnAmerican Staffing Association survey of temporary employees found that 43% saidtime for family was an important factor in job decisions and 28% said temping givesthem flexibility to pursue other interests. An Employment policy foundation studyfound that 81% of high-tech independent contractors did not want to become regularemployees.

5. SUPPLEMENTAL INCOME Many employees and candidates are attracted totemp jobs by the supplemental income that they provide. This is particularly attractiveto student, retired people, specialists and professionals considering entrepreneurialventures.

6. EMPLOYER ACCESS Temp staffing companies are often able to offer work atemployers who may not be hiring directly or for permanent positions. Suchexperiences improve resumes and expose candidates to a work environment thatmay not be directly available. For example Microsoft reports that 30-40% of the 9000regular positions created in the last four years of the 1990s were filled by individualswho at one time had worked for staffing companies.

7. TRAINING Temporary staffing companies globally offer a number ofclassroom, electronic and other forms of specialized, vocational and other training. AUS government estimates puts this amount at over $700 million by US staffingcompanies alone


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CHAPTER 5: THE TEMPORARY STAFFING INDUSTRY

While economic cycles and labor costs influence the degree to which full employmentcan be attained, the mechanics, structure and legislation of the labor market are also a

key variable in this battle.

The traditionally static view of jobs (permanent, full-time) and labor (middle-aged men) istired and a key factor in reducing unemployment in recent times has been increasedlabor market flexibility. Flexibility is often associated with precarious working conditionsand a key challenge is balancing the increased need and desire for flexibility (both byworkers and employers) with the basic human need for continuity and certainty.

The flexibility needs of workers and companies can be Quantitative (varying the amountof work) and Qualitative (varying the content of work) or Internal (building on thecompanys own work force) or external (using outside sources of labor). For e.g.

LaborFlexibility

Internal External

QUALITATIVE Outsourcing Secondments

QUANTITATIVE Temporary

Staffing

Fixed TermContracts

QUALITATIVE Job rotation Multi-skilling

Vocationaltraining

Re-skilling

QUANTITATIVE Over-time Shift work

Part-time Increase

workforce Decrease

workforce

Temporary staffing is the fastest growing form of flexible employment. The global staffingindustry has evolved from what once were several distinct kinds of businesses temporary help, permanent placement, contingency recruiting, retained search, contractproject staffing, outplacement, and professional employer organizations to one industrywhere these many sectors that have blended together.


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WHAT IS TEMPORARY STAFFING?

Temporary staffing is a contractual labor market arrangement based on a three-partyrelationship between the temping firm, client and employee:

The Temp firm and Client sign a service level agreement (overlap 1), the Associate andTemp firm have an employment relationship (overlap 2), and the Associate providesservices to the client (overlap 4).

Temporary workers are employed by staffing companies and sent to work on specificprojects or for specified periods of time with their clients (i.e. companies requiringtemporary staff). The worker may move from one client site to another depending on thestaffing companys clients. The temporary staffing company is responsible for the salaryand benefits of the temporary workers, while the staffing company in turn receives

payment from the client.

The staffing company is the employer of record though some countries also assign someresponsibilities to clients for the temporary staff used. The staffing company assumesresponsibility for a) employee payroll, b) benefits, and c) all compliance. The clients areoften responsible for compliance with government regulations that are related to worksitesupervision and safety.

The relationship between the client/employer and the temporary company is captured ina Client Service Agreement (CSA). The CSA establishes a three-party relationshipwhereby the staffing company acts as the employer of the temporary employees whowork at the client's location. Under the CSA, the temporary company assumesresponsibility for personnel administration and compliance with most employment-relatedgovernmental regulations, while the client retains the employees' services in its businessand remains the employer for various other purposes. The temporary company chargesa comprehensive service fee, which is invoiced concurrently with the processing ofpayroll for the worksite employees of the client.

Temp Firm

1

32 4

Client

Associates


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TEMPORARY STAFFING SEGMENTS

Historically, temporary staffing comprised four major segments; clerical/office, industrial,medical and technical. But as temping has become more widely accepted as a strategiccomponent of work force composition the breadth of positions has expanded. Now in

addition to the four traditional segments, temporary help also encompassesprofessional/specialty positions and information technology (IT) staffing. Withinprofessional/specialty, there are a number of sub-sectors including legal and accounting.Some details on each segment:

Clerical/Office Staffing Services Secretarial staff, executive assistants, wordprocessors, customer service representatives, data entry operators, telemarketers, othergeneral office staff and call center agents, including customer service, help desk/productsupport, order takers, market surveyors, collection agents and telesales.

