CONTRACT LABOUR

Dr. EM RAO
XIM BHUBANESWAR
 Contract Labour - FAQs
• If the principal employer does not get himself registered under the CLRAA,
what are the disabilities to which he would be subject in the matter of engaging
contract workers?

• If the contractor does not possess valid license, what is the legal relation of the
contractor with regard to the contract workers?

• Can the principal employer engage contract workers on jobs of perennial

nature?

• If so, what is the outer limit in terms of tenure?

• Is the principal employer required to pay compensation to the contract workers

in the even of termination?

• Is the principal employer obliged to absorb contract workers in his regular

employment?
 Contract Labour - FAQs
• What is the nature of liability imposed on the principal employer vis-à-vis
contractor under the CLRAA?

• Who between the two – the principal employer and the contractor – is
responsible for the payment of wages, deduction of statutory contributions, etc.,
in respect of contract workers?

• Are the contract workers entitled to statutory bonus declared by the principal
employer in respect of his employees under the Payment of Bonus Act 1965?

• Who between the two is responsible for payment of wages for the national and
festival holidays to be given to the contract workers?

• What is the liability of PE in the matter of providing restroom, shelter, etc.,

under the Act?
 Contract Labour - FAQs
• If the contractor fails to discharge his obligations under the Act, what are the
options available to the principal employer?

• If the principal employer has to discharge the liabilities of the defaulting

contractor, can he recover the money from the bills payable to the contractor?

• In what circumstances can the government abolish contract labour in an

establishment or an activity?

• What will be the legal status of the contract workers on the issue of a notification
by the government abolishing contract labour system? Do they get automatic
absorption in the service of the principal employer?
 Contract Labour - FAQs
• Can the employer engage contract workers in the statutory canteens (under the
Factories Act, for example?

• What is the position with regard to an activity, such as canteen which is run by a
workers’ cooperative society, employing its own workers therein?

• Can they claim that they are not contract workers, but employees of the principal
employer?

• Permanent workmen and contract workers working side-by-side and doing same
job; What is the position?

• Can the principal employer maintain pay differentials as between the regular
workers and contract workers doing the same job?
 Contract Labour - FAQs
• Does the mere supervision of contract workers by principal employer mean they
are the workers are the principal employer?

• What is the position if workers are engaged through contractor in an

operation/activity in which contract labour is abolished?

• Who should take disciplinary action against a contract worker in the event of an
alleged misconduct?

• Can the contract workers and/or their union raise an industrial dispute against the
principal employer?

• Who should negotiate the charter of demands submitted by the contract workers?
Concept of Employment
• Employer
• Employee
• Contract of Employment / Contract of Service

Contract of Service vs. Contract for Service

• Control Test
• Integration Test
• Economic Reality Test
 Contract of Service vs. Contract for Service
• Control Test
• Right of selecting the servant
• Payment of wages / remuneration
• Right to control the method of doing the work
• Right to suspend / dismiss the servant
- Mersey D &HB v. Coggins and Griffith (Liverpool) Ltd., (1947) 1 AC 1 (23)
- Short v. J & W Henderson Ltd., (1946) 62 TLR 427, per Lordon Thankerton, LJ

• Integration Test
• Whether the man is employed as part of the business
• Whether his work is done as an integral part of the business
- Stevenson, Jordon and Harrison v. Mac Donald and Evans, (1952) 2 All ER 957, per Lord
Denning, LJ.
 Contract of Service vs. Contract for Service

• Multiple or “Economic Reality” Test

• The degree of control

• Opportunities for profit or loss
• Investment in facilities
• Permanency in relations
• Skill required
- U.S. v. Silk, 331 US 704
Outsourcing - Essence & Implications
• A managerial concept – not a legal concept
• Contracting out of a business function – hitherto performed in-house –
to an external provider
• ‘Make’ or ‘Buy’ decision
• Agreement for exchange of services and payments
• Work done generally outside the party’s premises
• Actuated by economic considerations
• Governed by Contract Act 1872
• Offer – Acceptance – Consideration
• Direct Liability
• Non-/under-performance amounts to:
 withholding of payment
 breach of contract
 suit for specific performance OR damages
 BENEFITS OF OUTSOURCING

