Formalization of Unorganized Workers: The Need of the Hour


Madhu Damodaran
Simpliance COE


Animay Singh
Simpliance COE




unorganized workers


India’s unorganized sector workforce has been at the forefront of driving the economy’s rampant growth prior to the onset of COVID-19, however, despite increased economic prosperity exploitation, poverty and lack of basic necessities are still commonplace. The total amount of informal workers participating in the workforce is estimated to be around 93% of the labour component in the country according to the economic survey of 2018-19. The ‘Report of the Committee on Unorganised Sector Statistics’ of the National Statistical Commission (NSC), 2012 also pegs this number at above 90%.

Other estimates peg the total workforce in India at between 450-500 million, of which about 63 million do not receive a regular payment, while around 110 million are employed for periods below 6 months and approximately 26 million are engaged in part-time jobs. There is also a shift in the nature of employment with a sharp decrease in agricultural employment with a corresponding spike in non-agricultural employment. Around 88 million people or approximately 20% of the labour workforce are engaged as small traders, hawkers, street vendors and as daily wage earners. Self-employed entrepreneurs constitute around 14% of the workforce meaning that as many as 215 million workers may be considered self-employed.

The above statistics reveal two troubling issues with the way the informal sector is being managed in the country. Firstly, we lack accurate and up-to-date data on the composition, nature of employment and the contribution to overall economic development by informal workers. Secondly, the lack of reliable statistics makes policy formulation and enforcement of existing labour laws difficult, especially those relating to social security. This is problematic because most social security schemes either ignore this class of workers entirely or fail to adequately provide benefits due to practical difficulties like identification of informal workers, transfer of funds and setting up official machinery at the grassroots level.

Inter-State Migrant Workers Conundrum

The migratory nature of a large chunk of India’s informal workforce adds to the aforementioned challenges. As per the 2011 census, the total number of internal migrants in India is approximately 45.36 crore, a figure that includes intra-state migrants in addition to inter-state migrants. Once again, the exact figures with respect to inter-state migrants are all estimates, making data collection and analysis the need of the hour.

Under the Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979 the term ‘inter-State migrant workmen’ is defined as: –

“any person who is recruited by or through a contractor in one State under an agreement or other arrangement for employment in an establishment in another State, whether with or without the knowledge of the principal employer in relation to such establishment”

The Act aims to regulate the employment of inter-State migrant workmen by providing for a scheme for registration of establishments employer such workers. It also contains provisions pertaining to licensing of contractors who engage in recruitment and placement activities. The Act also aims to provide for conditions of service and matters connected therewith. It provides for wage rates as well as non-discrimination in terms of wages for similar work.

From an employment benefit perspective, the Act provides for two major allowances: 

  • Journey Allowance: A payment towards the fare for the journey from the place of residence of the workman in his State to the place of work in the other State. The quantum of the allowance cannot be lesser than the fare for the journey and is applicable to both the outward and return journeys. Additionally, the workman is entitled to payment of wages during the period of such journeys as if he were on duty.

  • Displacement Allowance: Every inter-State migrant workman is entitled to a displacement allowance at the time of recruitment. This amount may be either seventy-five rupees or half of the monthly wages payable to him, whichever is higher.

The legislation imposes a duty on every contractor employing inter-State migrant workmen to ensure regular payment of wages to such workmen, equal pay for equal work irrespective of sex, to provide adequate residential accommodation during the period of employment, to provide prescribed medical facilities and protective clothing as well as report any fatal accident/bodily injuries to appropriate authorities of both States and the workman’s kin.

Under Section-17 the responsibility for payment of wages is placed on the contractor, however, the principal employer is required to nominate a representative to be present at the time of disbursement of wages who is vested with the duty to certify the amounts paid as wages. In case of failed, reduced, or delayed payment of wages on part of the contractor, the principal employer shall be liable to make good the payment of wages to the extent they are unpaid. The principal employer can then recover the amount so paid from the contractor either as a deduction from a sum payable or as a debt payable. A similar scheme of payment and liability exists under Section-18 in relation to responsibility for payment of allowances.

