Navigating Job Contracts: What Are the Legal Responsibilities of a Principal Employer?

Sir,

I am in a government organization (herein referred to as the principal employer) and we have around 10 job contracts with various contractors. Five contractors are employing 15 to 20 personnel, and the remaining five are employing more than 30 employees. All these contract workers are working in the premises of the principal employer every day from 0900 hrs to 1700 hrs. I would also like to mention that my government department is not registered under the Factories Act as the number of permanent employees is less than 30. Since I am new to this assignment, I need clarification on the following:

(a) Whether the Principal Employer has to get registered with the labor commissioner for a license even though it's a government organization? If this government organization is a defense organization and a prohibited place, then what are the orders on this subject?

(b) Is it necessary for the contractor to have a license under the Contract Labor Act?

(c) Other than the salary, what other payments does the contractor have to make such as EPF and ESI? Is this amount that he pays to the employees supposed to be reimbursed by the principal employer? If yes, how?

(d) If the contractor fails to pay the EPF and ESI, is the principal employer liable to pay the same? And how is the contractor to be penalized?

(e) Can you email me a sample copy of a contract that is to be awarded (interested in the legal language - how to ensure the Contractor has a license, how he pays EPF, ESI, and how he shows the proof, the penalty clause if he fails to pay them, medical insurance, etc.)?

Thus, you can see that I am totally ignorant about these contracts, and so are all of them in my establishment. We have been doing this for 3-4 years, but unfortunately, nothing has happened. But now that I am aware that such a thing exists, we want to be sure that we correct our mistakes.

Dear Sabirafrin,

With regard to paras (c) and (d), I would like to add some insights regarding ESI. Generally, there is a standard thumb rule in respect of the contractors - to maximize profit by minimizing whatever is possible under the contract. Although I may sound a bit pessimistic, this is the real fact.

Generally, most of the HR personnel just check whether the monthly statutory payments have been made and whether the remittance challan is produced. The area where the HR fails is whether the quantum of the amount remitted is in tandem with the labor bill raised by the contractor. For example, the bill submitted for a particular week might be, let us say, for 2 lakhs and the contractor also submits a challan for Rs. 1250 towards ESI contribution remittance. Assuming he operates at a margin of 15% (a margin above this level makes the company imprudent), his payout should be (bill amount minus profit) i.e. Rs. 1,70,000. Now, at a rate of 6.5% (ESI Contribution Rate), the contribution should be Rs. 11,050, whereas the contractor submits a challan for Rs. 1250 only, thereby evading Rs. 9800. This discrepancy often comes to light after say 2 years when an inspector from ESI comes and verifies the records, by which time the contractor may have fled.

For ESI, if it is a pure labor/manpower contract, deduct or instruct the contractor to remit the contribution on around 2/3rds of the bill amount. This is the thumb rule followed by the ESI authorities and could save the company from future shocks.

Also, read Sections 40 to 44 of the ESI Act with reference to your question.

Bye,
Ramesh

From the write-up, it is clear that you are engaging more than 20 employees through different contractors. Therefore, in the first instance, you have to obtain registration under the Contract Labour (Regulation & Abolition) Act. Secondly, please count the number of employees being engaged by each contractor. If any contractor employs 20 or more employees, then that contractor should have obtained a license to engage employees on a contract basis. This license (issued to the Contractor) is renewable every year, though the registration to be obtained by the Principal employer need not be renewed.

From the post, it is not clear what activity is being carried out in the department. If any manufacturing process is being carried out, then you should have obtained registration under the Factories Act as well because your number of workers, including workers engaged through contractors, exceeded 10. I do not know why there is no such registration.

If your department is covered by ESI and EPF (not the government Provident Fund but the Employees Provident Fund governed by the Employees Provident Fund and Misc. Provisions Act, 1952), then all contractors should have ESI and EPF registration. On the other hand, if your department is not covered by ESI and EPF, then there is no need for the Contractors to have ESI and EPF just to employ workers in your department.

If so covered, it becomes the responsibility of the Principal Employer to ensure that the Contractors have remitted all ESI and EPF contributions in respect of all employees engaged by them in your department. It is also the responsibility of the Principal employer to ensure that the contractors have paid at least the minimum rates of salary fixed by the government as per the Minimum Wages Act and paid the salary on time as per the provisions of the Payment of Wages Act.

Regards,

Madhu.T.K

Well explained sir, but I have some suspicion about your point regarding the applicability of ESI and EPF. You mentioned that if a department is not covered by ESI and EPF, then there is no need for the Contractors to have ESI and EPF just to employ workers in that department. It is not mandatory for the principal employer to ensure compliance.

Suppose a contractor has employed more than 20 employees and has not obtained a code, and even the principal employer, as mentioned above, follows government PF rules and not PF & Misc Act or ESI as the case may be. So according to you, there is no need to comply.

However, by virtue of the applicability of the PF Act and ESI Act, it is applicable to any establishment in which 20 or more persons are employed.

In view of this, who shall be responsible for non-compliance? Because based on both Acts, to the best of my knowledge and understanding, in the first instance, the principal employer is liable for any default in non-compliance or breach of rules, although they have the right to recover the same from the contractors.

You have mentioned in the next paragraph that the principal employer shall ensure compliance of the contractors.

Could you please clarify?

In the first instance, in order to ensure that the contractor's workers are covered by ESI/EPF, the principal employer should also be covered by ESI/EPF. If the principal employer is not covered due to any reason whatsoever, the employees will not be covered. Therefore, employees engaged through a contractor will not be covered. The coverage of ESI and EPF is primarily for the establishment, and it is not possible to obtain coverage solely due to the engagement of contract employees.

Regards,
Madhu.T.K

What if the principal employer is covered, being a manufacturing concern and engaging more than 50 workers, but their contractors, who have also employed more than 20 workers, have not gotten themselves registered? Should the principal employer deposit the PF of these contract workers in the same license meant for their own employees or obtain a separate license as a contractor to avoid any potential litigations?

Furthermore, if the employer uses their own license to deposit PF, can a contractor worker claim to be treated as an employee of the principal employer before a court of law?

If the contractor has no ESI or PF registration, the principal employer can enroll the contract workers under his ESI or PF rolls, as the case may be. By this act, the workmen will not become workers of the principal employer since the amount of contributions is not borne by the principal employer, though paid by him at the first instance and recovered from the contractor later on as a deduction from the amount payable to the contractor. To be on the safer side and for the convenience of accounting, it is advisable to use separate challans for depositing the contributions.

Regards,
Madhu.T.K

Many thanks for your advice. Yesterday, I was going through another link on a related topic where different views were shared by the participants.

18598-contractor-liabilities.html#axzz1BBHNZnNf

Regards,
J.V. Mishra

Dear,

Please see the ESI Circular reference in the following link for more information: https://www.citehr.com/285737-legal-...#ixzz1BHj8UDqB. The liability can be accordingly fixed.

With Regards, Advocates & Notaries & Legal Consultants
E-mail: rajanassociates@eth.net
-9025792684-9025792634

Dear Sir, we are a mechanical construction organization and take on projects at various locations throughout the country. I would like to know if, in the case of the absence of a labor license under the Contract Labour Act of 1970, our labor subcontractor can apply for EPF and ESI registration. They have CST registration and have been issued a work order. Please guide.

Regards,
Agmayekar
Artson Engineering Limited
11th Floor, Hiranandani Knowledge Park, Technology Street, Powai, Mumbai - 400076
Tel. +22 66255622 / [Phone Number Removed For Privacy Reasons]