Are Contract Employees on Payroll Legally Compliant? Seeking Clarity on ESI, PF, and More

My company employs certain people (such as civil engineers, fitters, operators, supervisors, etc.) on time-bound contracts for specific projects who work in their individual capacity and not through any third-party contractor. These people are not field labor. They are being paid through the normal payroll system of permanent employees and even have employee IDs. They do not raise any monthly invoice per se. Their remuneration consists of a normal salary breakup such as Basic, HRA, and other allowances. The company is even deducting PF & ESI for such people.

My Query

1) Is this legally allowed?

2) Is my company supposed to deduct ESI/PF for them?

3) Won't these people be covered under the CL Act?

4) If yes to (3), do they need to have a CL License individually?

5) What will be the status if the contract expires? Are they deemed to be permanent employees on the expiry of the contract?

6) What are the legal repercussions in case they continue to work and get paid despite the contract being expired?

7) Are there any other potential violations in this kind of setup?

Any guidance would be greatly appreciated.

Regards,
Vivek A.

Dear Mr. Vivek,

Fixed-Term Employees and Legal Considerations

The workmen/employees referred to by you are usually called "fixed-term employees."

Item No. 1: Legal Permissibility

This is legally permissible subject to the following condition:

- If the company or "industrial establishment" is one to which the Industrial Employment (Standing Orders) Act is applicable and if these employees referred to by you are also "workmen" as defined under section 2(i) of the Industrial Employment (Standing Orders) Act, then the certified standing orders applicable to your "industrial establishment" should contain a sub-clause "fixed-term employees" in the clause relating to the classification of workmen in the certified standing orders.

Item No. 2: ESI and PF Deductions

ESI and PF are to be deducted subject to the provisions of the respective laws.

Item No. 3: Coverage Under C.L. (R and A) Act

They are not covered under the C.L. (R and A) Act as they are not engaged through a contractor and are employed directly by the company.

Item No. 4: Applicability of C.L. (R and A) Act

Not applicable in view of the response to item No. 3.

Item No. 5: Employment Beyond Contract Period

If they are employed beyond the period specified in the fixed-term contract, they will continue to earn wages/salary for the extended period according to the terms and conditions agreed upon already. They cannot claim permanency. This is subject to the condition that there are no laws which regulate the grant of permanency to the worker being employed for a particular number of days during a specified period of years. I am not referring to the 240 days referred to in the Industrial Disputes Act. For example, in Tamil Nadu, there is a law called the Tamil Nadu Industrial Establishments (Conferment of Permanent Status to Workmen) Act 1981. According to this Act, if in an industrial establishment to which the Tamil Nadu Industrial Establishments (Conferment of Permanent Status to Workmen) Act 1981 is applicable, a worker who has worked for 480 days in a period of twenty-four calendar months becomes a permanent worker of that industrial establishment. So, if there is such a law in your state and if the conditions specified by that law are fulfilled, these "fixed-term employees" may claim and will get permanency even though they have worked as fixed-term employees.

Item No. 6: Further Clarification

Answered in Item No. 5.

Item No. 7: Other Considerations

No other major issues regarding such employment.

With regards,

Dear Mr. Harikrishnan,

Can such fixed-term employees continue to work by signing a fresh agreement every year? If they work continuously for 6 years, are they eligible for Gratuity? Please explain.