Is It Legal for Companies to Classify Employees as Consultants to Avoid Compliance? Seeking Real Cases and Advice

Query on Employee Classification as Consultants

Can a private limited company appoint most of its employees as consultants who are paid professional fees after deducting TDS? By doing so, they are avoiding many of the statutory compliances. It also avoids following the leave rules as per the Shops and Establishment Act. Is this legal?

Can anybody please provide me with some cases wherein such companies have been taken to court by their employees, and judgments have been passed in favor of the employee? How can someone explain to such management the advantages of being legally compliant and following good HR practices, with examples of some present companies? Your guidance will be valuable.

Regards,
raga1628

Question 1: What is the definition of "most"? What percentage of your organization's total employees are consultants?

Question 2: What roles do they play?

Question 3: Are they allowed to take on other assignments?

Question 4: Have you issued any letters, and if so, what are the terms and conditions?

Question 5: Have these individuals been clearly explained the terms and conditions?

Question 6: Are you making payments based on the invoices they raise every month?

Question 7: What business is your organization in?

I was inclined to say that there is nothing wrong with this arrangement. However, if you do not allow such consultants to take up other assignments, there is a strong case to claim that they are, no doubt, regular employees. When their position is explained very clearly in the beginning, then there is no cause to take this up with the courts. If someone takes it up, there are some chances of winning only on the ground that they are not allowed to take up other assignments.

For example, medical professionals are retained on this basis. They are invariably allowed to practice elsewhere. There are sales consultants doing sales for two or three companies. There are HR consultants and finance consultants. I am talking only about junior employees and not senior consultants.

In all fairness, organizations engaging people on this basis should allow them to take up other assignments.

I think that even if the persons are not allowed to take up other assignments, there is little legal danger. More important is the wording of the agreement entered into with them. The agreement must show that they are not under active supervision but working independently. For example, there may be a clause stating that you will allow them to use your office premises when needed, but you will not require them to come to the office regularly. You need to have the agreement vetted by a lawyer and/or a labor laws consultant.

Factors to Consider When Appointing Consultants

There are a combination of many factors:

• Direct supervision
• Right to engage in other avocations
• Nature of the job
• Requirement of the organization – long term or short term
• Right intention (Intention to avoid legislative control can be seen through)
• Purpose of the job
• Percentage of such consultants

We can add a few more, but the organization should keep all these factors in mind before resorting to such a practice.

Regards,
T. Sivasankaran

Considerations for Contract Terms

The term of the contract should also be taken into account. The consultant should be willing to work as a consultant; they should not be individuals hoping to transition to permanent roles within the company. If a consultant aims to become a permanent employee but the company does not offer this opportunity, there could be legal implications. It could be argued in court that the company has a permanent need but is hiring individuals as consultants to avoid providing all the benefits entitled to permanent employees. Typically, a consultant should not work solely for your company for a year or more without being converted to a permanent employee.

Thank you all for your valuable suggestions. Yes, I understand that it is not right to appoint consultants and expect them to work as regular employees. Junior staff (especially in sales) are taken as consultants because most of them quit within a few months of joining. They are mostly freshers or have 1-2 years of experience, who join, work for a couple of months, and when they are given targets and expected to perform, they quit.

Hiring Consultants vs. Regular Employees

Is there any point in hiring such staff and incorporating them into the employee rolls, giving them benefits such as PF, ESIC, etc.? Can an organization hire them initially as consultants and then take them into company rolls after a year? Is it legal?

Thank you all for your valuable suggestions. Yes, I understand that it is not right to appoint consultants and expect them to work as regular employees. Junior staff, especially in sales, are taken as consultants because most of them quit within a few months of joining. They are mostly freshers or have 1-2 years of experience who join, work for a couple of months, and then quit when they are given targets and expected to perform. Is there any point in hiring such staff and incorporating them into the employee rolls, giving them benefits such as PF, ESIC, etc.? Can an organization hire them initially as consultants and then take them into company rolls after a year? Is it legal?

There is nothing in any law that prevents you from following the above route. In fact, your willingness to absorb such people into your rolls will be looked at in a positive manner both in law and by prospective employees. However, it's also a question of how many such people you are hiring. You need to make a contract for each of them, give them a letter or ask them to send a letter offering their services, then accept the same, keep track of it, deduct and pay TDS on the same (they must have PAN numbers for you to be able to file your TDS returns - most freshers may not have PAN Cards). The paperwork is a lot.

Thank you all for your valuable suggestions. Can a candidate be hired on a short-term contract for 3 to 6 months? In such an instance, will the Indian Contract Act be applicable or the Contract Labour Act?