Is XYZ Ltd. Responsible for PF and ESIC Deductions for Job Contractors' Workers?

Applicability of Contract Labour Act & PF Act

XYZ Ltd. is a Solitaire Cutting & Polishing company. It outsources its job work to job contractors to manufacture at their premises. The job contractor takes rough Solitaire from XYZ company's office. The job contractor cuts & polishes the solitaire in their own factory premises located in various districts of Gujarat & Maharashtra. These job contractors raise bills based on the quantity of polished Solitaire they produce in their factory. They are free to obtain rough solitaire for polishing from other companies as well, and in most cases, they do get it from other companies. They employ their own workers and pay them salaries based on a piece-rate basis. Almost 90% of the job contractors do not provide PF and ESIC benefits to their workers.

Labour officers from the Labour department & PF enforcement officers visit the office of XYZ and observe the payments made to these job contractors.

1) Now, my query is whether in the given scenario XYZ Ltd. can be treated as the Principal Employer;

2) Whether XYZ Ltd. is liable to deduct PF & ESIC from the payments to its job contractors since these payments include their profits as well.

Looking forward to your reply.

With regards,
Avinash K.

Principal Employer Status of XYZ Ltd.

Yes, XYZ Limited is the Principal Employer.

Liability for PF & ESIC Deductions

Whether XYZ Ltd. is liable to deduct PF & ESIC from the payment of its job contractors, since these payments include their profits also. Deduction of statutory liability has no relevance to profit. That is the minimum one needs to deduct. The contractor should have signed a contract incorporating statutory liabilities. Minimum wages + PF + ESI + 8.33% Bonus + Leave salary at 4% is the bare minimum for a labor contract. Add a profit margin over and above this. The Principal Employer will focus on productivity rather than saving costs on statutory liabilities.

Employer and Employee Relationship with XYZ

The employer and employee relationship lies with XYZ because XYZ is the one directly hiring the employees and connected to them. Hence, Mr. Sivasankaran has replied to your issues. Contract employees do fall under PF benefits.

Please let me know if you need further assistance.

Regards.

Thanks for the reply. I have a little doubt.

Nowadays, every big industry/company outsources some of the work of manufacturing to smaller industries, who undertake to do it more profitably and efficiently. Additionally, these industries are independent manufacturing facilities that have nothing to do with XYZ Ltd. apart from manufacturing on a piece-rate basis. Moreover, XYZ Ltd. has no control over the affairs of these job contractors. Today they are manufacturing for XYZ Ltd.; additionally, they manufacture for ABC, CHE, or any other companies.

So, how come XYZ is treated as the Principal Employer or even held responsible for PF deduction?

Looking forward to your reply.

Regards,
Avinash K.

You are outsourcing the work and not the employees. PF is provided for the employees, not for the work done.

Employer Responsibility in Outsourcing

If the employees are being outsourced, then the employer who holds the right to outsource them is responsible; he becomes the employer.

Say, A is the company that hires 50 employees and sends them to work at your place. In this case, you are not responsible, but A is responsible because A is the employer of the 50 employees and the one who pays them.

A is the company that hires 50 employees, but it will not send them to another place. Instead, it takes work projects from others, such as companies B, C, D, E, and F.

You mean to say, why can't these companies B, C, D, E, and F be liable to pay PF to the 50 employees?

It is A who has employed those 50 employees, and A is the one who is paying them their salaries, not B, C, D, E, and F. Hence, the 50 employees are the employees of A. So when A is paying their salaries, it is A's responsibility to pay them their PF and other benefits, right?

How can B, C, D, E, and F deduct PF amounts from the basic salary of those 50 employees when they are not paying it?

Hence, A company is taking the work from B, C, D, E, and F, just serving them, and A's 50 employees have got nothing to do with B, C, D, E, and F. But the 50 employees are subjected to A directly.

Hope I am not confusing you.

XYZ Ltd. does not hire any employees in HKG Pvt. Ltd. who are just involved in contract manufacturing. For example, as seen with Godrej soap, although they carry the brand name of Godrej, the soaps are not manufactured at Godrej factories. If you look closely at the packaging, you will notice that they are marketed by Godrej but manufactured at XXX Pvt. Ltd. In this scenario, one cannot hold Godrej or XXX Ltd. responsible for any misdeeds committed by the contract manufacturers.

All employees working for XXX Pvt. Ltd. do not automatically become contract employees of Godrej or XXX Ltd. simply because they are involved in contract manufacturing of the soap or any other product that will later be marketed by them but not manufactured at their premises.

I hope this clarifies things and I look forward to your reply.

Regards,
Avinash K.

Exclusive Marketing Rights (EMR)

We refer to this concept as "Exclusive Marketing Rights" (EMR) in legal terms. Whoever may manufacture the products, the complete rights over the products are owned by the brand. It's about the right to trade, similar to Britannia Marie Gold biscuits, which are manufactured by another factory but the overall rights are held by Britannia, as well as with Godrej and the spare parts of cars, durables. The branding is held by the rights owner.

Yes, you got it  Employees do not become employees of Godrej. Cheers!! 

I am a contractor working in an establishment with fewer than 20 employees. Am I liable for PF & ESI Act? Please advise.