What Happens When Contractors Skip PF and ESIC Registration? A Look at Employer Challenges

Issues Faced by Principal Employers When Contractors Fail to Register in PF and ESIC

If a contractor does not register in PF (Provident Fund) and ESIC (Employees' State Insurance Corporation), the principal employer may face several problems:

• **Legal Liabilities:** The principal employer might be held responsible for any non-compliance with statutory requirements, leading to legal penalties.

• **Financial Penalties:** There could be financial repercussions, including fines and interest on unpaid contributions.

• **Reputation Damage:** Non-compliance can harm the company's reputation, affecting business relationships and employee trust.

• **Operational Disruptions:** Legal and financial issues can lead to operational disruptions, impacting overall business performance.

It's crucial for principal employers to ensure that their contractors comply with all statutory requirements to avoid these potential problems.

If a contractor does not register for PF and ESIC, then all the problems from laborers/employees, including accidents, termination, PF, and ESIC, will make the principal employer responsible. The principal employer would be responsible for each and every employee through the contractor.

Regards,
Beena

As per the Indian Contract Act, if any establishment is to engage contract labor, they must apply for a license, and a copy of the license shall be provided to the contractor who will be carrying out the contract work. Subsequently, the contractor should apply for a license to provide services to the principal employer. If the contractor does not possess a valid license, the principal employer is liable for all future liabilities.

Best regards,
Chandrashekar
Bangalore

Thank you for your reply. Could you clarify whether laborers working under a contractor do not work for a long time or on a permanent basis? How will they utilize this facility, and will the PF or ESIC deductions be monitored?

With regards,
Suborna

For the purpose of coverage and ESI contributions, the definition should be as per the Factory Act. With regard to PF, it should be as per the EPF Act. The service period may vary, ranging from short to long.

Best regards,
Chandrashekar
Bangalore

It is desirable that the contractor be registered with authorities under the PF & ESI Act and have his own code so that he has direct responsibility and accountability for compliance with the provisions of the said statutes. This is notwithstanding the fact that the ultimate responsibility lies with the principal employer, as the definition of a worker under the said Acts includes the worker indirectly engaged through an agency.

If the contractor has registered himself under the said acts, you can always contend that the contractor is an independent entity with his own establishment, employees, and direction and control of his employees lying with him. The principal employer is concerned with the ultimate result/outcome of the contract work assigned to him, and it is up to the contractor how and in what way he gets things done from his employees. However, it should be ensured that the principal employer has no say in the matters of recruitment, supervision, and disciplinary matters of the contractor's employees.

If a contractor does not register his contractual company in the Provident Fund or under ESI, then if any accident occurs or any benefit needs to be given to an employee, it cannot be made under the scheme. It will be the liability of the principal employer to be held responsible if the contractor is not registered under the act. Benefits cannot be obtained. Therefore, it is better and safer to fulfill the statutory obligation on the part of the contractor to register his company under the act.

Regards,
R. Devarajan

Sir, we have been working since 2001. Our contractor does not register us under ESI and PF. There are a total of 430 employees working with me. What should we do? What are the responsibilities of the contractor and principal employer under the ESI and PF scheme? Please guide us.

Dear Devashish,

Since 2001, if your contractual employees are not covered under PF & ESI by either the Contractor or the Principal Employer, then it is a serious matter. In the absence of proper compliance by the Contractor under PF & ESI, it is the responsibility of the Principal Employer to take care of the same. The total number of employees is 430, and the liability will be significant. Please take this matter seriously and do the needful. I am from Kolkata.

Thanks & Regards,

S. K. Bandyopadhyay
USD HR Solutions
Email: skb@usdhrs.in