The scheme provided by the Act is supposed to be enforced by a system of inspectors, however the same is disproportionate to the size of the task at hand. In other words, the machinery to regulate the broad number of subjects covered by the enactment simply does not exist. Take, for example, the above scheme for disbursement of wages and the manner in which duties are divided therein. There is ample scope for a principal employer’s representative or the contractor to plead ignorance of facts or misconduct by the other party. Moreover, the requirement of knowledge as an element under the burden of proof to establish liability makes prosecution difficult.

Another drawback of this enactment is that the objectives it envisages are too far removed from ground realities from a business as well as a cost of compliance perspective. The two points are corollaries and can be examined as such, take, for example, the fact that most inter-State migrant workers are employed in building and construction work and that such activities are covered by the Building and Other Construction Workers’ (Regulation of Employment and Conditions of Service) Act, 1996 and Building and Other Construction Workers’ Welfare Cess Act, 1996. Compliances and benefits to be provided are similar under both the acts which leads to increased cost of compliance. There is also no clarity from the labour department on whether compliance with benefits under one exempts an employer from providing the same under the other. Although it may be inferred, the same might become an issue during the inspection, thus it is understandable why employers might be wary of relying on the aforementioned inference.

Current Proposals for Reform

Most of the measures for change proposed can be found in the draft labour Codes on Social Security and Occupational Safety, Health and Working Conditions, respectively. The first major change under both these Codes is in the definition of ‘contract labour’, it reads as follows: –

“Contract labour means a worker who shall be deemed to be employed in or in connection with the work of an establishment when he is hired in or in connection with such work by or through a contractor, with or without the knowledge of the employer and includes inter-State migrant worker…”

The aim of the above inclusion is to make inter-state migrant workers eligible for the benefits that are currently available to contract labourers. Another desired effect of this change is to make a collection of data on inter-state migrant workers easier by bringing them under the scope of contract labour first and then creating a further classification on their state of origin. Finally, the most important consequence of this proposed inclusion is to regularize the employment of inter-state migrant workers, as they have been the most common victims of exploitation by middlemen.

The draft Code on Social Security also introduces definitions for terms such as ‘gig worker’, ‘platform worker’ and ‘home-based worker’, terms that are essential to define as the nature of work moves towards more independent contracting and remote work.

The draft Code also contains provisions that vest powers in the Central Government to notify social security schemes specifically for the unorganized sector of the workforce. The Parliamentary report on the Occupational Safety, Health and Working Conditions Code calls for the creation of a centralized database on India’s workforce. The database is to be made in collaboration with the National Statistical Commission and its benefits include ease in the disbursement of social security benefits, seeding of profiles with AADHAR to safeguard beneficiaries as well as prevent fraud and formulation of minimum wages based on an objective sector-wise view.

Chapter-VIII and IX of the Code on Social Security, 2019 provide for schemes relating social security and cess relating to building and other construction workers, and unorganized workers, respectively. The former provides for the collection of cess for the welfare of building workers at a rate not exceeding two percent but not less than one percent of construction cost incurred by an employer. This must be deposited to the Building and Other Construction Workers’ Welfare Board that shall utilize the same for the benefit of this class of workers.

This is largely similar to the existing cess fund valued at approximately 45,000 crores of which around 4,500 crores have been utilized towards alleviating the hardship felt by migrant labourers due to COVID-19 lockdowns. The Code on Social Security fails to address the major challenge faced by the current Cess Board which is disbursing these funds accurately and expeditiously. The ID card plan under the existing scheme has failed from an implementation perspective. Moreover, the same must be seeded with AADHAR to allow for direct transfer of benefits and ease in identification of beneficiaries, an aspect which is lacking in the scheme envisaged by the Code.