Industrial Staffing Services Assembly work (such as mechanical assemblers, generalassemblers, solderers and electronic assemblers), factory work (including merchandisepackagers, machine operators and pricing and tagging personnel), warehouse work(such as general laborers, stock clerks, material handlers, order pullers, forkliftoperators, palletizers and shipping/receiving clerks), technical work (such as labtechnicians, quality-control technicians, bench technicians, test operators, electronictechnicians, inspectors, drafters, checkers, designers, expediters and buyers) andgeneral services (such as maintenance and repair personnel, janitors and food serviceworkers).

Medical Staffing Services Nurses, physicians, "allied health" professionals includingradiology and diagnostic imaging technicians, clinical laboratory technicians andtherapists. Also covers laboratory personnel, pharmaceutical contract researchpersonnel, etc.

Professional/ Specialty staffing services: Accounting professionals (auditors, controllers,accountants, etc), finance professionals (analysts, etc), and legal professionals(attorneys, legal secretaries, paralegals, etc.) Also includes scientists, and interimexecutives

IT Staffing ServicesHardware and software engineering, database design development,application development, Internet/intranet site development, networking, software qualityassurance and technical support.


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WHY DO COMPANIES AND INDIVIDUALS USE STAFFING COMPANIES?

The popular perception of staffing companies being used to reduce labor costs byemployers may be misplaced with primary motivation being flexibility. Individuals have amore complex and varied reasons for choosing staffing company employment.

According to a survey the key factors in hiring temporary staff were:

Reasons why employers use temporary staff

Match peaks in demand 63%

Cover for holidays/sick leave 59%

Perform one-off tasks 39%

Cover for maternity leave 38%

Specialist skills 21%

Trial for permanent work 20%

Reduce wage costs 6%

Source: Temporary Staffing Services Profile study by UNCTAD/WTO inDecember 1998, from the UNCTAD website

According to asurvey, the key factors in choosing temporary employment were:

Reasons why people choose a temporary job

Could not find a permanent job 39%

Gain work experience 26%

Work between jobs 13%

Work for different employers 7%

Flexible schedule 6%

Be able to quite 5%

Work for a short period 4%

Source: Deloitte and Touche Survey, CIET(2000)


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GLOBAL MARKETS

The global staffing industry provides work to an estimated 7 million people every day andhas global revenues in excess of $200 billion. The global market remains concentratedin the UK and North America which account for 60% of global sales. The inclusion of the

next four markets; Japan, France, Germany and Netherlands shows that six countriesaccount for over 90% of global sales.

However, the penetration rate (the share of persons in total employment working for aprivate employment agency on any given day) of temporary staffing is very varied:

Penetration rate per country (%)

Share of Global Market2003

1998 1999 2000 2003

Austria 0.7 0.7 0.8 0.8

Belgium 1% 1.6 1.7 1.8 2.0

Canada 1.7 1.8

Denmark 0.1 0.2 0.2 0.2

France 10% 2.5 2.1 2.4 2.4

Germany 3% 0.6 0.7 0.8 0.8

Ireland 0.5 0.6 0.6

Italy 0.0 0.2 0.7 0.7

Japan 10% 0.5 0.6 1.1

Netherlands 3% 4.5 4.5 4.0 3.3

Portugal 0.9 1.0 1.1 1.1

Spain 1% 0.7 0.8 0.9 0.9

Switzerland 0.8 0.8 0.8

UK 18% 3.2 3.3 3.8 3.8

USA 43% 2.2 2.4 1.7

TOTAL $ 200 billion

Source: CIETT (2000), Randstad (2003)

As the table shows, the largest staffing market is that of the US economy followed byUK, France and Japan. The total share of European countries in worldwide staffingturnover is 38%. The market in the US is highly fragmented with the top three playersplayers controlling only 12% of the revenues vs. Europe where the top three control upto50% in some markets.

Many global staffing firms accelerat ed their international expansion between 1995 and2000 and consequently reduced home market revenues e.g. Addecco (82% vs. 30%),Manpower (43% vs. 31%), Randstad (65% vs. 42%), etc.


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THE US STAFFING MARKET

Labor markets in the US are more flexible relative to other markets and have created ahighly competitive market for the staffing industry. There are many competitors, with no

single company having a highly dominant position. Key points

The US temporary staffing industry has revenues of around $100 billion

The U.S. Bureau of Labor Statistics (Department of Labor) says there were 2.85million temporary workersas of January 2003 including those placed by staffingagencies and those directly hired by employers.

