Outsourcing Under India’s Labour Codes: Redrawing The Core Activity Boundary

Outsourcing in India has traditionally been structured around commercial considerations such as operational flexibility, scalability, and cost efficiency, leading businesses across sectors to rely extensively on contract labour rather than direct employment on the principal employer’s payroll.

With the transition from the Contract Labour (Regulation and Abolition) Act, 1970 (“CLRA”) to the Occupational Safety, Health and Working Conditions Code, 2020 (“OSH Code”), the legal analysis has become significantly more nuanced. The question is no longer limited to whether a function can be outsourced for business convenience; it now extends to whether the relevant activity is legally permissible to be performed through contract labour at all.

This is significant because the OSH Code imposes a statutory restriction on the engagement of contract labour in the “core activities” of an establishment, subject to specified exceptions.¹ As a result, outsourcing arrangements can no longer be assessed solely on the basis of contractual structure, vendor capability, or commercial efficiency. Businesses must instead evaluate the nature of the activity, the purpose for which the establishment was set up, and whether the outsourced function is essential to that purpose.

The issue is not whether outsourcing remains permissible: it does.

The more critical question is whether the outsourcing model is supported by a defensible statutory basis, operational clarity, and robust contractor oversight.

The Legal Shift under the OSH Code: Introduction of ‘Core Activity’ Framework

A ‘Core Activity of an Establishment’ under the OSH Code has been defined to mean the activity for which the establishment is set up, including any activity that is essential or necessary to such primary activity (“Core Activities”).²

Strictly speaking, the OSH Code does not create a standalone definition of “non-core activity”; rather, it defines “core activity” and then excludes certain support functions from being treated as essential or necessary to the establishment’s primary activity, where the establishment itself is not set up for such functions (“Non-Core Activities”).

Under the CLRA, the prohibition of contract labour in specified processes, operations or work was primarily driven by abolition notifications issued by the appropriate Government. The OSH Code changes the starting point: Section 57 of the OSH Code imposes a statutory prohibition on the employment of contract labour in core activities, subject to limited exceptions:

1. where the activity is ordinarily done through a contractor;
2. where the activity does not require full-time workers for the major portion of the day; or
3. where there is a sudden increase in the volume of work that must be completed within a specified time.

While the legal distinction appears conceptually clear, its application in practice may entail significant operational and sector-specific analysis. It is understood that activities directly linked to the production process, such as assembly-line operations, product testing, quality control, and core manufacturing functions, would ordinarily constitute Core Activities.

However, the classification of several operational functions, including warehousing, packaging, inventory management, logistics coordination, and equipment maintenance, as either Core Activities or Non-Core Activities is likely to remain a matter of interpretive uncertainty, contingent upon the nature and structure of the enterprise and the degree of its integration with the Core Activity.

A practical assessment may require businesses to examine:

1. the purpose for which the establishment has been set up;
2. whether the activity is essential or necessary to that purpose;
3. whether the activity is continuous, intermittent or ordinarily performed through contractors in that industry;
4. whether the activity falls within any statutory carve-out; and
5. whether the relevant exception under the OSH Code can be genuinely supported.

Recalibrating Outsourcing under the New Labour Law Framework

The distinction between ‘Core Activities’ and ‘Non-Core Activities’ will increasingly influence how businesses structure outsourcing arrangements, allocate operational responsibilities, and assess workforce deployment models. Where outsourced personnel are closely integrated with the establishment’s principal business activity, principal employers will need to adopt more disciplined oversight mechanisms around contractor engagement. This, in turn, is likely to shift contractor assessment away from price and deployment capability alone and towards statutory compliance records, wage-payment discipline, labour record maintenance, social security remittances, licensing status, and overall governance resilience.

This shift is commercially significant because the labour law framework (under both the CLRA and the OSH Code) does not externalise labour-related risks; rather, it exposes principal employers to commercial and legal liability.³ Where a contractor fails to discharge its obligations regarding wages, welfare facilities, or statutory contributions for contract labour deployed in an establishment, the principal employer may be required to step in.

However, the OSH Code entitles the principal employer to recover such defaulted amounts from the contractor, either by way of deduction from any sums payable to the contractor under the contract or as a debt recoverable from the contractor.⁴

The Evolving Architecture of Workforce and Outsourcing Models

Contractor engagement agreements are likely to become more governance-heavy, with stronger indemnity protections, audit rights, compliance undertakings, reporting obligations, payroll verification mechanisms, and digital monitoring systems. Equally, businesses are likely to prefer organised, compliance-capable service providers over fragmented layers of subcontractors, particularly in sectors where continuity, visibility, and control across outsourced functions are commercially critical.

A parallel response may also lie in rethinking workforce structures beyond conventional contract labour. For certain operationally sensitive or business-critical functions, one possible outcome may be the increased adoption of fixed-term employment structures, which now enjoy formal statutory recognition under India’s labour law reforms.⁵

Fixed-term employment enables businesses to engage personnel directly for project-specific or time-bound operational requirements while retaining greater visibility and control over workforce management and compliance oversight. Simultaneously, businesses may also explore genuine managed services arrangements, integrated facility management models and specialised technical service providers.

However, merely relabelling a manpower supply arrangement as a managed services contract will not reduce risk if vendor personnel remain functionally embedded in the principal employer’s core operations.

Why Classification Matters in Practice⁶

 Conclusion

The commercial lesson is clear: outsourcing remains available, but it must now be designed with greater legal discipline. Principal employers should move away from generic manpower-supply arrangements and towards structures supported by a defensible classification analysis, stronger contractor diligence, measurable compliance controls, and clear contractual remedies.

Businesses that undertake this exercise early will be better placed to preserve operational flexibility without inviting avoidable regulatory, wage-payment, workforce and supply-chain risk.

Varun Vaish is a Partner, and Shashwat Jain & Prachi Negi are Associates at Luthra and Luthra Law Offices India.

Footnotes

^{1 Section 2(p) of the OSH Code.}

^{2 Ibid.}

^{3 Section 55(3) of the OSH Code.}

^{4 Ibid.}

^{5 Section 2(34) of the Code on Social Security, 2020 defines “fixed term employment” as employment under a written contract for a fixed period, with wages, hours, allowances, and benefits not less than those of a permanent employee performing similar work, and with proportionate statutory benefits irrespective of the qualifying period of service.}   

^{6 The classifications above are illustrative and may vary depending on the nature of the establishment, operational integration of the function, factual deployment model and the applicable Central or State framework.}

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