Umakanthan53
Labour Law & Hr Consultant
Saswatabanerjee
Partner - Risk Management
Drbijoy
Med. Superintendent
Raghunathmr
Principal Scientist
+1 Other

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Labour contractors are obligated normally to pay minimum wages as applicable to the type of job and the minimum wages mandated by the State or Central govt. In addition to the minimum wages, ESI and EPF are also charged. However, I am not aware if there is a minimum mandated charge for the services provided by the contractor. This is separate and not to be confused with the service tax which is mandated by the govt.

The reason I am posing this question is some labour contractors are not charging any amount for their services and quote the minimum wages plus ESI, EPF, Service tax etc. But, the organization which accepts such service from the labour contractor nevertheless deducts 2% as Tax deducted at source (TDS). So, if we back calculate, the law on minimum wages would have been violated. Please enlighten me if the labour contractor is obligated to charge a minimum amount for the service provided.
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Dear Ragunath,
I think it will not be possible to put legal restrictions on the service charges leviable by a contractor. Any work involving manpower can be accomplished by varying the no of workmen and it depends upon the methods of work, effective utilisation of manpower etc. But when the very contract itself is based on the no of contract labour to be engaged and not merely the output of work, if no service charges are levied by the contractor, then there must be something foul. The Principal Employer normally knows the cost of labour of any work out-sourced. Therefore, he should weigh the rates quoted by different prospective contractors for the same work in a proper perspective.
Many thanks for the reply. I had suspected that this is a grey area. But your advice on the second part is very much valid and I intend to apply it wherever possible.
The contractor may or may not add a separate Service Charge component while submitting the quotation for the work to the Principal Employer. It is the duty of the Contractor to pay Minimum wages + PF + ESI, etc. The Service Tax component has to be added separately at the time of Billing. The Principal Employer deducts a 'token' 2% as TDS and deposits in the Treasury under the understanding that the Contractor would deposit the Service Tax as per Rules. Check out the break-up of the Bill Amount submitted by the Contractor.
Dear Bijoy,
It is not about the service tax, but about the service charges to the contractor the query revolves around. The token 2% deduction at source is the income tax payable by the contractor I think.
Why would a contractor work free or below cost.
So :
1. Are you present during payment of wages (mandatory)
2. Are you ensuring correct wages are paid ?
3. Check the attendance and days paid. They would be marking people as absent to reduce the salary while keeping the rate charged to you as full.
4. Are they paying PF and ESIC dues as required ? Do all people have PF numbers and ESIC cards ? Also call the contractor and ask him to log into PF portal to check whose names are in the records.
5. Are they working 12 hour shifts and 30 days a month ? Both of which are illegal, but cheaper for contract.
6. Is any money being deducted for uniform etc which is not allowed under payment of wages act.
Incidentally, service tax can not be charged by the contractor. It has to instead be computed and paid by the principal employer as "reverse charges"
Dear Raghunath,

It is a common practice by may contractors to charge on several heads- minimum wage, PF, ESI, Bonus, Leave pay, Gratuity etc. monthly basis but no service charge ( not service tax as per law) for the services provided by them. What they do - pay less to labour, pay less to PF & ESI contribution, Never paid leave pay, gratuity etc. and manage the profit. Saswata Banerjee has already mentioned the control part from PE's side. It is essential to check the every month actual payment to labor and PF & ESI Authority before processing the invoice. Also please keep in mind that Service Tax as per law is now the responsibility of Principal Employer to deposit 100% in case of any manpower service charges invoice. The ideal condition may be :

Actual wage( obviously minimum or above) + Employer's portion of PF & ESIC contribution + service charge ( per labor per month or % basis based on negotiation) less TDS at source 1 or 2% as the case may be. Let suppose the minimum wage 7000/- per month ( break up 6000/- basic & DA + 1000 HRA) + PF employers contribution 13.36% = 802/- + ESIC employers contribution 4.75%= 333/- + Service Charge say 7% of gross = 570/- = Gross Invoice- 8705/- less TDS say 2% = 8531/- net. After paying properly to labor and then depositing proper PF & ESIC Contribution, there will be some profit to contractor.

Trust this will clarify your query.

S K Bandyopadhyay

USD HR Solutions

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+9198310 81531


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