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Soical Compliance Auditing
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Rizwan Ahmad
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Thread Started by #govindsuresh

Iam working as a HR Manager in a Manufacturing Company. I wanted to have a small clarification. If we are hiring employees nearly 25 from a manpower contractor. We are paying PF and ESI to the contractor. I wanted to clarify, if the contractor doesnt pay the PF and ESI to concerned department and fakes our company means who is the responsible for this. If any issue arises means who is responsible whether we are responsible or else the contractor. Based on the bill only we are going to release the payment. In that case how we will be responsible this is my question, because we are having a valid proof that we are giving the money to my contractor. Because we have the bill.
Kindly clarify me..
13th August 2009 From India, Madras
Firstly......... has the contractor taken the licence from the office of Labour Commissioner to provide Contractual manpower to your outfit.
Secondly.....It is always the Principal employer who is responsible for all submission of ESI & PF. You can keep a tab on the Contractor by directing him to provide ESI & PF numbers of contractual manpower being supplied to you. Moreover you should also demand periodic returns submitted by him in regards to ESI & PF.
Thirdly........ Make an agreement with the Contractor on Stamp Paper which shall include all clauses related to ESI & PF.
13th August 2009 From India, Delhi
if my contractor doesnt pay PF and ESI for the employees means now who is getting into trouble. As a employer we are getting into trouble or else my contractor. eventhough we have records showing that we paid necessary amount to my contractor to for pay PF and ESI. now who is in touble.
13th August 2009 From India, Madras
I am completely agree with what shahid.kumar has shared. Moreover, you can have a practice of asking paid PF, ESI challans as an enclosure alongwith the bill for next month (without which you should not process the bill for payment) so as you can have cross check anytime with respective authority whether it has been complied with or not.
Mukesh T.
13th August 2009 From India, Vadodara
my question is this, if this problem is arised means. whom the government is going to claim whether me or else contractor
13th August 2009 From India, Madras
how a employer will get the problem because i already paid to the contractor. government as to claim only from the contractor right
13th August 2009 From India, Madras
what will be the consequence if he does not registered with pf and esi. and what will be the consequences if he registered with pf and esi
13th August 2009 From India, Madras
Dear Govind,
1.You ask the PF \ESI code no alloted copy from the contractor.
2.Instead of paying money to the contractor for ESI/PF directly , deduct the amount from his bill and you make the remittance on monthly basis on behalf of him.(You prepare the cheque on ESI/PF by yourself for contractor and add it along with his bill amount) by this way you can solve your headache.
3.Send a testmail to my id, i will forward you the contractor Audit sheet.

13th August 2009 From India, Madras
I completely agree with Shahid & the comments backed up by the members. Its the sole responsibility of the contractor to pay this and you as a client are not answerable.

13th August 2009 From India, Bangalore
hi govind suresh,
By giving the man power supply to contractors the company liability in r/o the statutory obligations does not dissolves. If you awarded a contract to another person also he will be get registered as your co. contractor only after issue of Form-V certificate duly filled and signed by your co. ofiicial stating that if any discrepancies in future about the statutory obligations you will be responsible to that effect. after that only the contractor wii get registered and starts the work in your co. Regarding the ESI & EPF compliances you must know whether his co. was registered undeer ESI& EPF Acts. If is not registered under the said Acts you must advise him to get registered and it is not possible in any case you must allow him to make compliance on your co. codes and you must see the correctness in compliances in any manner. Even though you are having bills the responsibility will not exhausts.
13th August 2009 From India, Hyderabad
Dear Govind
Ultimately reponsibility of compliance lies with Principle employer not with contractor if you donot have proofs of challan of compliances you are in trouble firstly get in touch with contractor & inform him regarding penalties & jail for non payment of pf & esi & also discuss the same with legal consultant and take his further advice and action.
sai nandan
13th August 2009 From India, Bhopal
Dear it is very much clear from the P.F. & E.S.I.Act that for conract labour the Principle Employer is fully responsible for the contribution if not paid by the contractor. If ur contractor is having his own PF & ESI code you just ensure that and take the photocopy of the Certificates from the contractor. To ensure the deposition of payment of contribution,you can deposit the same through challans on his code No's and just put a stamp on the challans " EMPLOYEES ENGAGED AT-------------------(your" So that the contractor can not use ur challan at any other co. It is also mentioned here that you may deduct the deposited amount from his bill i.e. you just pay the amount after deduction the ESI & PF contribution. So, this way you can save ur co. and your co. will be safe. V.K.Gupta
14th August 2009 From India, Delhi
I have seen lot of transaction between you and other professionals.