The industry is highly fragmented; it is estimated that about 90% of the estimated11,000 temporary help firms are one-branch operations. But these firms generateonly 31.2% of the receipts and a similar percentage of the temporary helpsectors payroll (Source; Staffing Industry Sourcebook 2002).

Firms with more than 10 or more branches represented only 1.3%of thefirms butgenerated more than half of the sectors receipts (51.8%) and payroll (52.1%).

The U.S. staffing industry has been growing at above 10% per year in the lastdecade, while overall employment growth has been only around 2% andeconomic growth has been only around 4%.

Key players in the industry include Manpower Inc., Adecco, Kelly Services,Gevity HR, Spherion, and Robert Half. There are around 10 staffing agenciesthat have a turnover of $1 billion or more.

Manpower Inc. employs more people than any other firm in the U.S.

Specialty staffing is a high-growth and high-margin area and includes Legalstaffing, IT staffing, Nurse staffing, Accounting staffing, etc. Data on the size ofthe specialty staffing market is sketchy but it is estimated to be around 25% ofthe overall temporary staffing industry, or around $25 billion.

The large staffing companies in the U.S. typically operate on a 15%-20% grossmargin, i.e., this is the mark-up they charge up over the labor costs of thetemporary staff they provide. These companies spend approximately 10%-15%on general, sales & administrative (GSA) expenses, including employee benefitsand sales & administrative expenses, and have net profit margins of only 0.5%-1%.


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THE EUROPEAN STAFFING MARKET

The useof temporary staffing in Europe is common to most countries, but the industry isless developed than in the U.S. It is estimated to be about 38% of the global $200 billionstaffing industry. About 80% of the temporary workers in Europe were employed in 4

countries - the Netherlands, France, Germany and UK.

The following table lists the movement in the percentage of Temporary Employment (asa % of total employment) for select countries over time:

1985 1990 1995 2000 2001 2002

Austria 6.0 7.9 8.1 7.4

Belgium 6.9 5.3 5.3 9.0 8.8 7.6

Canada 12.5

Denmark 12.3 10.8 12.1 10.2 9.4 8.9

France 4.7 10.5 12.3 15.0 14.9 14.1

Germany 10.0 10.5 10.4 12.7 12.4 12.0Ireland 7.3 8.5 10.2 4.7 3.7 5.3

Italy 4.8 5.2 7.2 10.1 9.5 9.9

Netherlands 7.6 7.6 10.9 14.0 14.3 14.3

Portugal 18.3 10.0 20.4 20.3 21.8

Spain 29.8 35.0 32.1 31.6 31.2

Switzerland 13.2 11.7 11.6 12.3

UK 7.0 5.2 7.0 6.8 6.7 6.1

Source; OECD LMS 2001 (2002), Eurostat LFS (2002, 2003)

A good overview of available national statistics on agency work in the EU is collected byStorrie and presented in the table on the next page. The relative size of the agency workbusiness is largest in the Netherlands and the United Kingdom, and most immature inDenmark and until recently Italy.

Data shows that in general agency work in Europe is most common in the manufacturingsector. This also explains why women are mostly underrepresented among agencyworkers (except for Scandinavian countries); they work predominantly in servicesindustries. Also clear is that agency workers are on average lowly educated and veryyoung (about 20-50% are below age 25). Overall Netherlands has the youngestpopulation of agency workers and UK has the oldest.

Except Greece, all European countries permit temporary staffing, though certain

countries have rules restricting the types of jobs or the durations for which temporarystaff may be employed. In March 2002 the European Union (EU) brought out a new setof directives on the use of temporary staffing, which seeks to provide parity in pay andworking conditions to temporary staff on par with the full-time employees of theemployer. However, this is still under finalization.


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GEO-HISTORIC EVOLUTION

LOCALIZEDGROWTH

NATIONAL

ROLLOUTS

GLOBAL

TENDENCIES

Industry

Structure

Limited- clerical and

light industrial,some generalistagencies

Still limited but

growth in somespecialist niches

Broadening; penetrating

more segments of theeconomy and developinglong-term relationships

MarketCharacteristics

Fragmented Fragmented, someconsolidationthrough takeoversand mergers

Intensified consolidation,possible oligopolies inalongside fragmentation,early evidence of marketpower of global firms

RegulatoryFramework

Weak Uneven emergingof nationalregulatoryframeworks

Increasing liberalization,US/UK labor marketmodel finding favorglobally and WorldBank/IMF push reforms

Functionssupplied

Temporary filling ofvacancies

Temporary filling ofvacancies togetherwith basicrecruitmentfunctions

Temporary vacancyfilling, growing range ofrecruitment functions,some provision of HRfunctions, evidence ofcomplete process

