Outsourcing Dilemma: What Compliance Steps Are Needed for Contractor's Direct Employees?

Outsourcing Job Contracts and Compliance Requirements

We have outsourced the job contract to one company. If they deploy their own employees (directly) at our premises, then they do not fall under the coverage of the CL(R&A) Act. In such a case, as they are not contract laborers, what are the procedural documents and compliance requirements that need to be ensured by us (our company)?

Regards,
DG

Coverage Under the CLRA Act

Why shouldn't they be covered by the CLRA Act? If the contractor is working for you, that will come under Contract Labour Regulations even if they undertake the work outside your factory premises. The current situation is that the contractor is engaging his workers in your factory premises. Then, why shouldn't they be under coverage?

Regards,
Madhu.T.K

Hi @madhu.t.k, we have engaged a large company for networking and maintenance. They have deployed 9 personnel for the work. They are designated as Service Engineers/Customer Engineers. Two of them are their direct employees whose salaries are relatively high (e.g., 20,000), and the other seven are hired for this job on a contractual basis with lower salaries (e.g., 5,000-6,000). These employees are not receiving all benefits, and the contractor, which is a very large company, claims that since they are engineers, they are not entitled to CL and are receiving consolidated pay. Please suggest.

Regards, DG

Clarification on Contractual Workers and Outsourcing

Please be informed that if the contractual workers are employees of an Outsourcing Company, which is a registered company under the Companies Act, then these workers are not considered contractual workers. There is an order by the Honorable Supreme Court in this regard. I do not have the reference available with me right now. However, to be employees of the company to which the work has been outsourced, the workers should be:

1. On the roll of the Outsourced Company, having been appointed as per the rules/regulations of that company. Their terms of employment should be defined in the appointment letter, including designation, grade, pay scale, and other terms and conditions of employment/non-employment.

2. Such workers must have been issued identity cards as proof that they are employees of the Outsourced Company.

3. The company should have its own certified Standing Order or should follow the Model Standing Order as defined in the Standing Orders Act.

4. The Outsourced Company must record/enroll their names in Form 'B' or any such bounded register containing details of the workmen engaged by them, such as name, father's name, date of birth/age, qualification, nature of employment (Surface/UG), permanent home address, mark of identification, photograph duly attested by a Gazetted Officer or Company Official duly authorized.

5. The Outsourced Company must deduct Provident Fund contributions after the completion of 30 days of employment.

6. Other social security provisions such as medical facilities, gratuity after superannuation, leave with wages, etc., should be implemented by the Outsourcing Company.

If the above provisions are being followed by the Outsourcing Company, then the workers engaged by the Outsourcing Company are to be treated as employees of that company and not as contractual workers. Thus, Sec. 10(i) of the CL(R&A) Act, which deals with the prohibition of work of perennial nature to be carried out by a contractor, does not apply.

Hope this information is helpful.

Good luck.

Regards,
AK Jain
HR Personnel
NCL, CIL

You and your company are being taken for a ride.

1. **Definition of Worker under the Factory Act**
Check the definition of a worker under the Factory Act. It covers everyone in the factory except the factory manager and occupier. Yes, it includes contract workers.

2. **Definition of Contractor and Contract Labour under the Contract Labour Act**
Check the definition of contractor and contract labour under the Contract Labour Act. There is no distinction based on salary, qualification, or nature of work. Anyone working inside your premises because you have a contract with their direct employer to do certain work or deliver a result is a contract worker. The only exception is where the contract is for the pure sale of goods and nothing else (which again does not apply in your case).

3. **PF Registration Requirement**
All companies are required to be registered under PF if they have more than 19 employees. So your large contracting/outsourcing company is covered. PF rules do not differentiate based on salary levels either. The only exception is those who joined at a starting basic + DA salary of more than 6500 and did not have any existing PF account on joining would be exempt if they have filed Form 11 (sorry, I can't remember the exact form number).

4. **ESIC Coverage Requirement**
If the company is in an ESIC covered area, or the factory is covered in an ESIC zone, then payment of ESIC dues and registering the employees for ESIC is compulsory for everyone whose salary is below 15000 per month (gross). If ESIC coverage is not there, the practice is to make the employer take a workman compensation policy to protect in case of an accident.