Chapter-IX relates to social security for unorganized workers and states that the Central Government shall formulate and notify suitable welfare schemes for unorganized workers, such as audio-visual workers, beedi workers, gig workers etc. These schemes will pertain to matters such as life and disability cover, health and maternity benefits, old-age protection, education, housing and other benefits that the government deems fit. The chapter vests similar powers in the State Government to formulate and notify schemes with respect to different subject matter such as provident fund, injury benefit, housing, educational schemes, skill upgradation, funeral assistance etc.

A prima facie reading reveals clearly that the government has divided some subject-matter but has left others overlapping, such as housing. This might lead to confusion especially when analyzed in the context of the sources of funding, which not only includes central and state funds but also include contributions from beneficiaries/employers and corporate social responsibility funds.

However, registration of unorganized workers under Chapter-IX differs from that under Chapter-VIII in that it makes provisions for linking of profiles with AADHAR numbers. There also exists a separate provision enabling the Central Government to formulate and notify schemes relating to gig and platform workers covering life, disability, health, maternity, and age-related benefits. Most notably, the Code states that every scheme formulated and notified may provide the role of aggregators in the scheme which is essential. This is beneficial not only from the perspective of tracking trends and movement of workers from formal modes of employment to informal/semi-formal modes but also ensuring that the cost of providing benefits is distributed across aggregators so as to prevent any disruption of their business model.

Thus, the above chapters can be regarded as a clear reform effort on part of the government to provide the largest chunk of India’s workforce with adequate social security benefits.

Incentivization and Deregulation

Some other proposals include extending existing welfare schemes such as the Employee Provident Fund (EPF) scheme and the Employee State Insurance (ESI) scheme at lowered rates of contribution on behalf of the employee. This is because daily wagers and low-income earners require disposable income for day-to-day activities, therefore a contribution at the rate of around 1% might be feasible. Clubbing of all scheme related benefits under one umbrella would make administration and enforcement easier. Moreover, it would reduce the reluctance of unorganized workers to agree to wage deductions as education pertaining to the same would be easier to impart. It is indeed very often the case that workers prefer to remain in informal modes of employment because they are unwilling to forgo wages towards complex social security schemes.

This leads us to the point of incentivization with respect to moving labour from informal modes of employment towards more formal types of work. All stakeholders must be incentivized for this shift to occur, merely targeting workers or employers will only lead to unnatural spikes in the demand-supply curve which will distort market conditions. For example, a scheme wherein informal workers who move to formal work can continue remitting their contributions at lower rates applicable to their previous employment until they finish three years of service. On completion of the same, the rates of contribution can be brought to the level applicable to formal employment.

For the above to work, contribution rates must be varied across different modes of informal or semi-formal employment, such as gig work, platform work and informal employment in factories. This is because the nature of work and wages differ vastly, therefore a ‘one size fits all’ approach would be naïve.

This can be done by defining the term ‘inter-State migrant workers’ in a manner that gives them the same status as ordinary employees. While the effort to formulate new and separate schemes for unorganized, platform and gig workers is commendable, it suffers from being practically difficult. Instead, if existing schemes were extended to all classes of workers, there would be a great deal of expense and time saved. This is because there would be no need to set up parallel machinery to administer, disburse and enforce compliance with the scheme related norms.

Real-time collection of data is a measure that has already been discussed in depth with respect to the proposal for a Centralized Database. However, the same would be futile if the data is not shared between state governments as well as private sector participants to enable efficient policymaking and promote collaboration with industries. This will also enable both the government and the private sector in identifying employment trends and formulating employment policies that are in touch with the same.

Reduction in GST

Another aspect that is rarely touched upon is the impact of the inclusion of labour contracting under the 18% slab under the GST scheme. The consequences of this have been felt by the individuals on the bottom half of the income ladder. A proposed reduction of the same to 5% will assist those engaged in this business to pass on the benefit to those in need of the same. This is because in the current scenario businesses are losing out on the biggest benefit that comes with GST, namely input credit rebate. In the context of contract staffing, there are two major consumers, those being manufacturing/industrial establishments and companies in the services sector.