Geographical

frontiers

North America Western Europe Latin and SouthAmerica, Asia

Segmentfrontiers

Clerical Light industrial IT, Accountants,healthcare, seniormanagement

Scale ofcompetition Independent vs.Independent firms Independent vs.National firms Independent vs. nationalvs. global firms

Business Model Local branchnetwork

National branch/franchise route

Global branch/ franchisenetwork and internetservice delivery

Terms ofCompetition

Local contracts Local contractsand multi-siteagreements

Growth in national, multi-site agreements, slowemergence of globalagreements

Formalrepresentationof Industry

Weak and un-coordinated

Weak but gettingstronger

Contested overlappingnational andsupranational institutions

Representation Temporary staffing Flexible staffing Labor solutions

Source: Ward (2002)


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GLOBAL REGULATION

Globally there has been a generalized, albeit uneven, movement towards a more liberal,decentralized and individualized pattern of regulation over recent decades. The

privileged normative and institutional status of the standard job relatively secure, full -time, regulated by an open-ended contract of employment, often unionized and well-paid has been eroded, sometimes dramatically, just as the numerical weight of jobs hasdeclined. The flip side of these developments has been the sustained growth of non-standard, flexible and contingent jobs many of which are part-time or temporary.

Social-welfare and employment policies, along with labor and industrial relations laws,have been extensively redesigned, both to accommodate and facilitate thesedevelopments. The primary objective has been to encourage labor markets to behavemore like real markets, to strengthen the play of competitive pressures, to erode rigidsocial protections and to de-collectivize employment relationships.

In this changing regulatory environment, temporary work, once the very definition of

undesirable or marginal work, has come to the front. With the benefit of liberalizingemployment regulation, the temporary staffing business has enjoyed explosive growth inmany countries, though invariably from a small base. The pattern of regulatory reformsacross most industrial nations and many developing countries has been favorable; whichmeans the industry is operating in the context of a positive regulatory environment forthe first time in its history.

The extent to which a market is attractive depends upon the particular configuration ofstate regulation, prevailing wage conditions, industrial and occupational mix, and thein/formalization of employment relations. What is crucial is the quantitative andqualitative nature of each markets development.

A symbolic and materially important recognition of role came with the passage of

Convention 181 by the International Labor organization in 1997. This conventionoverturned a fifty-year opposition to temporary staffing (Convention 96) and explicitlynoted their constructive role in a well-functioning labor market. Following theconvention, legal recognition for private employment agencies was formally granted inItaly (1997), Japan (1999), and Greece (1999) while related regulations were liberalizedin Belgium (1997) and Netherlands (1998).


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TEMPORARY STAFING LAWS IN THE US

Temporary staff is entitled to at least the minimum wage, $5.15 per hour, or thehigher state minimum wage, and to 1 times the regular hourly rate for all hoursworked above 40 hours per week.

Temporary workers on construction projects may be entitled to the prevailingwage.

Living wage laws in some states may cover temps/day laborers working undercontracts or for public agencies.

The company must pay the temporary staff at least the rate that was agreedupon at the start of the assignment.

The company cannot pay a temporary staff less than other temps doing the samework on the basis of gender, age, disability, race, religion, or national origin.

The company cannot fire a temporary staff for engaging in concerted activity withothers to improve your working conditions (hence temporary staff often try tomake demands with at least one other person).

A company cannot discriminate in assignments based on gender, age, disability,race, religion, or national origin.

A company cannot fire a temporary staff based on gender, age, disability, race,religion, or national origin.

Some states have a cap on the amount that a company can charge a worker fortransportation to the worksite, and some states like Georgia prohibittransportation fees entirely.

The Occupational Safety & Health Act covers most private employees.Employees of private temporary/day labor firms who work for public agencies arecovered. In addition, at least half the states have laws that cover public sectorworkers.

Temporary workers and day laborers are covered by workers compensation.They are also covered by state disability insurance in states that provide it.

Eligibility for unemployment insurance varies by state. In over 20 states,

temporary employees are covered only if they report to the company at thecompletion of a job and take almost any job the company offers. Part-timeworkers are also often denied coverage.

Temps, day laborers and independent contractors may be eligible for federalearned Income Tax Credits and state credits where they exist. To claim the EITC,the temporary staff must be work authorized with a valid Social Security number.

The Family and Medical Leave Act (FMLA) provides up to 12 weeks of unpaidleave to employees who have worked for an employer for at least 12 months andfor 1,250 hours within the past year. To be covered, the employer must have atleast 50 employees within a 75-mile radius.