I like to provide you the legal stand. First for all the violations of statute by any contractor or agents, the principal employeer is mainly responsible. Though you have given the money to the contractor, if the conotractor has no paid, you must have ensured whether he has paid or not. If he has shown fake chellans, it is the employers responsibility to check the proof correctly and not the contractor. May be you can take criminal action against the contractor for cheating under sec 420 on contractor, however you must have ensured all payments and you cant escape that the contractor has not paid and so what employer can do. If the Authorities accept your plea, every company can appoint a contractor who inturn show fake chellan and the employer can escape from action. So, you have to face the action. You need not fear, the authorieties may seek amount that has not paid with penalry and damages and interest for the non remittal amount. No other action they will take.hope you are clear.
14th August 2009 From India, Madras
Dear Govind,
I am completely agree with shahid and Dinesh
If u fail to take ESI and EPF code from your contractor and fail to deposite required amounts for ESI & EPF then both department recover those amount from Principle Employer on the basis of wages paid to contractot @ 6.5 % for ESI with Interest rate near about 13% and for EPF 25.61 % with Interest rate of nearly 13 %.
Regards Rizwan
14th August 2009 From India, Haryana
I read the whole discussion, and every thing posted was very correct legally and socially.
The main question of Govind is who is responsible, The whole onus of responsibility is on the Principal Employer for any non compliance of statutory requirements.
Sanjeev Kumar
14th August 2009 From India, Pune
Pricipal employer will be responsible For wages & their social security contributions if contractor fails to clear their dues or social security contribution.
Ajay Kumar Mishra

14th August 2009 From India, Delhi
At the outset it is your responsibility as PRINCIPAL EMPLOYER to ensure that the conbtractor appoited by you is abiding all the legal reqmts. Govt will catch you first when they see the records. Hence it is very much essential that before teh contacrt is awarded you must ensure that the contractpor is willing to abide with all statutory reqmts.
Thogh the law permits that you can deduct these dues form the bills of contractor afterwards.
Plesae refer to contract labour(abolition and regularation act)
Milind Naik
14th August 2009 From India, Mumbai
To answer your query the organization on who's payroll the employee in working will be responsible.
what you can do to get out of this mass is seek clarification from the contractor regarding the same. You can also make an amendment in the SLA for the same to again safeguard your Firm interest.
14th August 2009 From India, Mumbai
Hi, I agree with Mukesh thakkar, we also follow the same procedure. Our contractor submit copy of PF&ESI challan along with bill.
14th August 2009 From India, Kozhikode
Dear Govind,
I has gone through the above question and replies given by our better to collect the following documents with your contractor right now.
1) Contract registred licnece ( Department of Labour)
2) Agreement made by company & contrator
3) Half yearly returns.
4) PFcode no allotment copy.
5) ESIC code no allotment copy.
6) Service Tax registration copy.
7) PT registration copy.
8) Any policy's like ( Travel, Local conveyance etc).
9) Monthly salary register.
10) OT register.
Principal employer is resposiable for if contrator is not paid amount to depts. Right now conduct audit to your contractor ask him to produce all above documents and verify each and every thing if you found any fraud ask him to pay immediatly to dept.
14th August 2009 From India, Bangalore
Dear Govind,
1. Before signing the contract. Please check his PF/ ESI Licence. He should provide you with a copy of the same along with his quote.
2. He should provide you with a copy of the Chalan vide which he has deposited the PF/ESI for the employees working with you.
3. In case of the inspectors visiting your facility, it is your responcibility to account for all the employees including Contractual Staff. The Contractor will be approached later.
4. Thus always insist on getting the Chalans and study them thoroughly for the remittences of the people working with you.
14th August 2009 From India, Mumbai
Dear, Monitoring without periodically gap is must. Payment of ESI and EPF directly is better than payment to Contractor. JP Singh
14th August 2009 From India, New Delhi
According to act no contractor to whom this Act applies, shall undertake or execute any work through contract labour except under and in accordance with a licence issued in that behalf by the licensing officer.
so you should ask for license from your contractor.
14th August 2009
now my contractor didnt paid the pf and esi. eventhough we paid to him. from whom the government will collect and what action will be taken by the government for contractor and for employer
regards suresh
14th August 2009 From India, Madras
Hi As principle employer you are liable to pay the contributions if the contractor has not paid, and the authorities will initiate action on the principle employer.
15th August 2009 From India, Mumbai
Yes Principal Employer ( Your Company ) is responsible for that. If you want to avoid those problem you must to ask to your contactor Separate challan ( PF ) fill in bank , and ask for Annual return copy for your record. You conduct Audit every 6 monthly for all statutory compliance
PF you ask for 3A,9 12A.
ESIC ask for RC (which is 6 monthly submit )
Professional tax asks for calculation (if he pay combine) or ask him separately
Incase you have any query call me Sachin 09822027644
15th August 2009 From India, Pune
Hi Govind,
Of course contractor is going to be in trouble. While finalizing vendor you should have cross checked all necessary documents like licence et.. You can still ask for the same and challans month on month from the contractor for ensuring proper submission of ESI/PF.
supporting document is compulsory for accounts people release their PF, ESI bills. Hope you are collecting challans from the contractor every month.
Anyway you dont need to worry. Still i suggest you to cross check the necessary documents.
15th August 2009 From India, Bangalore
Dear Govind,
You can send an application to your nearest ESI/PF department regarding the PF/ESI amount has been paid to the contractor and said contractor still not deposited the ESI/PF of all workers who are engage in work with us since...........
This will confirm about employer liablity met with the requirements and you will be safe for future.
Be hold all ESI/PF for future trasection and even the contractor has taken ESI/PF amount from you and not deposited and ESI/PF dept will take care of this and they will send a legal notice to contractor.
Best Regards
Sajid Ansari-Delhi
15th August 2009 From India, Delhi
My dear In this case principal employeer is responsible i.e. it will be your responsibility to ensure contractor must deposit emploee P.F., ESI, Sunil Prabhakar Manager HR
15th August 2009
Dear Mr Govind