Cost savings:
The lowering of the overall cost of the service to the business

Focus on Core Business:

Resources - investment, people, infrastructure - are focused on developing
the core business

Cost restructuring:
Balancing the ratio of fixed costs to variable costs – moving from fixed to
variable cost and making variable costs more predictable

Knowledge:
Access to intellectual property and wider experience and knowledge
 BENEFITS OF OUTSOURCING

Quality improvement

Contract:
Services will be provided to a legally binding contract with financial
penalties and legal redress, unlike internal services

Operational expertise:
Easy access to operational best practice available externally

Access to talent:
Access to a large talent pool and a sustainable source of skills, in
particular, science and engineering

Catalyst for change:

The outsourcer becomes a change agent and catalyses the change process
 BENEFITS OF OUTSOURCING

Capacity management:
The risk of providing excess capacity is borne by the supplier

Greater innovation:
Knowledge service providers supplement product innovation

Reduce time to market:

Supplier helps in accelerating the manufacture of product

Scalability:
Better handling of temporary increase/decrease in demand

Liability:
Transfer of liabilities inherent to specific business processes or services
that are outside of their core competencies
Contract Labour System – Essence & Implications
• Essentially a legal concept
• Implications for employment relationship
• Immediate Employer vs. Principal Employer
• Work done inside the premises
• Vicariously liability of PE
• Workers not under the disciplinary control of PE
• Non-/under-performance by IE results i8n:
• breach of contract
• withholding of payment to IE
• suit for specific performance OR damanges
• But wages of contract workers cannot be denied
• Liability still rests with PE
Contract Labour - RCL Report 1931
• Rampancy of CL system in Textile & Jute industries
• Widespread exploitation of contract workers
• Need for employers shouldering responsibility for them

Nature of CL System
• Not confined to India, but is universal
• Rigid legal framework
• Near-property right over job
• Indiscipline & Low productivity of regular employees
• Nightmare of permanency
• Cost Effectiveness of CL system
Contract Labour - Pre-legislation Initiatives

SC decision to discourage CL system in cases where:

• the work is perennial in nature

• it is incidental to the work of the factory

• it is sufficient enough to engage regular workers

• such work is generally performed by regular workers

(Standard Vacuum case (1960)

• Incorporated in S. 10 of the Act

 CONTRACT LABOUR (R & A) ACT, 1970

• Registration of employer

•Licensing of the contractor

• Abolition of CL in establishments/operation
 CONTRACT LABOUR (R & A) ACT, 1970

Regulation of working conditions

s. 16: Canteen to be provided, if 100 or more CL is employed

s. 17: Rest-rooms, if CL is required to halt at night
s. 18: Drinking water, conveniences, washing facilities, etc.
s. 19: First-aid box to be provided

s. 20: PE liable for to provide the facility, if the contractor fails to do so –

can recover the money from the bills payable

s. 21: PE responsible for payment of wages to CL

Establishment to get a
registration if there are 20
or more contract workers If there are 20 or more contract
employed workers employed in any contract ,
Contractor to apply for License, Maintenance of all types
principal employer to issue form V of records related to
contract labour to be
maintained
Workmen’s
Compensation Act

Gratuity Act
Minimum
Bonus Act
Wages Act
Industrial Dispute
Mines Act
Act
ESI PF Factories Act
 CL Act – Landmark Court Decisions

Landmark decisions on Contract Labour Law

• Constitutional validity of the Act was upheld
• Gammon India Ltd. v. UOI, [1974 I LLJ 489 (SC)]

• Principal employer not registered; and contractor has no license –

exposes them only to penal action
• Dena Nath v. NFL,, [1992 I LLJ 289 (SC)]

