Engaging Contract Labour: What do Employers Have to Be Mindful Of

Engaging contract labour and outsourcing of work by organisations reduces business expenditure and helps improving organisational productivity and building service competitiveness. This practice gets statutory recognition under, and is subject to regulation by, the Contract Labour (Regulation and Abolition) Act, 1970 (“Act”). The Act provides for a principal employer to employ, through a contractor, workmen as contract labour, for its organisation or for any work in connection with such organisation’s work.

As per Section 2(1)(g) of the Act, a principal employer means: (a) in relation to any office or department of the government or a local authority, the head of such office or department or such other officer as specified by the government or the local authority; or (b) in relation to a factory, the owner or occupier of the factory and the manager designated under the Factories Act, 1948; or (c) in a mine, the owner or agent of the mine and the designated manager of the mine; or (d) in any other establishment, the person responsible for the supervision and control of the establishment.

As per Section 2 of the Act, contract labour includes workmen engaged by or through a contractor, with or without the knowledge of the principal employer, for any work in the establishment or in connection with the work of an establishment, including any skilled, semi-skilled or un-skilled, manual, supervisory, technical or clerical work, but excludes out workers, employees in managerial or administrative capacity or those drawing wages in excess of a specified quantum.

Engaging contract labour by a principal employer involves risks such as: (a) non-compliance with provisions of the Act by principal  employers; (b) claims for regularisation of contract labour; (c) an employer-employee relationship deemed to be established between principal employer and contract labour; or (d) claims that the contract between the principal employer and contract labour is a sham or subterfuge, intended to avoid the principal employers’ obligations under labour laws.

Therefore, to mitigate the above risks, a principal employer should keep in mind inter alia the following factors when engaging contract labour.

1. Number of Workmen

As per Section 1 of the Act, the principal employer should be in compliance with the provisions of the Act, if he employs 20 (twenty) or more workmen on any day of the preceding 12 (twelve) months as contract labour. The states of Andhra Pradesh, Maharashtra, Rajasthan, Haryana and Uttar Pradesh have increased this threshold to 50 (fifty) or more workmen engaged by the principal employer on any day of the preceding 12 (twelve) months as contract labour.

2. Limited Control and Supervision by Employer

To exercise caution against contract labour being deemed as regular employees of the principal employer, the principal employer has to be considerate of the extent of supervision exercised by him over the contract labour engaged.

The Hon’ble Supreme Court of India has observed in judicial precedents such as Dhrangadhra Chemical Works Ltd. vs. State of Saurashtra[1] and International Airport Authority of India vs. International Air Cargo Workers' Union[2] that, as one of the key factors for establishing an employer – employee relationship between a principal employer and contract labour, the principal employer has to supervise and control the work done by the contract labour. This can be done by: (a) determining the nature of work; and (b) the manner in which it is to be performed.

Therefore, if the contractor decides where contract labour will work, how long he will work and subject to what conditions, the principal control is deemed to rest with the contractor. Only when the contract labour is indirectly managed by the principal employer for work to be done for him, does the principal employer gain supervision and control over the labour, resulting in an employer-employee relationship between the parties. If such a relationship is established, contract labour would be deemed as regular employee of the principal employer and the principal  employer would have to comply with the extant and applicable labour laws in relation thereto.  

3. Who Pays the Salary?

The principal employer has to keep financial considerations in mind while engaging workmen as contract labour. In Bengal Nagpur Cotton Mills vs. Bharat Lal[3], it was held that in order to determine if workmen engaged by principal employer are regular employees or contract labour, one may consider inter alia whether the principal employer pays the salary instead of the contractor.

4. Nature of Work

Principal employers have to be mindful that work performed by contract labour is not the core business activity of the establishment. For example, the states of Andhra Pradesh and Telangana through Section 4 of the Contract Labour (Regulation and Abolition) (Andhra Pradesh) (Amendment) Act, 2003, have prohibited employment of contract labour for core activities of any establishment except in the following circumstances: (a) if the normal functioning of the establishments is such that the activity is ordinarily done through contractors; or (b) the activities are such that they do not require full time workers for the major portion of the working hours in a day or for longer periods, as the case may be; or (c) any sudden increase of volume of work in the core activity which needs to be accomplished in a specified time.

Further, principal employers can engage contract labour only for performing work in the establishment or in connection with the work of establishment. As per the Hon’ble Supreme Court’s judgment in The Managing Director, Hassan Co-operative Milk Producer's Society Union Limited vs. The Assistant Regional Director Employees State Insurance Corporation[4], while elaborating on work performed by contract labour “in connection with the work of establishment”, it was held that the work performed by the contract labour could be in distant connection with the work of the establishment and the contract labour may do any work which is ancillary, incidental or has relevance to or link with the object of the establishment.

5. Perennial Work

With respect to the duration and nature of work, principal employers should be mindful of not engaging contract labour for work of a permanent or perennial nature, in order to draw a distinction between contract labour and regular employees. For example, in Food Corporation of India and Ors. vs. Gen. Secy., FCI India Employees Union and Ors.[5], the Supreme Court refused to interfere with the impugned order passed by the Industrial Tribunal regularising contract labours as employees of the appellant due to their perennial nature of work, and inter alia held, “It is evident that the Tribunal, on appreciating the evidence in its original jurisdiction, rightly concluded that… Thirdly, the nature of work, which these workers were performing, was of a perennial nature...”.

6. Various Decisive Factors

The Supreme Court has held in several judgements[6] that apart from the above, various other decisive factors have to be taken into consideration when engaging contract labour, in order to draw a distinction between contract labour and regular employees, such as: (a) who is the appointing authority and who can dismiss; (b) how long the alternative service lasts; (c) the nature of the job, e.g. whether it is professional or skilled work; (d) nature of establishment; and (e) the right to reject.

Engagement of contract labour may add impetus to a business’ profitability and productivity. However, it is desirable that the principal employer is mindful of the aforementioned factors, for creating a marked distinction between his regular employees and the contract labour employed by him. This distinction is essential for ensuring that the principal employer is fully compliant with the existing labour laws, in its engagement of contract labour.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal Hyderabad.

[1]AIR 1957 SC 274

[2](2009) 13 SCC 374

[3] (2011) 1 SCC 635

[4] AIR 2010 SC 2109

[5]AIR 2018 SC 3902

[6] Balwant Rai Saluja vs. Air India Ltd MANU/SC/0732/2014; Workmen of Nilgiri Cooperative Marketing Society Limited  vs. State of Tamil Nadu and Ors AIR 2004 SC 1639; Bharat Heavy Electricals Ltd. vs. Mahendra Prasad Jakhmola and Ors 2019 (4) SCALE 738