Low-wage workers may also be eligible for food stamps, Medicaid, subsidizedchildcare, and Temporary Assistance for Needy Families (TANF).


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NEGATIVE PERCEPTION VERSUS REALITY

A well-developed staffing industry offers an organized and transparent workarrangement that enhances employment opportunities for workers. However, temp

staffing is still associated with a number of negative attributes and it is important tosurface and confront this issue. The negative perceptions around temporary staffing arerooted in four basic areas:

LOW EMPLOYMENT SECURITY Although the industry will continue to becharacterized by workers who change assignments frequently, staffing companies canoffer their workers income security over the longer-term by providing them with acontinuous stream of assignments. Since staffing companies manage a portfolio ofemployment opportunities with multiple employers, they are in an excellent position toprovide security of employment to their own workers.

LOW LEVEL OF TRAINING Some academic research points out that whileformal training is low overall for workers, temp workers receive less formal training thanpermanent workers. This observation may undervalue the importance of staffing

companies in career development. Temping provides many unemployed workers with asocial link to the job markets. Furthermore, temp workers acquire a diverse set of workexperiences, which adds to their overall career development and employability.

Given the short time that workers stay with temp jobs, such on-the-job learning may bemore useful than formal training. Plus staffing companies are starting to offer innovativetraining (e-learning, webinars, etc) to increase their competitiveness; this was estimatedat over $700 million for the US market alone.

DIFFERENTIAL WAGE LEVELS It is very difficult to compare wage levelsamong different populations of workers. There are often valid reasons why wages differ,such as differences in qualifications, seniority, experience, and job content. Comparingthe wages of highly diverse populations is even more problematic. Pay differencesamong companies within a sector can be significant, and are sometimes larger than paydifferences between permanent and temporary workers.

In establishing wage levels, two forms of equality need to be balanced carefully; theequality between two temporary workers working in different sectors or companies andthe equality between an agency worker and a permanent employee at a client company.However, the over-riding principle should be that it is the agencies that are employers ofagency workers, and, like other employers, have the right to determine the wages oftheir workers.

LACK OF BENEFIT CONTINUITY Benefits are based on the outdated assumption thatworkers remain in their jobs for long periods of time. This assumption is no longer valid,even for so-called permanent workers. As a result workers who change jobs frequently,return to education, or take leave of absence can lose some of their gratuity, pension,

and health benefits. A more important trend is the move to CTC (Cost-to-Company)where most benefits are monetized into wages. This removes the traditionaldisadvantages of temp workers.


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CHAPTER 6: TEMPORARY STAFFING SURVEY

This white paper was born out of discussions with decision makers in corporate India onthe current penetration of temping; its potential and required reform

1) OBJECTIVE

We conducted an in-depth survey of 75 companies in various cities in India with atwofold objective:

Estimate the potential job creation potential with temporary staffing reform

Highlight the specific areas and issues for reform

2) APPROACH AND METHODOLOGY

Symbolic of the regulatory regime, most respondents agreed to participate in our survey

on the condition of anonymity. Consequently, we publish only the aggregate results ofthe survey, and not individual responses from specific companies.

Our attempt was to understand at a macro level the problems that companies face dueto our existing labor laws around temporary staffing. We were more interested inunderstanding the key issues, broad trends and estimating potential and less interestedin conducting statistical analysis by surveying hundreds of companies. This has helpedus uncover subtle qualitative issues, and added to the richness of the feedback wereceived from respondents. However, some professionals may believe our sample sizeand techniques may not be statistically significant.

3) SAMPLE SIZE

Our survey covered 75 companies in various cities in India, with the following break-up:

Manufacturing 45%, Services 55%

Indian owned 40%, Multinational 60%

4) FINDINGS

Quantitative; Presented in the two tables on the next page

Qualitative: Presented in the form of recommendations for staffing reform in

the next section


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QUANTITATIVE FINDINGS

a) Survey responses overwhelmingly indicate that Indian managers and companiesbelieve that the Contract Labor Act does not serve its purpose.

The Contract Labor Act does not help employers or employees

Agree 74%

Do not agree 26%

100%

Source: TeamLease survey.

2) Survey responses indicate that companies would substantially increase their usage oftemporary staffing in their overall labor force

Demand for temporary staffing with reform

YEAR Millions % of workforce

2008 10.5 2.6%

2010 13.7 4%

Source: TeamLease survey.

Given the number of assumptions (labor force growth, employment elasticity, GDPgrowth) and the nature of our survey, we estimate that the number of temporary jobscould be between 10-12 million within five years.