• Where, in public undertakings, the contract workers approached SC for

their absorption, the SC ordered regularisation in the services of
principal employer
• Catering Cleaners of S. Rly., [1987 I LLJ 343 (SC)]
• Sankar Mukherjee v. UOI, [1990 II LLJ 443 (SC)]
• PC Raha v. LICI, [1995 II LLJ 339 (SC)]
 CL Act – Landmark Court Decisions

Legal position on abolition of contract labour

• The Act did not provide for absorption of CL in the services of principal
employer on its abolition

• As a result, the remedy became worse than the disease, and workers are
deprived of their livelihood

• It could not be the contemplation of the CL Act

• Hence, on abolition, the nexus between the contractor and his workers stand
snapped; and a fresh bond of relationship stands established between the
principal employer and contract workers
• Air India Statutory Corporation case, [1997 I LLJ 1113 (SC)]
 CL Act – Landmark Court Decisions

Legal position after the SC decision in SAIL case

• There is no master-servant relationship between the principal employer and
contract workers as to warrant their absorption by principal employer

• What is true of a workman directly employed by principal employer cannot be

true of a contract worker

• It is not the contemplation of the CL Act that the contract workers should be
absorbed by principal employer on the abolition of the CL system

• It is only when the contract is not found genuine, the contract workers should
be treated as the employees of the principal employer
• SAIL case [2001 – II LLJ (SC)].
 CL Act – Landmark Court Decisions

Legal position after the SC decision in SAIL case

• Canteen employees engaged through Contractor by NTPC

• Canteen maintained by NTPC as per statutory obligation under S. 46 of

Factories Act

HELD:
• Canteen employees are workmen of NTPC
• Liberty given to NTPC to regularise those workmen who satisfy the
requirement and who are otherwise not unfit for confirmation.
• NTPC Ltd., v. Karri Pothuraju & Ors., AIR 2003 SC 3647
 CL Act – Landmark Court Decisions

Legal position after the SC decision in SAIL case

• Contract workers working in the statutory canteen of a factory areworkers only
for the purposes of factories act

• They are not entitled to regularization in the services of the principal employer
• Haldia Refinery CEU v. IOC Ltd., 2005 II LLJ 684 (SC) (DB).
 CL Act – Landmark Court Decisions

Legal position after the SC decision in SAIL case

• Contract labour employed thro’ different contractors in the sub-station set up
to maintain electricity supply to Govt. Medical College and Hospital -
maintained by dept. of Engg. &Admn. of the UT of Chandigarh

HELD:
• Without ascertaining through the industrial forum, factual aspects of inter se
relationship between the Chandigarh Administration, the contractor and the
contract employees, no relief can be granted in appeal.
• Ram Singh & Ors. v. Union Territory of Chandigarh & Ors. (AIR 2004
SC 969)
 CL Act – Landmark Court Decisions
Legal position after the SC decision in SAIL case
• No notification u/s. 10 was issued prohibiting contract labour;
• There was neither a contention nor a finding that the contract with
the contractor was sham and the contract workers were the
employees of the principal employer

HELD:
• the HC has no jurisdiction to direct asorption of the workers by the principal
employer – it is not for the HC to assume that the CL System was a
camouflage

• If the workers want the relief of absorption, they should approach the Tribunal
and establish that the CLS was only a camouflage to avoid labour law benefits
to them
– APSRTC v. GS Reddy – AIR 2006 SC 1465
 CL Act – Landmark Court Decisions

Legal position after the SC decision in SAIL case

• If the facts disclose that, having entered into a contract with a security agency
for the supply of security guards, the principal employer does not extend the
said contract after its expiry and yet continues to engage the same security
guards, in such a situation:

HELD:
• An inference could be drawn that security guards are the employees of the
principal employer
• Brijbhushan Yadav v. Union of India -AIR 2007 SC (suppl.) 1014
 CLRAA

Application for registration I

Certificate of Registration II
Application for license IV
Form of certificate by principal employer V
License VI
Notice of commencement of contract work VI-A
Application for renewal of license VII
Register of contractors XII
Register of workmen employed by contractor XIII
Muster Roll XVI
Register of Wages XVII
Half-yearly Return (by contractor) XXIV
Annual Return (by principal employer) XXV