In case the statutory benefits are not given, you as the principal employer will be liable and responsible. Your contract with the outsourcing company should have specified this. If they are not willing to follow the law, then you need to convince the management of your factory to change the vendor immediately. Irrespective of what the contract says, failure to pay statutory dues is grounds to terminate the contract, probably without notice.

More than one cadre of employees can be engaged in similar work activities. If both of your workers are engaged in a similar job, there is nothing wrong. You should take care of your workers according to the guidelines of the Contract Labour Regulation and Abolition Act (CLRA). You will not be liable for the employees engaged by the Principal Employer directly. However, the Principal Employer will be liable for all, as the Occupier of the premises.

I think you read the situation wrong. The post was about outsourced contracts, and the poster is from the principal employer (the factory/office where they are deployed). The contractor has his own employees and temporary/subcontractor employees working. He claims that:
a. They are not workers but engineers.
b. They are paid a consolidated salary, so PF and ESIC are not applicable/included in the salary.
c. As it is a job contract, the CLRA Act does not apply.

Difference Between Contract Employees and Contractual Employees

Here, we have to draw the difference between contract employees/labour and contractual employees. The former, of course, is the one who is engaged through an intermediary/contractor and is covered by CLRA anyhow. In the latter case, it is just like a regular employee but with the difference that he is employed for a certain period or for a certain work. It is called a Fixed Term Contract.

In your case, your contractor has employed a few engineers and some persons for a fixed period, maybe until the work in your plant is over. Still, as long as he is engaged, the employer-employee relationship exists, and as such, he should be given all statutory coverage like ESI, PF, etc. The only thing is that if he is employed to do a specific work, his employment will come to an end automatically once the work is completed. Similarly, if he is employed for a certain period, say one year, he should go out of the employment on the expiry of the period for which he is employed.

In the instant case, as far as the Principal employer is concerned, whoever is engaged by the contractor in his plant is contract labour irrespective of whether he is a regular employee, a fixed-term employee, or a temporary employee for the contractor. Therefore, all benefits as per statute, like minimum wages, ESI, PF, etc., should be given to those 7 employees engaged by the contractor also. Being the Principal employer, it is your duty to ensure that they get the benefits, failing which it will become your burden to pay it. It is not on the statements from the contractor about the status of the employees engaged by him that you should work, but you should only see if these 7 are working for you or not. If they are working for you, then in the next stage, you can ask what is their remuneration and find if it is not less than minimum wages and if they are covered by ESI and PF. You need not accept the statements that they are temporary or FTC, etc. That is the headache of the contractor who has appointed them.

Consolidated pay does not make him free from his obligations. If they are paid consolidated pay, naturally, it will be on that whole amount that he should contribute ESI, PF, etc.

Regards,
Madhu.T.K

Minimum Wages Compliance Issue

For your information, our company is a PSU under the Government of India and follows the Rate of Minimum Wages as per Central Notification. As per the current rate for the skilled category, it comes to around Rs. 9,802/-, and for the highly skilled category, it comes to around Rs. 10,660/-. The company that has been given the job contract follows the state rate (West Bengal) of minimum wages and accordingly designs the salary of their employees.

A few Service Engineers, who are on-roll employees of that company and deployed at our premises for the project, receive a gross salary ranging from Rs. 8,000/- to Rs. 9,000/-, out of which the Basic constitutes 80% of the gross, i.e., around Rs. 6,500 to Rs. 7,500 (no DA as it's a private company), and the rest are allowances. The company is providing PF on Basic (max on Rs. 6,500/-) and ESI on gross.

For us, the problem is non-compliance with minimum wages as per the central rate. The company's argument is that the persons deployed are their on-roll employees and are getting salaries as per the company's present salary structure (following the minimum wages as per the state rate), and it is not possible for them to increase or decrease the salaries of their on-roll employees on a project-to-project basis.

Regards,
DG

Salary Payable and Compliance with Relevant Acts

The rate and amount of salary payable depend on the applicability of the relevant Act on the principal employer. Therefore, if the principal employer is under Central notification, the contractor has to follow the central notification. As far as the contractor is concerned, even if he pays as per central minimum wages, it will not cost anything for him because he can shift the burden to the principal employer.

If he cannot have two types of salary structures, one for those who are deployed in companies that come under state minimum wages notification and another for those who come under central notification, you have to think of changing the contract itself. I don't think that the contractor will hesitate to pay as per the principal employer's policy. If the principal employer is ready to bear the cost, why should the contractor not?

Regards,
Madhu.T.K