It is the primary responsibility of the principal employer to comply under the provosions of the ESI Act, 1948 in respect of all the employees engaged either directly or through an immediate employer(contractor) in the first instance under section 40 of the Act. Then Section 41 emplowers you to deduct the contributions from the immediate employer (contractor) from his bills or any amount payable to him. Suppose if the contractor is already covered under the Act with separate code No. they as a principal employer you have to insist the contractor to submit the copy of the challan, copy of Register of employees , wage sheet of the labour deployed at your site as provided under section 41(1A) of the Act. It is the mandatory and the principle employer can not escape from the statutory responsibility of the payment of contributions under any circumstances. A clear cut case of Honble A.P.High Court case is there in the case of M/s Bajrang Jute Mills vs ESIC.

The same position stands good in the case of PF also. Hence it is advisable to ensure the statutory compliances like ESI/PF before settling his claims.
15th August 2009 From India, Hyderabad
Before hiring a contractor few things you should follow
1. Application to labor commissioner in form 1
2. Contractor should have license to employee the contract labor
3. He is registered under ESI,PF
4. While submitting monthly bill he has to submit the Xerox copies of PF,ESI payment challan
5. With above you can also ask for xerox copies of PF form 2 and ESI form 1
Precaution is better than cure
15th August 2009 From India, Bangalore
You have been correctly advised by R. Dinesh. To be on the safe side, also get an Indemnity bond signed by the contractor, indemnifying the Principal employer against any claims towards payment of P.F, ESI dues etc.
Remember, in practically all the labour enactments, the contractor labour is included as an 'employee, a workman, or a worker'. Finally, it is the Principal employer's duty to ensure that the Contractor has fulfilled his statutory obligations. If not, the Principal employer becomes liable.
15th August 2009 From India, Nagpur
i agree with Cyril. Dnt take risk and run away with the duty. Always the principal employer becomes liable in such cases. Cirus
15th August 2009 From India
Hi,being principla employer you will be responsible if your contractor default in paying his employees PF/ESIC.
To be on the safe side ask the contractor to submit the previous months PF/ESIS payment challan69 before releasing his current bills.
15th August 2009 From India, Mumbai
The principal employer is responsible for the contractor's employees, if contractor not coply, the you hold the 10% amount from his bill, then the contractor deposit esi and pf on the stipulated time then you release the said payment. the contractro must have the seprate code PF & ESI,
15th August 2009 From India, Chandigarh
If the contractor is employeeing more than19 workmen, it is mandatory for him to have a licence from Labour Deptt. Otherwise in case of industrial dispute, all employees will be treated as principal employers emploee. Please ensure he has licence issued by Labour Deptt, as per Contract labour Act & regulations.
For PF & ESI, please ask the contractor to submit copy of monthly challan as proof of deposite, to your organisation before clearing his bill. Also ask the contractor to show his registration certificate with PF & ESI authorities. Alternatively you can directly deposit the PF & ESI dues and deduct the amount from his bill
S K Sinha
15th August 2009 From India, New Delhi
Hello GovindSuresh & others. Both the PF and ESI Act cast the responsibility for compliance of PF & ESI on the Principal Employer. However, where the contractor complies with the provision the principal employer is free of this burden. Hence the principal employer must insist on PF and ESI challan with respect to the contributions paid by the contractor for his labour with each bill. However, where the contract with the contractor is a contract for service (i.e. contract defines performance in terms of the output and not on the number of contract labour deployed and their attendence) it will not be possible for the principal employer to verify the contribution paid. In such cases the PF & ESI registration of the contractor comes handy. Where the PF and ESI codes are with the contractor he becomes a seperate establishment in itself diistinct from the principal employer and that would a valid defence when the PF & ESI authorities raise the issue of contribution.

