Navigating Principal and Contractor Roles: How Can I Clarify This Complex Relationship?

Seniors,

I request your guidance on the below-mentioned issue.

The principal employer has outsourced all its business activities like sales, collections, etc., apart from administration and other back-office works to another company, say the contractor.

(a) The directors of the contractor company are employees of the Principal company.
(b) The appointment letters, salaries, etc., are processed, and the cheques are signed by the employees of the principal company.
(c) All the contract employees are controlled and supervised by the employees of the Principal Company.

The Principal and the contractor companies are group companies. There are no employees in the managerial cadre in the contractor company, and all decisions regarding the company are taken by the Board, which again comprises employees of the principal company.

I need guidance on how to sort this out and establish a clear principal and contractor relationship.

Requesting all your help.

Regards

1. Is it a case of merging of two companies as it is understood from your mail?

2. I would like to know if the employees of the contractor company, while getting merged with the principal employer, were issued appointment letters.

3. If not, what are the conditions under which they merged with the principal employer?

4. To clear and streamline everything, I suggest issuing new appointment letters to the employees of the contract company, clearly mentioning therein the reporting structure.

Dear,

Here, the contractor does not have any control over the employees. The principal employer gives direct instructions to the contract workers, and the principal employer supervises the contract workers. In this condition, all employees belong to the principal. The contract is just an eyewash.

Thank you.
J. S. Malik

Correct, Malik. This is why I want to have all your suggestions on how to set this right to make the contractor-employee relationship clear.

Regards

Dear HR professional,

These issues are governed by THE CONTRACT LABOUR (REGULATION AND ABOLITION) ACT, 1970. The definition of "contractor," in relation to an establishment, means 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 and includes a subcontractor.

"Principal employer" means - (i) in relation to any office or department of the Government or a local authority, the head of that office or department or such other officer as the Government or the local authority, as the case may be, may specify in this behalf, (ii) in a factory, the owner or occupier where a person has been named as the manager, the person so named, (iii) in a mine, (iv) in any other establishment, any person responsible for the supervision and control of the establishment.

In the instant case, for establishing a clear Principal-Contractor relationship, let's browse the positive aspects: The two companies are different legal entities.

Now, let's see what's not going well: A common employee with the Principal is issuing letters of appointment, making payment of salary through cheques, physically controlling and supervising the contract labour. It would be very easy to establish that the contractor and the Principal Employer are one and the same.

The aspects which are not clear from your description are:
- Has the Principal Employer obtained Registration under section 7 of the Act?
- Has the contractor obtained a license under section 13 of the act?
- Is the job outsourced the one where the deployment of contract labour is abolished?

My suggestion is:
a. Both Principal and Contractor should establish their exclusivity in all respects of service matters, control of employees, and supervision.
b. Principal should enter into a contract for "Producing results"; i.e., define results or jobs to be done and measures/metrics of performance. Also, agree on audits; checks by contractor should be built-in.
c. Employees of Principal should desist from corresponding with, controlling, or supervising employees of the contractor.
d. Results produced as per metrics should be measured, and the contractor paid as per the agreed scale. No direct payment should be made to employees of the contractor.
e. The contractor shall pay salaries/wages and remit all applicable statutory benefits, such as PF, ESI, insurance, etc., under his company's letterhead, to concerned authorities. The representative of the Principal Employer shall witness wage payments and certify accordingly. Alternatively, payments can be released through the bank.

Hope this is helpful to you.