Contract labour

By Santosh Pai and Anuj Trivedi, Link Legal India Law Services

Utilizing contract workers in India can be tricky for Chinese-invested enterprises. The following guide provides the opportunities and pitfalls of working within this system

Many foreign investors find Indian labour laws challenging but it is an especially significant challenge for Chinese-invested enterprises, due to their high concentration in the manufacturing sector. Labour law reform in India is receiving a lot of attention from the Modi (2.0) government.

One ambitious project underway is to consolidate 44 labour laws into labour codes under four categories, namely wages, social security, industrial safety and welfare, and industrial relations. This article focuses on the widely employed contract labour system that can prove useful to many manufacturing companies, but can also expose them to risks if not implemented properly.

Santosh Pai
Link Legal India Law Services

The contract labour system refers to a legal mechanism whereby a labour contractor hired by the company acts as an independent agent to employ workers, and then supplies them to the company as a service, thus obviating the need for a direct employer-employee relationship between the company and its workers.

Some advantages of the “contract labour” system are: (1) overall cost of engaging contract labourers might be lower compared to direct hiring; (2) short-term requirements can be met without long-term commitments; (3) minimal direct supervision is required on the part of the employer; (4) non-core activities can be outsourced so that the company can focus on its core activities; (5) increasing or decreasing labour supply is much easier; (6) it can lead to potential gains in productivity; and (7) labour contractors can be held responsible for performance-related issues.

The primary aim of the Contract Labour (Regulation and Abolition) Act 1970 (CLRA Act) is to abolish contract labour in certain circumstances, and regulate it in others.

Anuj Trivedi
Link Legal India Law Services

The proper application of contract labour is in areas where continuous employment is not possible, or in work processes that are seasonal, intermittent or ancillary to the role of the permanent workforce in an industrial establishment, such as gardening, security, etc. The Indian Supreme Court enunciated these principles in Gammon India Ltd. v Union of India. The provisions of the CLRA Act are normally applicable to every establishment and contractor that employs more than 20 workmen, although certain states have increased these thresholds.

The three main players in the contract labour system are: (1) the labour contractor; (2) the workman (contract labour); and (3) the principal employer, with clearly identified rights and obligations attached to each of them. The labour contractor or sub-contractor is defined as a person who undertakes to produce a given result for the establishment, other than a mere supply of goods or articles of manufacture to such establishment, through contract labour,, or who supplies contract labour for any work of the establishment.

A workman is deemed to be “contract labour” when he is hired through a contractor who is responsible for his supervision and remuneration. The principal employer is one who is responsible for the supervision and control of an establishment, such as the owner or occupier of a factory. Back-to-back agreements among these three players govern the direct employment of workmen by the labour contractor, and supply of services from contractor to employer.

However, enterprises must bear in mind that their legal obligations towards contract labourers cannot be washed away merely by hiring contractors, since the CLRA Act contains several provisions where the principal employer can be held liable, either when the contractor fails to meet his obligations, or makes both the principal employer and contractor jointly liable. For instance, timely payment of wages and provision of canteen, restrooms, drinking water and first aid facilities to the contract workers are responsibilities of the contractor under normal circumstances. In the absence of the contractor fulfilling such obligations, they automatically become the responsibility of the principal employer.

The most significant risk that principal employers face under the CLRA Act is the possibility of the contract workers being treated as permanent employees. In General Manager (OSD), Bengal Nagpur Cotton Mills, Rajnandgaon v Bharat Lala and Another, the Supreme Court of India laid down the following two core tests to find out whether the contract labour can be treated as direct employees of the principal employer:

  • Whether the principal employer pays the salary instead of the contractor; and
  • Whether the principal employer controls and supervises the work of the employee.

The expression, “control and supervision” in the context of contract labour was explained by Supreme Court in International Airport Authority of India v International Air Cargo Workers Union. The primary control of the contract workers was said to rest with the contractor, who pays and assigns them to work with the principal employer. The principal employer exercises secondary control over the workers after they have been assigned to work at its premises.

Hence, the contract between the principal employer and contractor must be carefully drafted to, inter alia, ensure: (1) the labour contractor’s independent status as independent contractor; (2) the labour contractor’s sole discretion on recruitment, deployment and payment issues; (3) the workers are hired on rolls of the contractor; and (4) the labour contractor will exercise primary supervision. At the same time care must be taken that the contract labour mechanism is not a nominal arrangement or sham that is designed with the sole purpose of denying permanent employment benefits to workers.

One common method to manage such risks on the part of the principal employer is to shift the burden of compliance with the CLRA Act onto the contractor, and require periodic declarations of compliance. Notwithstanding this, it will be prudent for the principal employer to closely supervise compliance, since any non-compliance with provisions of the act not only attracts penal provisions under law, but also brings with it the social and political stigma of being considered an uncaring and exploitative employer. Such an undesirable outcome far outweighs the burden of ensuring full compliance in a long-term, high-growth market such as India.

Santosh Pai is a partner at Link Legal India Law Services. He can be contacted on +91 9004265235 or by email at

Anuj Trivedi is a partner at Link Legal India Law Services. He can be contacted on +91 9971992092 or by email at

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