Ehically, the principal employer shall verify from the contract labour whether they are getting ESI facility and also seek the copy of six monthly return of the contractor and get it exhibited at the work premises. Once you are making payment to the contractor reckoning PF & ESI liability, let the contractor not unduly profit himself at the expense these hapless labour.


16th August 2009
During one of the training programmes being conducted by me, one of the participants shared his experience about the coverage of employees under the Provident fund Act. He informed that there are contractors who show a different set of workers for coverage under PF. Therese persons are their family members and their relations. The actual workers, who are working dont get any benefit. This, I am told operates as a racket, with the connivance of Inspectors etc.
I wonder if any one from this Forum has come across such reports.
16th August 2009 From India, Nagpur
In case of any non-compliance, you as the Principal Employer will be responsible.
EWhenever you hire employees through a contractor, or hire a Contractor to do a job, please ensure:
1. He has registered himself under the ESI & PF Acts and has Code No.s for both...ESI & PF. Ask the Contractor to submit photocopies of the same. Validate the copies by verifying the same against the original letters from the ESI & PF Authorities wherein the Contractor has been allotted Code No.s.
2. Ask for documented compliance monthwise, before releasing his payments each month. In the current month you can ask for compliance for the previous month...Copies of Challans validated against the originals will be the right thing to do.
Remember, if there is any kind of violation, the Principal Employer will be held resposible and liable.
Remember too, that compliance under the Contract Labour (Regulation & Abolition) Act, is also mandatory.
Vasant Nair
16th August 2009 From India, Mumbai
Dear Mr.Govind
Based on your querries:
1. Have your establishment taken labour licence to engage contract labour to engage contract labour under contract labour act
secondly if the manpower supply contractor is having valid labour licence from labour department ?
Has the contractor having own ESI & PF code numbers?
If so please take a letter from him he is solely responsible for making statutory payments like ESI & PF for the personnel worked in your establishment and take a xerox copies of ESI & PF challans from him and keep the same with you for any inspections like (PF/ESI)
Thirdly even if he doesn't do the above, you can deduct the PF/ESI contributions amount from out of the bills payable to him and cover them under your company code from the day one onwards.
Hope the above clarify
Tks & Regards
17th August 2009 From India, Hyderabad
First see weather the contractor is a registed contractor, Ask you contractor to give the PF & ESI challan monthly with a letter stating that this challan inclued the PF amt of the workers & tak the list every one. if contrator fails to pay the Pf & ESI the liability vests to your Company. the challans of PF & ESI shluld be their also, if the Inspectors of the concern department visit for inspection they will surely ask for the same to u first.
17th August 2009 From India, Mumbai
Dear Govind,
The simple answer to your question is only principal employer, means you are totally responsible for non-payment of the dues. As a principal employer, it is your duty to confirm that the contractor follows all statutory compliance. So, First you get copy of pf & esi registration from the contractor. Make all labour payment in front of your company representative. If possible, deposit the PF & Esi contribution directly in the concerned authority. Any way, as principal employer, you are entirely responsible for everything.
Thanks ,
shiv kumar
17th August 2009 From India, Delhi
Hi Govind & friends,

End of the day Principal Employer( PE) is liable for all non compliance of contractor. So, periodically PE should review his challans submitted with appropriate authority.

Befor enggaging contractors following facts should be considered always.

----Bfor awarding contract to contractor----------

Principal Employer's nature of business should not be same as contractor's.

