How Should a Principal Employer Handle Unpaid Wages and Contractor Bankruptcy Issues?

I want to share an interesting case study and will need solutions from your end.

Case Study Overview

1. A contractor has defaulted on making statutory payments to its workers and authorities for the past 5 months, citing bankruptcy and frozen accounts. The contractor is also not submitting bills to the principal employer.

2. Workers have filed a case to be permanently absorbed into the principal employer's establishment.

3. According to the judgment, the existing labor must be employed by the new contractor in the future.

4. It is also stated that if the existing contractor cannot continue, they must arrange an alternate contractor to carry on the work for the principal employer.

5. The old contractor refuses to raise bills or make payments, suggesting that the alternate contractor will settle the 5 months' outstanding payments and continue business as agreed between them. (I want to know if this is possible).

Principal Employer's Responsibility

6. What is the responsibility and role of the principal employer in this situation?

Please suggest how a principal employer can ensure that statutory payments are made to workers and authorities.

The matter depends upon the contents and the order of the honorable court as per the judgment in the case mentioned by you. It is also important whether the employer has challenged the order of the honorable court in an appellate court/authority. It is doubtful whether it will be a valid direction by the honorable court to the principal employer to engage a new contractor and employ all such old contractor employees by such a new contractor.

Both the principal employer and the contractor (who had engaged the workers) are liable for the payment of wages and dues of such contractor employees by virtue of provisions contained under Section 21 of the Contract Labour (Regulation and Abolition) Act, 1970. Kindly see the provisions of the said Act as relevant to the facts of this case.

A contractor shall be responsible for the payment of wages to each worker employed by him as contract labor. Every principal employer has to nominate a representative duly authorized by him to be present at the time of disbursement of wages by the contractor, and it is the duty of such a representative to certify the amounts paid as wages.

In case the contractor fails to make payment of wages within the prescribed period, then the principal employer shall be liable to make payment of wages in full or the unpaid balance due to the contract labor employed by the contractor and recover the amount so paid from the contractor either by deduction from any amount payable to the contractor under any contract or as a debt payable by the contractor.

To keep a check on the above and record for statutory purposes, a register has to be maintained (Muster roll, Wage, Advance, Fine, Damages, Accident).

As in your case, the contractor is not raising the bill; first, the principal employer has to pay all dues (Wages). Later, the principal employer can pull the contractor to labor court. (Maybe the court can award seizing his immovable/movable properties and shall make payment to the principal employer by selling the same).

Regards

Thank you, sir, for your valuable inputs. The contractor has not been raising bills upon the principal employer for the past 5 months. As per the judgment passed, he has arranged for an alternate contractor who will raise bills upon the principal employer, make statutory payments, and continue the business. Is there any provision for making payments by the alternate contractor?

If the alternate contractor cannot make payments, how can the principal employer make payments since he won't be able to recover them from the contractor who is unwilling to continue further? Please suggest.

The judgment passed is that if the contractor is unable to continue service, they will arrange for an alternate contractor, and the same workers will be employed with the new contractor. This decision is in response to workers filing a case to obtain permanent status with the principal employer's establishment.

Warm regards,
Anil Sharma

So far as I understand, there are no provisions in the law by which a non-contracting party will bear the burden of wages of employees for past periods. Even if a new contractor is engaged as directed by the Honorable Court, their liabilities will start from the date they undertake such work.

However, in order to avoid the levy of any damages or penal action under relevant laws for non-payment of such wages to contractor employees, in my opinion, the principal employer should discharge the liabilities of payment of wages to contractor employees immediately by virtue of the provisions of Section 21 of the said Act.

Which court has passed this judgment? Can you please share the information? Please follow the advice of Harsh Kumar Ji by paying the wages to the contractor's labor and discharge your liability as per the provisions of Section 21 of the POW Act. Please ask your contractor to raise the pending bills for the past 5 months. You can recover the amount paid to his labor. Needless to say, you need to have all the relevant records/documents.

Regards

Dear Korgaonkarji, Thanks for appreciating my views as mentioned in the remarks above. I may, however, point out that Section 21 relates to the Contract Labour (Regulation and Abolition) Act, 1970, and not the Payment of Wages Act as mentioned by you in your comments above. However, similar provisions exist in Section 3 of the Payment of Wages Act, 1936. The recovery procedure by way of attachment of properties and penalties has been provided under Sections 17A and 20 of the said Act.

Problem Overview

There are two parts to the problem. One is that the contractor has not paid wages or statutory dues for five months.

Were you and your team sleeping? Why did you not take immediate action? Surely the workers would have complained. Apart from the fact that your representatives should have been present during the payment of wages and should have known about the problem.

You are very lucky that the court only asked to appoint a new contractor and didn't make the employees permanent.

Immediate Actions Required

First, you need to pay the wages of the previous period directly. You can do that and recover (or try to recover) the same from the contractor.

Similarly, you need to pay the statutory dues. Both PF and ESIC websites have a separate page for allowing the principal employer to deposit PF/ESIC for contract workers.

Waiting for a new contractor to do this for the previous period before he started would be both wrong and risky.

Ensuring Future Compliance

The second part of the problem is in monitoring to ensure that no such non-compliance takes place again in the future. There are details discussed in this forum and also mentioned by one member earlier in this thread.

I see you are not willing to share the details of the judgment on the forum for obvious reasons. However, this interests me, and I would appreciate it if you could message me your contact details so I can speak to you and understand it better.

I fully agree and endorse the views and advice posted by both Shri Harsh Kumar Mehtaji and Saswat Banarji. They have very correctly discussed and analyzed the situation and have suggested what is to be done in the case.

Growing Concerns with Principal Employer Responsibilities

What is alarming nowadays is that there is a growing tendency of the Principal Employer to shrink his responsibility under the garb of contract employees. You want good quality, quantity, and timely work from contract workers, but when the question of providing certain amenities on par with regular company workers is raised, a big show is made by the officers of the Principal Employer. Are we not going to learn anything from the Maruti-Manesar Plant incident? A statutory duty is cast on the Principal Employer to pay the wages when he engages a Contractor who fails to pay wages and dues.

HR Policy Design and Contract Worker Rehabilitation

Apart from the legal points of the case, we have to design our policy through an HR aspect. There must be a time-bound rehabilitation of contract workers, which not only reduces the disparity in benefits but also helps to reduce the grievances.

Regards,
Adv. K. H. Kulkarni

Thank you for your valuable suggestions. Appreciated! The first contractor is not willing to raise bills, so how can the principal employer make payment?

So, pay the workers directly now. What stops you from doing that? Workers need to be paid for the previous periods. You are torturing them by not paying them. It's inhuman. Though in general, we do not recommend payment of salary directly by the principal employer, in this case, you can do it. As soon as it is done, you should raise a claim on the contractor and issue a legal notice to him for the recovery of the money. Then automatically, he will come in line. Even if he does not bother, the fact that you are taking legal action shows that you did this for the sake of workers and not because you have control over workers. The Contract Labour Act provides for you to pay the salary and recover it as debt from the contractor.

It does not matter whether the first contractor is raising bills or not. The Principal Employer can pay wages directly to the contractor's workers and debit the amount of wages together with dues on his account. Statutory dues can also be deposited through the Principal Employer's login ID and password by selecting the option "through contractor," etc. This will certainly absolve the responsibility of the Principal Employer.