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ISSUE 1 DEFINITION OF PRINCIPAL EMPLOYERSection 2(G), 7 of Contract Labor Regulation Act (CLRA)

BACKGROUND

The CLRA defines the Principal Employer of a Temporary employee as the entitywho is using the services of that employee rather than the temporary staffingcompany.

The Principal Employer status entails a number of responsibilities such as salarypayment, coverage of such employees for PF/ESIC, payment of minimum wages,service conditions.

The CLRA currently also requires every Principal employer to register with Laborauthorities and obtain a certificate based on which a temporary staffing firm is able toprovide services

CONSEQUENCE

Blurred accountability with dual employer responsibility

Lower usage of temporary staffing; higher unemployment Higher outsourcing to the unorganized sector Higher out location to the unorganized sector Sham consulting agreements Barriers to first time-job seekers and labor market outsiders

RECOMMENDATION

Designate the temporary staffing company as the Principal employer under Section2(g)

Insert a new clause in Section 2 (g) which lays out responsibilities of workplacesafety for clients of temporary staffing companies

Delete Section 7 which currently requires Principal Employers i.e. clients of

temporary staffing companies to get registered under the CLRA. Amend Chapter V (sections 16-20) laying out responsibilities of workplace safety and

health as only responsibilities for clients of temporary staffing companies Delete Section 21 which lays out certain responsibilities on disbursement wages to

temp staff on the Principal employer


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ISSUE 2 CORE, PERENNIAL, INDUSTRY, LOCATION AND TIMING

RESTRICTIONSSection 10 of Contract Labor Regulation Act (CLRA)Section 25B of Industrial Disputes Act (IDA)

BACKGROUND

The CLRA currently provides for prohibition of Contract Labor by State or CentralGovernment as applicable if a) the process/operation/work performed by ContractLabor is core to the industry/trade/business/manufacture of the Client Company, b)the process is of perennial Nature. For e.g. some State Governments have notifiedCanteens in factories to be core and perennial.

Central Government CLRA notifications also restricts temporary staffing in certainprocess and companies like

o Telephone operators by International Airports Authority of India;o Fire fighting, Typists, accountants, Data/Computer Operators by ONGCo Cleaning work in catering in the Railways/Railcars

There is no clear definition of core and perennial work and the interpretation is left tothe local level leading to high inconsistencies.

Labor authorities assume that that once a prohibition order is notified, the contractemployees become employees of the client.

No clear definition of temp worker Any employee who has worked more than 240 days in a year is assumed to have

served one year of continuous service under Section 25 B of Industrial Disputes Act.Contracts longer than this carry the potential for a permanency claim with thePrincipal Employer. States have different rules e.g. Maharashtra has 90 days.

The Perennial and core work clause implies that the permanency case is stronger ifthe work is done on the premises of the Principal Employer.

CONSEQUENCE

Companies enter into sham agreements to disguise contract labor in what can be

considered as core/perennial activity. Direct contracts that disguise contract employees as service providers/ retainers Lower usage of temporary staffing; higher unemployment Higher outsourcing to the unorganized sector Higher out location to the unorganized sector Sham consulting agreements and companies front-ending Barriers to first time-job seekers and labor market outsiders Lump sum payments instead of salary

Contract Rotation; roll-over of many short term contracts

RECOMMENDATION

Delete the current provisions of Section 10 and replace with an explicit recognition of

contract staffing in all activities, industries, locations and durations. Amend 25B to revoke powers of Labor authorities under Industrial Disputes Act to

grant permanency to contract employees


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ISSUE 5 HIGH MANDATORY PAYROLL DEDUCTIONSEmployees Provident Fund ActEmployees State Insurance Act

BACKGROUND

The EPF Act was amended in 1992 to include temporary/ contract labor from the dayof employment rather than 60 days of employment

The ESI Act requires coverage of all employees from the date of employment The total mandatory deductions from gross salary at above 40% are among the

highest in the world and greatly reduce cash in hand for employees. Most white collar temporary workers are not big users of ESI and have alternative

saving mechanisms

CONSEQUENCE

Higher incidence of structuring temporary contracts as consulting

Large scale evasion of PF & ESI

Lower usage of temporary staffing; higher unemployment Higher outsourcing to the unorganized sector Higher out location to the unorganized sector Sham consulting agreements Barriers to first time-job seekers and labor market outsiders

RECOMMENDATION

Make ESI and PF applicable for temporary employees only after 6 months ofemployment with a temporary staffing firm

Exempt all temporary employees who have a salary of more than Rs 6500 per monthfrom PF/ESI for 18 months

Explicitly provide for centralized compliance for ESI/PF for all employers with more

than 100 employees


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2. DECLINING EMPLOYMENT ELASTICITY According to the PlanningCommission of the Government of India, employment elasticity of the Indian economy iscurrently around 0.15, which means that a 1% growth in GDP results in only 0.15%growth in jobs.

