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. 


  1. thank you very much.
    i was looking around everywhere for explanation of the perennial nature clause.

  2. In a very recent judgement in Bhilwara Dugdh Utpadak Sahakari S. Ltd. Vs. Vinod Kumar Sharma Dead by LRS & Ors, the Apex Court has ruled thatin order to avoid their liability under various labour statutes employers are resorting to subterfuge by trying to show that their employees are, in fact, the employees of a contractor It is high time that this subterfuge must come to an end. Labour statutes were meant to protect the employees/workmen because it was realised that the employers and the employees are not on an equal bargaining position.” Thta means if the contract is sham, the employees engaged through the contractor shall be treated as employees of the Principal employer.




  4. Dear Sir,

    Can you highlight some difference between 12(3) and 18(1) settelment.

    Why mostly all employers are prefereing 12(3) settlement?


  5. Really good bog. Please check below link for Biometric Labour Management System.

  6. I want to know about leave policy for contract staff who are direct engage to the company

    1. The contract employees who are directly appointed by the employer will not come under Contract Labour (R & A)Act. They are direct employees but for a fixed term. They have status equal to regular employees with regard to leave and benefits and only thing which differentiate them is that their employment will stand terminated automatically on the expiry of the term fixed and no compensation as is payable under the Industrial Disputes Act for retrenchment is payable to them.


  7. Sir can u enlighten on what duration would constitute perennial nature of employment or define perennial nature.

    1. Whether an activity is perennial or not is not decided by time. Any work which is regular in nature which can be carried out by engaging full time regular workmen is said to be perennial in nature.


  8. Sir,

    Can U tell me the applicability of the Act, when the employees of one company are outsourced to work in another company

  9. Contract Labour (Regulation and Abolition) Act is applicable in such scenario

  10. Sir,

    I work for a Govt PSU and is directly on contract with the PSU. Our fixed term contract is renewed every Twice year. This pratice is followed by the PSU from last 10 years, and there are approximately 400 + employees like in the same PSU. The PSU doesnt provide any PF, ESI ,Gratuity benefits. Leaves are stricted to 20 days only. The salary are also not revised yet till today according to 6th pay commission. The PSU is a profit making PSU and is also a MIniratna. Can i sue this company for permanency in job.

    Can you provide any guidance of any courts providing similar judgements against PSU. Can u also cite the relevant acts to refer to.

    Best Regards

  11. FTC is actually an arrangement made whenever there is a project which is likely to be completed over a certain period. At the same time, if the work is of regular nature, you cannot have fixed term employees. Moreover, fixed term contract employees are also eligible for ESI, PF, Bonus and gratuity (if they complete 5 years) Only difference is that for termination at the end of contract period, no notice is required nor any retrenchment compensation as is required to be paid u/s 25F of ID Act.

    Permanency of job is entirely different subject. An employee who is employed after following the formalities associated with hiring, like, calling for applications, inviting the candidates to appear for written test/ interview, giving appointment order, undergoing induction etc, is said to be in a regular employment and those who are hired without following these steps like casual employees have no right of regularisation. Certainly, on termination, he should be paid termination compensation at the rate of 15 days wages for every completed year of service provided he has worked in the establishment for 240 days in each year. The onus to prove his attendance also lies with the worker. FTC is also under the same rule but it is easy for an FTC employee to prove his service since he has got an appointment order and would be signing the muster rolls every day. Naturally, if there is no scope for engaging employees on a fixed term and still the PSU is engaging employees on FTC and that also without following the basic labour laws which are enforced very strictly by the enforcing authorities in tiny and small scale industries having very low number of employees, then it should be taken as exploitation and should fight against it.
    Renewal of contract in every two years or even one year has no significance. What is important is whether you have worked 240 days in each year.


  12. Sir, thanks for the enlightenment and its indeed a real eye opener ... Sir, in my case i have worked for more than 299 days per years, since the PSU entitles us for 20 days EL and the Central Govt. Holidays.. Plz... letme know the process of how i can ask the PSU to avail me the PF & other ESI schemes..
    Thanks once again.

  13. I don't know what your specific appointment order says. In normal circumstances an employee is eligible to ESI and EPF right from the first day of joining. Similarly, from that day onwards the 'days worked' will be counted for the purpose of leave with wages in the subsequent year. You can refer if there is any specific settlement or ruling as applicable to your unit

  14. Sir i am a contract worker in telangana electricity transco deportment,working as 132/33KV SUBSTATION operator (sub engineer) from 5 years. sir the governament decided to regulerise the contract employees,So here my dobt is we are also get regulerisation or not
    Can you provide any guidance, how to proceed for my regulerisation or absorbtion in deportment

  15. Operation and maintenance of hospital is contracted to "Global Hospitals". It functioned for 5 1/2 yeas. All the workers numbering 85 (ward boys, safai karmachari, maffing boys, drivers, security)worked through out. Some even for 10 years. New Dept of Spce, Govt of India, awarded contract to M/s Apollo. New contractor denied to take old workers, he did not even call them for interview. They have no union. We want help them. Pl. guide how to help them. Regards. Sambasivaiah, CITU

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  17. Sir please clarify my doubts regarding contract employees. Actually I was appeared for the post JUNIOR ENGINEER ( CIVIL) in PWD department in the year 2011 and I was qualified in the examination but unfortunately not qualified the interview.
    After that those who was qualified the interview process, was engaged by the RURAL DEVELOPMENT DEPARTMENT in the same post that is JUNIOR ENGINEER (CIVIL)on Contractual basis from the year 2011. Since then I m working as Junior engineer with same risk, responsibility as compared with regular Junior engineer. Now it's been more than 7 years I m working as Contractual employee.moreover department has transferred me to another jurisdiction with routine transfer and posting with regular employees. I will take the charge from regular staff
    So kindly suggest regarding the regularisation of contractual staff and what are chances of regularization please. My contact no. Is 9933270388
    Email id-
    Please do suggest me .