Contractor should have PF & ESIC codes, verify the same with pf & esi deptt.

Principal employer must obtain a registration under CL(R&A) Act 1970.

Issue Form V to Contractor.

Submitt Form VI-B with appropriate Authority for commencement or completion of work.

--------Post awarding contract------------------

Ensure, contractor should obtain License under CL(R&A) Act 1970

Periodically verify the challans of PF, ESIC, LWF if applicable, Wage register, OT register, fine & advance register,

Form XII should be maintained by PE

Ensure that Contractor should submitt Half yearly return in Form XXIV

PE should send their Annual return in Form XXV

Do not supervise the labour of Contractor directly to avoid Employer & Employee relationship.

Do not issue similar I-Card, Appreciation letter or any communicatin on letter head of Co. to contractual workman.

Sign off Wage payment register that salary was disbursed bfor 07th of month in presence of management representative.

Ensure your contractor should comply with all labour laws applicable to him else PE will be responsible for same.

Ensure your contractor should have issued I-card, appointment letter, payslip, PF & ESIC a/c No. to all their employees enggaged by him.

17th August 2009 From India, New Delhi
The principal employer is bound under the acts on PF,ESI and CLRA to ensure that the contractor employed has followed the relevant rules under the acts in respect of the persons employed by him for the principal employer.Merely by giving the amount to the contractor will not make the principal employer free from his duties.
17th August 2009 From India, Kolkata
HI,govind you are the principal employer have the legal liablity and right to get secured the personnels working with in your premises. your company have all the rights to verify the contractor crediblity with the ESI&PF office and with labour commissioner periodically or whenever you want at hte interest of the RISK on your co. LEGAL LIABLITY.
IF abny thing found guilty you can itake it to the knowledge of the respctive authorities, failing to which you are the joint responsiblity if any thing misfortune.
nagarajan. agent advisor, cholamandalam general ins. and SBI LIFE INS.
17th August 2009 From India, Madras
Make a schedule of the contarctor to submit their record and ask every body about original record like ESI PF PT LWF challans and put xerox after inspection with you. Ask every body to pay saperate challan your unit. Some contractor not paying for the particular unit and showing that we are paying all sites challan one time. Do not put faith on him ask him about saperate challan only. Principle Employer is responsible for every payment of statutory. so keep watch on every body.
within inspection you can understand all the rules & regulation. Some contractor are paying less to his employee and showing as per rule in wage register. conveyance & travelling allowance is most adjusted amount you can find in this section.
Thanking you
if you have query please contact me.
17th August 2009 From India, Pune
Dear Shiv,
Thanks for comprehensove reply. Can you please explain two terms in your reply.
Do not supervise the labour of Contractor directly to avoid Employer & Employee relationship.
Do not issue similar I-Card.
We are planning to take 25 sales staff across India through contractor.
What all documntes we should take from contractor and which records are to be maintained by us.
We would be tracking their attendance only, rest would be managed by contrcator
17th August 2009 From India, Delhi
If the contractor is employeeing more than19 workmen, it is mandatory for him to have a licence from Labour Deptt. Otherwise in case of industrial dispute, all employees will be treated as principal employers emploee. Please ensure he has licence issued by Labour Deptt, as per Contract labour Act & regulations.
For PF & ESI, please ask the contractor to submit copy of monthly challan as proof of deposite, to your organisation before clearing his bill. Also ask the contractor to show his registration certificate with PF & ESI authorities. Alternatively you can directly deposit the PF & ESI dues and deduct the amount from his bill
S K Sinha
17th August 2009 From India, New Delhi
My opinion in this regard is,
Firstly as a employer its your responsibility that you make an agreement with the manpower contractor after verfying all the legal formalities like, whether the contractor ws registered under the labour law, pf, esi and other mandatory policies of the state/central govt. once the employer found that the contractor is registered , then, need to make an agreement that the employee is not liable for any statutory laws like pf, esi, gratuty, bonus etc. now, in your case, as said by some of our friends that in case if your agreement says your not liable for any statutory laws, then your contractor is liable, other wise you are liable. please correct me incase if I have said something wrong.
21st August 2009 From India, Hyderabad
MR.GOVIND It is your responsiblity to check and clarify. At the end of the the day you are answerable to govt. You have all the rights to check and clarify with govt. authorities and in turn they will be in alert on the contactor to correct if anything found guilty.
S. NAGARAJAN ,Agent advisor, 9884396009
22nd August 2009 From India, Madras

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