Figure 1.5 below reveals interesting patterns in employment elasticity in the Indianeconomy in recent decades:

i. Employment elasticity has been declining continuously for the last several decades

ii. It is zero for agriculture due to overstaffing and marginal work, reflecting the lack ofalternative employment opportunities in rural areas

iii. It has declined sharply in manufacturing and electricity, implying that productivity isincreasing (i.e., 1% increase in manufacturing output requires only 0.26% moreworkers)

iv. It is as high as 1.00 for the construction industry, reflecting the low productivity in thissector (i.e., 1% increase in output requires 1% more workers, unlike the economy asa whole where 1% increase in output requires only 0.15% more workers)

Figure 1.5: Elasticity of Employment to GDP

Sector Employment Elasticity

1977 to 83 1983 to 94 1994 to 2000

1.Agriculture 0.45 0.50 0.00

2.Mining & Quarrying 0.80 0.69 0.00

3.Manufacturing 0.67 0.33 0.26

4.Electricity 0.73 0.52 0.005.Construction 1.00 1.00 1.00

6.Wholesale & Retail Trade 0.78 0.63 0.55

7. Transport, Storage & Construction 1.00 0.49 0.69

8. Finance, Real Estate, Insurance &Business Services 1.00 0.92 0.73

9. Community, Social and PersonalServices 0.83 0.50 0.07

All Sectors 0.53 0.41 0.15

(Source: Report of the Task Force on Employment Opportunities, PlanningCommission, Government of India, July 2001


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3. SECTORAL SKEW As seen from Figure 1.6 below, the bulk ofemployment (237 million out of the total of 397 million, or 60%) is in the agriculturalsector, while industry (69 million, or 17%) and services (90 million, or 23%) account for amuch smaller chunk of employment.

Employment in agriculture has been falling by 0.34% in the late 1990s, and this is barelyoffset by the growth in employment in industry and services. In addition, the agriculturesector offers poor prospects for employment:

i. Agricultural production is heavily dependent upon the monsoon rains, and has grownat barely 2% per year, which is not sufficient to substantially improve income levelsor generate additional employment

ii. Chronic under-employment means that tens of millions of agricultural workers havelow productivity and wages. Employment in agriculture has been falling over theyears, and marginal workers are compelled to migrate to cities in search of jobs

iii. Employment elasticity in agriculture is negative, i.e., agricultural production can beincreased further with even fewer agricultural workers

Figure 1.6: Growth of Employment by Sectors (UPSS)

Industry Employed workers (1999-00)

(Million)

Growth (1994-00)

(%)

1983 1993-94 1999-00 1983-94 1994-00

Agriculture 207.23 242.46 237.56 1.51 -0.34

Mining & Quarrying 1.76 2.70 2.27 4.16 -2.85

Manufacturing 34.03 42.50 48.01 2.14 2.05

Electricity, Gas & WaterSupply

0.85 1.35 1.28 4.50 -0.88

Construction 6.78 11.68 17.62 5.32 7.09

Trade 19.22 27.78 37.32 3.57 5.04

Transport, Storage &Communication

7.39 10.33 14.69 3.24 6.04

Financial Services 1.70 3.52 5.05 7.18 6.20

Community Social &Personal Services

23.80 32.13 33.20 2.90 0.55

Total Employment 302.76 374.45 397.00 2.04 0.98

Source: Report of the Task Force on Employment Opportunities, PlanninCommission, Government of India, July 2001


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6. UNEMPLOYMENT

(a) According to education:Contrary to what one may expect unemployment sharplyrises with the level of education. As seen from Figure 1.9 below, while the

unemployment rate (UPSS) for the overall population was 2.2% in 1999-00, it was aslow as 0.2% for illiterate persons, 1.2% for persons with primary school education,3.3% for those with middle school education, and as high as 7.1% for persons withsecondary education and above.