The current 18% threshold is problematic because it inflates the producer’s cost of production without him being able to claim input credit. Thus, the cost of production goes up, leading to a ripple effect across the chain, ultimately leading to the cost being passed on to the consumer. Therefore, the existing scenario can be described as a ‘lose-lose’ or ‘no-win’ situation.


From the above, it is clear that the policy approach with respect to reforming informal labour must be multi-faceted, such that creates incentives for all stakeholders. Only if these changes are brought about simultaneously can they facilitate any real and meaningful change? Deregulation is often negatively connotated, however, in this scenario it presents an opportunity wherein all parties benefit. Merely creating parallel schemes and supplementing machinery only puts a burden on the state exchequer and leads to confusion for employer-employee alike. The latter because it inevitably creates burdensome compliance requirements that make employers reluctant to follow and obedience difficult.

With these changes, India can take the first steps towards formalization of labour which will propel the economy out of the doldrums it is currently placed in by the global pandemic.

Disclaimer: This blog is meant for informational purposes and discussion only. It contains only general information about legal matters. The information provided is not legal advice and should not be acted upon without seeking proper legal advice from a practicing attorney.
Simpliance makes no representations or warranties in relation to the information on this article.

How useful was this post?

Click on a star to rate it!

6 thoughts on “Formalization of Unorganized Workers: The Need of the Hour”

  1. I read your details which are informative . Your prediction of increase in the economy by formalization of contract labour is not very authentic. Yes, they are entitled for all benefits and they do get them. During my tenure as joint managing director of a steel plant ; I had approx 2000 no of contract labour. Most of the large industries are highly dependent on contract labour and the scheme of compliance is very much in force. No employer wants to directly employ huge force of labour that makes for frequent strike and less output. At least I favour contract labour for smooth functioning of operations in large plants with the required checks and maintenance of records by the contractor. All nights guards in every organization are contract labour. Hare Krishna!

  2. An excellent article that pins down the problems of this largely ignored sector.

    However, the one thing we seem to forget that is this system is actually by design.

    People who hire labor class are not interested in paying for the cost markups that come with having this sector to be “managed” in a way that does social and economic justice.

    If we are seeking solutions with radical results, we need to rethink the “Labour” definition. Digital transformation access can allow the labour class to manage their most important resource, which is their time. And give them digital access to benefits provided by the State.

    A lot to work on.

  3. My name is N.Srinivasan, having 21+ years experience in HR & IR areas and my observations / suggestions were given below:
    1) The article is very good.
    2) In para-2, mentioned that around 450 million (45 crores) are in unorganized sector and in para-4, 45 crores were inter state migrant workers – which is little bit confusion.
    3) First & Foremost requirement is to create a database for informal workers, by following method.
    3.1) Self declaration by the worker (personal details, employer, residence, salary, family detail etc.)
    3.2) Detail to be given by Employer (salary, benefits, employment type etc.,)
    3.3) Details to be declared by House owner (where the worker is working, his salary, family, monthly rental, eb, maintenance details etc)
    4) In 2nd Phase, as per proposal, very very minimal contribution% to be introduced in PF. with respect to ESI (it can combine with PM health scheme) and treatment may be given.
    5) Unorganized Sector workers may be given broad classification like contract worker engaged in MNC, small scale, working in small hotels, shops, self employment etc.,)
    6) Minimum Wages to be fixed accordingly for the above category.
    7) If any company complies twice or thrice higher than minimum wages even for organized sector, then none of the workers should not have the provision to file the disputes – this will help the reduce the salary difference.
    Awaiting for comments

    1. Hi sir,
      First and foremost I would like to thank you for your inputs, I think the suggestions you have mentioned are extremely practical and relevant owing to the needs of our labour market. With regards to the difference in statistics I would like to point out that the discrepancy in numbers is the very problem that we are attempting to highlight through this post. We lack accurate and real-time data on the labour component in our nation which leads to issues in policy formulation. I would love to know your thoughts on how we can address this issue.


Leave a Reply

Your email address will not be published. Required fields are marked *