New Labour Code: Can Companies Still Use Contract Workers For Core Jobs?

The new Labour Codes, which came into effect on Nov.  21, 2025, introduced new restrictions on how companies can engage contract workers, potentially disrupting established business models that have relied heavily on outsourced labour.

From technology companies to manufacturing units, most Indian employers have traditionally depended on staffing agencies and third-party vendors to varying degrees. Some businesses have built their entire operational framework around contract workers deployed by these agencies. However, the implementation of four new Labour Codes has introduced specific restrictions that would require establishments to reassess their existing arrangements.

At the heart of these changes lies the Occupational Safety, Health, and Working Conditions Code, 2020 (OSH Code), which has subsumed the Contract Labour (Regulation and Abolition) Act, 1970 – the primary legislation governing third-party worker engagements prior to the OSH Code. The most notable change is a nationwide prohibition on engaging contractor workers in ‘core activities,’ except under specific circumstances. While this concept is not new, these restrictions were previously state-specific, with application in limited states such as Andhra Pradesh and Telangana – the restriction now extends across all Indian states.

The OSH Code defines core activity as any activity for which an establishment is set up, including activities that are essential or necessary for such activity. This definition casts a wide net. For instance, a spa and salon business cannot simply limit core activities to services provided by aestheticians and therapists. Under the new definition, supporting functions such as operations management and sales, could also potentially be considered core activities, thereby requiring these roles to be filled by direct employees rather than contract workers.

However, there is a relief for businesses in one area. The Code explicitly clarifies that support services such as housekeeping, security services, and canteen services (to name a few) will fall outside the definition of core activities. This exemption addresses a major concern for employers, as most companies routinely engage third-party workers specifically for these support functions. The clarification ensures that the customary practice of outsourcing facility management and security services can continue.

The OSH Code does not impose a complete ban on third-party workers in core activities. Three specific exceptions provide businesses with some operational flexibility. First, companies can engage contract workers if their normal business operations typically involve contractor-based work. Second, businesses can use third-party workers for activities that do not require full-time employees for major portions of working hours or extended periods. Third, companies facing sudden increases in core activity workload that must be completed within specified periods can engage contract workers temporarily.

These exceptions offer practical solutions for many businesses. A Software-as-a-Service (SaaS) company, for example, could engage third-party workers temporarily to provide client services during peak demand periods. Similarly, a non-IT company requiring specialized IT services could continue engaging third-party IT professionals, as such arrangements would fall within the normal-business-practice exception. That said, this exemption by its very wording is ripe for misuse (since an establishment can attempt to claim that any engagement of contract labour is pursuant to their normal business practice) so we will have to wait and see what courts and regulators consider reasonable.

Another equally meaningful change lies in how the OSH Code distinguishes between contract labour and genuine outsourcing arrangements. Under the new framework, workers who are permanent employees of third-party vendors and are receiving salary increments and social welfare benefits directly from their direct employer (i.e., the third-party vendor), without it being contingent on specific client engagements, will not be classified as contract workers.

This distinction effectively exempts true outsourcing arrangements from purview of the OSH Code, which was not entirely clear under the earlier regime resulting in many vendors complying with the earlier law by way of abundant caution. Companies engaging specialized vendors that maintain permanent workforces across multiple clients, such as payroll processing firms, audit firms, can continue their operations without regulatory constraints.

While the restrictions on contract workers in core activities presents immediate compliance challenges, they also offer an opportunity for companies to build more sustainable and viable workforce strategies. The success of this transition will depend on how effectively businesses can distinguish between genuine outsourcing arrangements and traditional contract labour, while leveraging the available exceptions to maintain operational flexibility. Companies will have to proactively adapt to these changes, to have a more compliant and strategically aligned workforce models.

Rashmi Pradeep is a partner (head - southern region), at Cyril Amarchand Mangaldas and Bishen Jeswant is a partner at Cyril Amarchand Mangaldas.

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