shaswati Datta

Hello, I have a situation. Need help to sort this out. Ours is a manufacturing company. I am new to this co. We have outsourced workers (80 so far) on third-party payroll. When i asked about Labor Contract, they told me that since they are only disbursing salary and not doing the recruitment they don't need to get the license. We, the co need to get a Labor license instead. They are not charging Service charges and Service Tax. They charge us at a flat rate per person. They don't give any joining letter. They, however, comply with the ESI and PF part with their own registration no.
My question :
1. Though they are only disbursing salary, these workers are their employees, don't they have to get a Labor License?
2. Isn't it mandatory to give an appointment letter or a joining letter?
3. Shouldn't they pay service tax?
Please help to clear my doubts.

From India, Calcutta
Shaswati Datta
Hr Professional
Hr / Business Consulting
Human Resource

Use factoHR and automate your HR processes

Mobile-first hire to retire HR and Payroll software that automates all HR operations and works as a catalysts for your organisational growth.

Hi Shaswati,

If they are using their own registration number for PF and ESI process, the candidates are on their rolls. In this case

1. It is mandatory to get a Labor License (if associates are more than 20)

2. Necessary to issue an appointment letter with all terms and conditions

3. Must pay service tax

• You should check if they are charging the amount including service tax. Or just ask then their Service Tax number and cross check with ST department if they are paying this.

In other case

If they don’t use their own Registration numbers for PF and ESI means just filling the forms on behalf of you, using your company’s registration numbers; and their work is limited to Salary calculation and disbursement… Its just a process outsource.

In this case they don’t need to have labor license nor to issue any offer/appointment letter. But they need to pay the Service Tax.

To all readers: Information above is as per my knowledge. If any thing is wrong/missing here, kindly update me as well…

For more queries feel free to contact…

-- Dhruv

From India, Ahmadabad
shaswati Datta

Thank you Mr Joshi for your response.
Can you please tell me which law or act i should refer to while addressing this issue to the third party as well as the Management of my Company?
The owner of the outsourcing agency argued with me that he found out from the contract Labor office and the officer there told him that since he is not doing the recruitment, our company will have to take the Labor License in our name. Just wanted to verify if it's true.
My argument was, since the legal formalities (PF, ESI & P. Tax, they have their own registration number against each)are maintained in their name they should issue appointment letter to the employees outsourced and they should get a Trade License in their own name.

From India, Calcutta
Dear Shaswati,

Greetings for the day.

In any case either it is “Recruitment + Payrolling” OR just “Payrolling”, It is necessary that the Contractor has valid license

Please refer Contract Labor Act 1970 and Rule to your management and the contractor.

• Before going to further discussions please check if your company has obtained “Registration from Central Licensing Authority” to use the services under Contract Labor Act. Any company/firm cannot have the contract staff without getting registered. Also, your company must have a valid Legal Contract with the contractor

• After getting registered the principal employer (your company) issues Form 5 to the contractor

• After which contractor Applies for the license, using Form 5, Form 4, Legal Contract and other required documents.

• Finally a license will be issued to the contractor for 1 year.

Please note that The Contractor obtains license to provide services; the principal employer just need to get registered to use the Contractor’s services.

I suggest, if your company already has the necessary registration, please arrange a meeting with Licensing Authority. He will explain all the process.

For any more queries, please feel free to contact.

*If any reader has more info/updates on this topic, kindly share the same*

Kind Regards,



From India, Ahmadabad
Hi Shaswati,
Would like to know some details:
1. Your company name
2. Contractor name
3. Location of your company and contractor
Just wanna study this case deeply.
Only if you feel secure in sharing the details, kindly email on
---- Dhruv

From India, Ahmadabad
shaswati Datta

Thanks Mr Joshi for explaining the procedure.
I did refer to the Contract Labor Act 1970 and found out the procedure. I also found out the status where we stand now regarding this issue.
Our Registration procedure as a Principal employer is half done. The contractor hasnot taken a license either. Thus I know exactly where we stand now and what I have to do.
First, we will have to apply for registration of establishments employing Contract Labour (FORM 1) and get the registration done.
Then in Form IV, Application for License, the Contractor will fill in his details and submit for the License along with Form V which we will issue to the Contractor as the Principal employer.
The first hand legality gets completed thus for one year.
Next year, the contractor will apply for renewal of license in Form VII.
That would take care of the situation i suppose.
Please correct me if I am missing some points somewhere.

From India, Calcutta
Hi Shaswati,
The procedure you are going to follow is all right.
But please note that once contractor gets license, the labor officer will inspect quarterly, it will be now principal employer’s responsibility to maintain registers in all 7 formats as per the CLA.
Any mismanagement may lead to legal action.
--- Dhruv

From India, Ahmadabad
shaswati Datta

Thanks Mr Joshi for your support.
Please claer me out, I had an idea that the 7 registers are to be maintained by the Contractor since employees transfered on third party payroll are their employees. We as Principal employer will only do the record keeping collected at the end of every month from the contractor.

From India, Calcutta

Dear Shaswati,
Theiritically you are correct, but understand this that the labour inspector will always ask you and not the contarctor for all these informations. So, you pl maintain all these registers as advised.
If it is a process outsoursing then all the employees will be on rolls of your company. So, find out whether all these emplyees are on your rolls or not. In thsi case he is not supossed to have licences and register as per the Contract Labour (R&AL) Act.
If they are not on your rolls then they are contract labour on rolls of the contractor, so they have to comply with all procedures of the act.
So, ask your managment body whose employee are they and then act accordingly.

Hi Shaswati,
At first, wishing u a very Happy Diwali.
I could not reply immediately as I was on long leave.
Now on to the topic…
You are very right that maintaining those 7 registers is under Contractor’s responsibilities.
Technically: The contractor can only provide you registers, keeping records are in your work area.
And as you already know about Govt Officers in India. Some are good while some are exceptionally terrible. Here I’m not saying political words; it’s a true fact.
Any mismanagement will affect both the contractor and the principal employer.
So it’s good to keep things going legally and well managed (at least as far as possible).
For further queries, feel free to write…
----- DHRUV

From India, Ahmadabad

If you are knowledgeable about any fact, resource or experience related to this topic - please add your views.

About Us Advertise Contact Us Testimonials
Privacy Policy Disclaimer Terms Of Service

All rights reserved @ 2022 CiteHR®

All Material Copyright And Trademarks Posted Held By Respective Owners.
Panel Selection For Threads Are Automated - Members Notified Via CiteMailer Server