Is It Risky to Label Contractors as Manpower Suppliers in Agreements? Seeking Clarity

According to my knowledge, no employer should use the supply of manpower in the agreement with a contractor. If we mention it like that, it shows that the employer is obtaining work from them by direct supervision, which could lead to the contract being considered a sham. Am I right?

However, some of the most experienced HR professionals are engaging in agreements with contractors as manpower suppliers. Kindly clarify.

Regards,
M S GIRI

Whether the contract between the principal employer and contractor is a sham or not does not only depend on the fact of a manpower supply contract. There are many factors to be considered for reaching the conclusion of the genuineness of the contract. It all depends on the terms of the manpower supply contract. If it sounds like the arrangement of simple manpower supply with no control and supervision over the labor by the contractor and simply receiving a commission on headcount supply, then in all probabilities, it will be a sham contract, and such labor can claim regular employment with the principal employer. The question to be seen is whether the principal employer engages labor for himself through the contractor or the contractor engages labor for himself for executing the work agreed to be done by the contractor for the principal employer.

Regards

Please clarify the applicability of Vicarious Liability under the Contract Labour Regulation and Abolition Act. In the case where contract workmen commit misconduct, who will be liable to pay the damages to the principal employer?

Please provide references or citations from HR resources.

Thanks,

Regards,
Rajesh Kantubhukta
Human Resources

The principle of Vicarious Liability has a different connotation. It implies that for the acts of the servant, the master will also be liable. Therefore, if a contract laborer (e.g., a driver who is a contract laborer) has an accident while driving a company vehicle, both the contractor and the company would be liable to pay compensation to the victim of the accident. In such a situation, a Principal Employer can seek indemnity from the contractor.

Regards,
KK

I always prefer contract jobs to contract labor. Contract labor policy only means that humans are considered a liability and not a resource. Issuing works contracts provides more control over output and quality of work. Also, costs are better controlled because the price is for the output and not for input.

Thank you for the cautionary note in your email. However, I do not agree with your contention that no employer should use the supply of manpower in the agreement with the contractor; otherwise, the same will be presumed to have direct supervision, and the contract will be treated as a sham. Let me reproduce the definition of the "contractor" given under the Contract Labour (Regulation and Abolition) Act, 1970 for your information.

Definition of Contractor

"Contractor," in relation to an establishment, means a person who undertakes to produce a given result for the establishment, other than a mere supply of goods or articles of manufacture to such establishment, through contract labour or who supplies contract labour for any work of the establishment and includes a subcontractor.

You will appreciate that the last sentence of the definition clearly brings "the supply of contract labour for any work of the establishment" into the ambit of the Contract Labour (Regulation and Abolition) Act, 1970. Therefore, your contention that such a system will be treated as a sham is clearly a wrong notion.

Regards,
BS Kalsi

I accept your contention, but many companies are doing the same by nominally maintaining a contract while officially performing all activities as the principal employer. However, this is incorrect. Contract labor implies there is no direct relationship between the contractor and the principal employer; otherwise, indiscipline may occur in the future.

Regards,
Rajesh Kantubhukta

I agree and accept what has been specified in the preceding emails. In addition, I would like to provide some further inputs:

Registration and Compliance Steps

A. Registration of the employer with GLO.
B. Issuing Form 5 to the Contractor.
C. Registration by the contractor at the GLO office.
D. Identifying the job performed by the contractor, where your permanent manpower is not involved.
E. Entering into an agreement with the contractor.
F. Ensuring PF and ESIC codes of the contractor.
G. Ensuring contractor workers are paid through bank accounts.

Please refer to CLRA 1970.

Thanks and Regards,
DKZ

Whether the contract is a sham is not a function of how the contract is designed and whether it results in direct supervision of the employee. It is a function of whether there is actually any contract or the agreement and contractor are just a creation of the company to avoid paying fair wages and giving benefits to the contract employees. It will depend on a number of different facts considered together by the court.

The contract can be held to be a sham even if the agreement talks of a job work and not labor supply. The Contract Labor Act does not specifically ban the use of contract labor or even the business of labor supply. Instead, it says the government can ban the use of contract labor if it wishes. However, it discourages the use of contract labor where it involves production or core activities, or where it is work generally (or previously) done by permanent workers.

Andhra, on the other hand, has defined production and core activity and specifically banned the use of contract labor in those functions. So there you would not have an excuse to think otherwise.

So the problem is when there is a complaint filed by any of the workers, or the union, that the workers are being denied permanency, and that the contract is a sham or designed to deny workers their rights. The court will look at the various aspects of the case. The things that generally make the courts think that the workers should be given permanency are:

- Work being done in production-related activity
- The number of workers needed is more or less standard unchanged, or the same workers are working for a long time on a continuous basis.
- Workers were recruited by or under the supervision of the principal employer.
- Attendance, leave, wage register, etc., being maintained by the principal employer and/or leave granted by the employer
- The contractor doing work only for one employer and no others, doing work without margin or very little margin (except where there is no other factory nearby needing contract labor)
- A contract not entered into (just work order given), or not renewed when completed
- Absence of a contract labor license

So, when the contractor is only providing contract labor and not doing the work, or does not know what the work is, or where they are doing work in production-related activity, the court will be inclined to consider that the workers should be made permanent. This is where the real danger lies. Not labor supply by itself, but a combination of factors. Still, it is best to avoid this where possible.

Thank you.