Can Switching to Contractual Letters Help Us Avoid Labor Compliance Issues?

Hi, my organization wants to convert or issue a letter to some employees as a contract/retainer/consultant to avoid labor compliances like ESIC, PF, and Gratuity. Please advise if we take this step and issue, are we still under the labor compliance umbrella?

Thanks,
Raj

If you maintain any group of employees as contract employees, they will definitely come under labor compliance if you are the principal employer. For trainees, ESI is a must, but you can exempt them from PF, only if their per day salary is at least the minimum wage. Additionally, you can designate them as trainees or apprentices for a certain period, not exceeding two years. If you wish to extend their training period, you should keep proper records.

All of these requirements necessitate proper record-keeping, so seek advice from your auditor and proceed carefully.

So far as the employee is contractual or through a contractor, it does not make any difference to the employer's liability for P.F, ESI, and in relevant cases, gratuity.

Consultants and Retainers

Secondly, as far as the consultant/retainer is concerned, mere designation as such will not free the employer from liability, and a lot depends upon the manner in which they perform their work. This is also the case with trainees.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Dear Raj,

Emphasizing your point of "convert," which suggests a transition of existing practices, herein referred to HR compliance matters, you may encounter challenges on the following points:

I. PF - Once extended to an employee of an organization, it cannot be withdrawn until he/she is serving the organization.

II. ESIC - It cannot be withdrawn midway between a contribution term even if you revise the salary to Rs. 15,001/month onwards.

Similarly, the basic statutory points do not differentiate between an employee engaged directly by an establishment or by other means.

Another crucial point is that you cannot designate someone as a "Trainee" to bypass the basic statutory points, as the statutory exemption is only for trainees who satisfy the provisions of the "Apprentice Act, 1961."

In conclusion, I would advise considering the idea of engaging a "contractor" to reduce the hassles pertaining to statutory compliance.

However, ensure that in case you engage a contractor, the party should be well-versed in the applicable enactments and statutory norms.

Regards

I have my own reservations and doubts to express on the matter. I request you to please review my observations and clarifications on the matter below.

Converting Employees to Contractual Roles

You wish to convert some of your employees into contract, retainership, and consultancy roles so that you can deprive them of the benefits of social securities such as EPF, ESI, Gratuity, etc. If it is permitted, then many employers like you will do it since they want to make a profit at the cost of the social security of their human assets. (There is no issue if some employees want to save some money. I have strong reasoning/logic and, moreover, legality.)

Please bear in mind, whether you employ any person on a contractual basis or through a contractor agency, all labor laws are applicable to them. (I do not agree with this point as it is very much possible in the case of a direct contract with an individual. You only need to have those contracts as professionals and for a certain time period, and thereafter, it can be renewed.)

Retainers and Consultants

Now, on the question of retainers and consultants, you cannot have every class of people as retainers and consultants. Even if you have retainers and consultants, and the employee-employer relationship is established there, your very purpose of doing this exercise is defeated. (No, I do not agree with this. If we do the contract with the consultant/professionals stating a specific task within the stipulated time frame and a certain amount for that period is fixed, nevertheless the amount we are realizing on a monthly basis, then the relationship cannot be established as master and servant. Only ensure that the individuals are raising the invoice with ST, and the company is realizing the payment by deducting TDS.)

So, be careful while suggesting anything to the employer or be careful if your employer wishes to take such steps and you are there as an HR professional.

More discussions on such issues by members are expected in such forums. (Hereby, it is advised to you to please do some more R&D, then we can have some fruitful discussion on this and reach any conclusion.)

Regards.

This is to inform you that Mr. Fikat has already stated in the first line itself that his organization wants to be relieved from the liability of statutory requirements, i.e., Employee Welfare (PF & ESI). Your arguments can be accepted for debate only, but they cannot be implemented. If we implement them, it will be like depriving the employees of their benefits. Even if an employee works for just one day and has his PF deducted, and later passes away, his family can still claim the PF Pension from the EPFO. With such advice, you are misguiding Mr. Fikat.

While your contentions may have strong reasoning, logic, and legality, there seems to be a lack of humanity in your actions. Please consider showing some humanity towards your employees before depriving them of their rights.

Doubts About the Contract Labour (Regulation & Abolition) Act

I have some doubts about the "Contract Labour (Regulation & Abolition) Act." What does "Regulation" mean, and in which part of the act does it describe "Abolition"? What is meant by the statement "need to have those contracts as professionals and for a certain time period and thereafter it can be renewed," which you seem to be conveying?

As a principal employer, one must ensure the remittance of PF and ESI for the employees engaged by the contractor. If the contractor fails to deduct or submit the Challan for PF and ESI, then the Principal Employer has every right to deduct and remit the same to their PF and ESI Account. If the contractor does not have a PF and ESI account in their name, then it is the duty of the Principal Employer to deduct from the PE's establishment code itself and remit the same.

Dear Raj,

If your contractor does not have PF/ESI registration, then you must deduct from the contractor for the workmen engaged by him and remit it to the PF and ESI authorities under your own Establishment Code.

Contract Labour Act Compliance

If you are engaging more than 20 contract workmen in your establishment, then you must register yourself as an establishment as per the Contract Labour Act and further issue Form V to your contractor. With Form V, the contractor will have to apply for a Contract Labour License.

Hence, you will be covered by one more act, i.e., the Contract Labour Act. If your state requires compliance with the Inter-State Migrant Workmen Act, then you will be covered by two more acts.

It may be advisable to recommend to your employer/management not to evade such statutory obligations and to insist on compliance as it is favorable to your employees.

Regards