Why Are Principal Employers Held Accountable for Contractor Compliance Issues?

Accountability of Principal Employers for Contractor Compliance

Can anyone explain why the principal employer is held accountable for statutory compliance by contractors? Why does the concerned government body penalize the contractor directly but instead does the same to the principal employer (e.g., ESIC)?

Liability of Principal and Immediate Employers under the ESI Act

The principal employer is responsible for the supervision and control of the establishment/factory and, therefore, is liable for prosecution under Chapter VIII of the ESI Act, 1948. However, the immediate employer (contractor) is also liable for prosecution for defaults by virtue of various provisions, such as Sections 41 and 44, of the said Act.

Contractors are not found in the units after their term of the contract closes, and hence only the principal employer is available for prosecution under the provisions of the said Act.

You have correctly pointed out that an immediate employer can be prosecuted for defaults. But the question arises as to why a principal employer should be prosecuted if he has paid the amount required by law to the contractor, even when the latter knowingly defaults.

For example, a principal employer demands the production of PF and ESIC challans from previous months during every monthly billing (to check compliance). However, in the case of a contractor providing labor for more than one establishment, the principal employer cannot determine whether all workers working in his establishment have been covered with ESIC/PF paid, as the contractor prepares a single challan for all establishments.

In such a case, if ESIC/PF authorities find a default by the contractor, why is the principal employer not absolved of their liability even if they have paid the required amount?

I would also like to add that the notion that a principal employer should be prosecuted because contractors are not found in the units after their contract term closes does not hold much strength. The contractor has to register under the Contract Labour Act to obtain a contract license in which they have to furnish all their details. Hence, the legal authorities should not have much trouble in finding the defaulting contractor.

Kindly share your thoughts on the same.

The most probable causes will be that:

1) The contract workers do the work of the principal employer, though they remain the workmen of the contractor. Thus, the principal employer shall also share the liability to pay the contribution with the contractor. It is a shared responsibility.

2) The principal employer is the disbursing authority. He controls the financial aspect of the contract and, therefore, shall ensure that all the statutory liabilities are met by the contractor before he disburses the contracted sum to the contractor in the same way as TDS. Thus, though the law renders him liable to pay the contributions, it empowers him to recover his dues from the sums payable to the contractor.

3) The Act is a welfare legislation to provide the most vital protection afforded to the poor, namely healthcare, and the poor workmen shall not be subject to any hardship in this regard in the event of any blame game between the principal employer and the contractor for default.

Regards,
B. Saikumar
In-House HR & IR Advisor

The employer, instead of engaging directly, has been entrusting a labor contractor to do the employer's work. As such, the primary burden lies with the employer. It is their duty to check every month before providing the contractor's salary bill. In what way is the government responsible? If the contractor fails to comply with the provisions of ESI and PF, both the employer and the contractor are responsible. However, to the authorities, the principal employer is solely responsible.

The idea behind penalizing the Principal Employer is the end result. After all, the workers working through contractors are working in connection with or incidentally to the principal employer and on the premises of the Principal Employer, for the benefit of the principal only.

Who is getting the end result, i.e., the principal employer? Everyone knows the contractor is only an intermediary for administration purposes.

Contractual/Casual/Outsourced, etc., are only classifications of workers/employees recognized under law, but ultimately, work is being done for the principal employer.

I would like to draw attention to the definition of "Employee" in the PF Act. An "employee" means any person who is employed for wages in any kind of work, manual or otherwise, in or in connection with the work of an establishment, and who gets his wages directly or indirectly from the employer, and includes any person:

(i) Employed by or through a contractor in or in connection with the work of the establishment.

In the ESI Act, an "employee" means any person employed for wages in or in connection with the work of a factory or establishment to which this Act applies and:

(i) Who is directly employed by the principal employer, on any work of, or incidental or preliminary to or connected with the work of, the factory or establishment, whether such work is done by the employee in the factory or establishment or elsewhere; or

(ii) Who is employed by or through an immediate employer, on the premises of the factory or establishment or under the supervision of the principal employer or his agent on work which is ordinarily part of the work of the factory or establishment or which is preliminary to the work carried on in or incidental to the purpose of the factory or establishment.

The above definitions clearly state that any person who is working either through the contractor or directly in connection with the work of an establishment/factory shall be considered an employee for the purpose of both legislations.

For contribution/compliance, the provision has to be done by the Principal Employer or ensure that the compliance is being done.

These legislations being social security, the liability is fastened on the Principal Employer to provide all benefits envisaged under the Acts because the Principal Employer is the real beneficiary of the work done by the employees of contractors also.