Figure 1.9: Unemployment by level of education

(% Of labor force)

Education level Unemployment Rate

1987-88 1993-94 1999-00

Not Literate 1.1 0.2 0.2

Literate upto primary 1.9 0.9 1.2Middle 5.3 3.4 3.3

Secondary 8.7 6.2 5.5

Higher Secondary 8.7 7.8 7.8

Secondary + Higher Secondary 7.1 - -

Graduate & Above 9.9 9.3 8.8

Educated (Secondary & Above) 9.0 7.7 7.1

All 2.7 1.9 2.2

(Source: Report of the Task Force on Employment Opportunities, PlanningCommission, Government of India, July 2001)

(b) According to age:The unemployment rate is significantly higher in the younger agegroups. For example, during 1999-2000 the unemployment rate for the 15-29 yearsage group was 12.1%, against 7.3% for the whole population. This seems to reflecttwo factors: (1) the number of new jobs created in the economy is less than thenumber of youngsters entering the workforce, and (2) new entrants into the laborforce may be more likely to wait (compared to older workers) until they find a jobwhich matches their aspirations.

(c) According to gender: Female unemployment in urban areas was 9.8% comparedwith 7.2% for their male counterparts. To some extent, this reflects the lower skilllevel of women entering the workforce, and the barriers that women face in achievingappropriate employment. Clearly, female unemployment will increase as morewomen enter the workforce in the decades to come.


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ANNEXURE B INDIA S LABOR LAWS

Contract Labor (Regulation and Abolition) Act 1970

Objective: To regulate the employment of contract labor in certain cases and to abolish it in

certain other cases

To whom does it apply?

To every establishment employing twenty or more workmen as contract labor,and every contractor who employs such contract laborers

Key provisions:

Central and state governments may constitute Advisory Contract Labor Boards toadvise the governments on the administration of this Act

Every establishment employing contract labor must register with the

Central/State Labor Commissioners in each of the location they employ labor Every Contractor must obtain a license from the Central/State Labor

Commissioner for each establishment in each location they provide labor.

The government may prohibit the use of contract labor in certain types ofjobs/occupations

Where more than 100 contract laborers are employed, the contractor mustprovide canteens, rest rooms and other amenities to workers.

Principal employer must nominate a representative to certify that the contractorhas paid wages. In case of default by contractor, the principal employer is liable.

Principal employer and contractor must maintain registers showing details ofcontract laborers employed

Key clauses:

7. Registration of certain establishments. - (1) Every principal employer of anestablishment may make an application to the registering officer in the prescribedmanner for registration of the establishment:

9. Effect of non-registration. - No principal employer of an establishment shall - (a) in thecase of an establishment which has not been registered, (b) in the case of anestablishment the registration in respect of which has been revoked employ contractlabor in the establishment.

10. Prohibition of employment of contract labor. - (1) the appropriate Government mayprohibit the employment of contract labor in any process, operation or other work in any

establishment.

12. Licensing of contractors. - (1) no contractor shall undertake or execute any workthrough contract labor except under and in accordance with a license issued in thatbehalf by the licensing officer.


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16. Canteens. - (1) The appropriate Government may make rules requiring that in everyestablishment - (a) to which this Act applies, (b) wherein work requiring employment ofcontract labor is likely to continue for such period as may be prescribed, and (c) whereincontract labor numbering one hundred or more is ordinarily employed by a contractor,one or more canteens shall be provided and maintained by the contractor for the use ofsuch contract labor.

17. Rest-rooms. - (1) In every place wherein contract labor is required to halt at night inconnection with the work of an establishment ---- there shall be provided and maintainedby the contractor for the use of the contract labor such number of rest-rooms or suchother suitable alternative accommodation within such time as may be prescribed.

20. Liability of principal employer in certain cases. - (1) If any amenity required to beprovided under section 16, section 17, section 18 or section 19 for the benefit of thecontract labor employed in an establishment is not provided by the contractor within thetime prescribed therefore, such amenity shall be provided by the principal employerwithin such time as may be prescribed.

21. Responsibility for payment of wages. (1) A contractor shall be responsible for payment of wages to each worker employed byhim as contract labor and such wages shall be paid before the expiry of such period asmay be prescribed.

(2) Every principal employer shall nominate a representative to be present at the time ofdisbursement of wages by the contractor and it shall be the duty of such representativeto certify the amounts paid as wages in such manner as may be prescribed.

(3) It shall be the duty of the contractor to ensure the disbursement of wages in thepresence of the authorized representative of the principal employer.

(4) In case the contractor fails to make payment of wages within the prescribed period ormakes short payment, then the principal employer shall be liable to make payment ofwages in full or the unpaid balance due, as the case may be, to the contract laboremployed by the contractor and recover the amount so paid from the contractor either by

deduction from any amount payable to the contractor under any contract or as a debtpayable by the contractor.

23. Contravention of provisions - Whoever contravenes any provision of this Act --

teamlease_labourreport2005

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