Wednesday, November 17, 2010

Contract Labour

Engaging workmen through a Contractor or outsourcing of job is a common practice now- a- days. Though both the terms appear to signify the same meaning and result the former is used when the employee engagement is taken place within the boundaries of the establishment under the control of the principal employer whereas the later is taken place outside the premises of the establishment. As such when a job is outsourced and is undertaken outside the premise which is not under the control and management of the Principal Employer the Contract Labour (Regulation and Abolition) Act, 1970, will not apply. In all other kinds of engagements and outsourcing the provisions of Contract Labour (Regulation and Abolition) Act, 1970 will apply. Let us see what the Act says:

n  Contract Labour (Regulation and Abolition )Act, 1970 is an Act to regulate employment of contract labour, prevent exploitation of contract labour and for abolition of contract labour in certain areas.
n  The Contract Labour (Regulation and Abolition ) Act, 1970 applies to establishment employing 20 or more contract labour and Contractors employing 20 or more employees
n  The Act requires that every establishment which employs 20 or more contract labour shall obtain Registration from the Appropriate Authority. Similarly, a Contractor who engages 20 or more workers shall have to obtain licence.
n  The Act makes it obligatory on the part of Principal Employer to ensure that the contractor pays wages in respect of his employees in time as prescribed under the Payment of Wages Act, 1936. Similarly, it is the responsibility of the Principal Employer to ensure that the contract workers are paid at least the Minimum Rates of wages as prescribed for the Industry. Above all, the Principal Employer has to make sure that remittances in respect of contract workers towards Employees State Insurance, Employees Provident Fund, Welfare Fund and other statutory contributions are made by the Contractor in time. If the contractor fails to comply with the above statutory provisions the Principal Employer will be responsible. In respect of contract workers not covered by ESI, it is the duty of the Principal Employer to bear any compensation which may become due under the Workmen’s Compensation Act. However, any amount paid by the Principal employer shall be recovered from the Contractor as deduction from the amount payable to the contractor as a debt due from him.
n  Section 10(1) of the CLRA Act empowers the Appropriate Authority to prohibit engagement of contract labour in certain kinds of jobs or process of operation. Contract Labour in a particular operation or job is abolished mainly on the following grounds.
1.     When the process in which contract labour is engaged is identical to the the core area of operation
2.     When the work in which contract labour is engaged is perennial in nature.
3.     When the work in which contract labour is engaged is carried out by regular workmen in similar establishments in the same industry
4.     When the work in which contract workers are engaged is of such duration that regular workers can be employed

Therefore, an establishment should not engage contract workers in core areas of its operation which are regular in nature and for which regular and full time employees could be engaged. Once a particular work or operation is declared prohibited the Principal Employer should not engage contract labour in that work or operation. Not complying with notification prohibiting contract labour will make the Principal employer liable to absorb the workmen so engaged, subject to other conditions pertaining to legitimacy of the contract.

Consequences of Sham Contract

In a discussion about contract labour it is very important to study the legality or authenticity of contract. If the contract between the Principal Employer and the Contractor is ruse or camouflage, it will be treated as a sham contract. In the following instances a contract shall become sham contract.
Ø When Principal employer signs as party to a wage settlement between the Contractor and his workmen
Ø When the Principal Employer has absolute control and supervision over of the work of contract workers
Ø When the Principal Employer fixes the service conditions of contract workers and initiates disciplinary action against them as and when required.
Ø When the Principal Employer ordinarily pays of salaries and allowances to contract workers otherwise than when the contractor fails to pay it time.
Ø When the Principal Employer himself becomes the authority for granting leave to contract workers

If the contract is sham the Principal employer is liable to absorb the workers as permanent or regular workers. In Hussain Bhai Vs Alath Factory Thozhilali Union(1978 SC AIR 1410) it was held that only “outworker”is excluded from the definition of workmen and hence if nature of employment and control of principal employer over contract workers is established in favour of workmen, they can claim regularisation. However, merely because the workers are under the supervision and control of the Principal Employer does not make the contract sham as some kind of supervision and control is inevitable in any kind of relationship as was observed in International Airport Authority of India Vs International Air Cargo Workers’ Union (2009-IV-LLJ-31-SC). In Gujarat State Electricity Board Vs Hind Mazdoor Sabha (1995 SC –II-LLJ 790)  it was held that claim for regularization is maintainable if raised on the ground that the contract was sham and camouflage. The same view was expressed in Municipal Corp. of Greater Mumbai Vs K V Shramik Sangh (2002-II-LLJ 544)

Abolition of Contract labour and absorption

If contract labour is prohibited by notification finding that the operation in which the labour is engaged is perennial in nature or the work is of such duration that regular workmen shall be engaged, the Principal Employer is expected to terminate the contract. The question of whether the contract workers engaged in an operation which is later on declared as prohibited should be absorbed as regular workmen by the Principal Employer has been discussed in various cases. In Steel Authority of India Ltd  Vs. National Union Waterfront Workers’ (2001 (II) LLJ 1087) it was held that mere abolition of contract labour following section 10(1) of the CLRA Act would not entitle the workmen for automatic absorption. If any job is found to be perennial in nature and following the finding the Appropriate Authority has prohibited engagement of contract labour in that job or operation, the principal employer can employ regular workmen. In the process he shall give preference to the former contract workmen, if otherwise found suitable. A direction of this kind has been given by the Jharkhand High Court in a recent judgment in Bharat Coking Coal Ltd Vs. Workmen, Bharat Coking Coal Ltd(2010-II-LLJ 131). Therefore, there is no compulsion on the part of Principal employer to employ the erstwhile contract labour.


Whenever workers are engaged through a contractor make sure that the operation in which the said workers are engaged is not directly related to the core function of the establishment. In other words, do not engage contract workers in operations of perennial nature. Similarly, the purpose of contract should be genuine. It should not be fake or a screen to deter rights conferred by Labour Laws to workers.