Are Labour Contractors Required to Charge a Minimum Fee for Their Services?

Understanding Labour Contractor Charges

Labour contractors are normally obligated to pay minimum wages applicable to the type of job and the minimum wages mandated by the State or Central government. In addition to the minimum wages, ESI and EPF are also charged. However, I am not aware if there is a minimum mandated charge for the services provided by the contractor. This is separate and not to be confused with the service tax mandated by the government.

The reason I am posing this question is that some labour contractors are not charging any amount for their services and quote the minimum wages plus ESI, EPF, service tax, etc. Nevertheless, the organization that accepts such services from the labour contractor deducts 2% as Tax Deducted at Source (TDS). So, if we back-calculate, the law on minimum wages would have been violated. Please enlighten me if the labour contractor is obligated to charge a minimum amount for the service provided.

I think it will not be possible to put legal restrictions on the service charges leviable by a contractor. Any work involving manpower can be accomplished by varying the number of workmen, and it depends upon the methods of work, effective utilization of manpower, etc. But when the contract itself is based on the number of contract laborers to be engaged and not merely the output of work, if no service charges are levied by the contractor, then there must be something foul. The Principal Employer normally knows the cost of labor for any outsourced work. Therefore, he should consider and compare the rates quoted by different prospective contractors for the same work in a proper perspective.

Many thanks for the reply. I had suspected that this is a grey area. But your advice on the second part is very much valid, and I intend to apply it wherever possible.

Service Charges and Tax Obligations for Contractors

The contractor may or may not add a separate service charge component while submitting the quotation for the work to the Principal Employer. It is the duty of the contractor to pay minimum wages, plus PF, ESI, etc. The service tax component has to be added separately at the time of billing. The Principal Employer deducts a 'token' 2% as TDS and deposits it in the Treasury under the understanding that the contractor would deposit the service tax as per rules. Check out the break-up of the bill amount submitted by the contractor.

Dear Bijoy,

It is not about the service tax, but about the service charges to the contractor the query revolves around. The token 2% deduction at source is the income tax payable by the contractor, I think.

Why Would a Contractor Work for Free or Below Cost?

So:

• Are you present during the payment of wages (mandatory)?

• Are you ensuring correct wages are paid?

• Check the attendance and days paid. They might be marking people as absent to reduce the salary while keeping the rate charged to you as full.

• Are they paying PF and ESIC dues as required? Do all people have PF numbers and ESIC cards? Also, call the contractor and ask him to log into the PF portal to check whose names are in the records.

• Are they working 12-hour shifts and 30 days a month? Both of which are illegal but cheaper for the contractor.

• Is any money being deducted for a uniform, etc., which is not allowed under the Payment of Wages Act?

Incidentally, service tax cannot be charged by the contractor. Instead, it has to be computed and paid by the principal employer as "reverse charges".

Dear Raghunath,

It is a common practice by many contractors to charge on several heads—minimum wage, PF, ESI, Bonus, Leave pay, Gratuity, etc.—on a monthly basis but no service charge (not service tax as per law) for the services provided by them. What they do is pay less to labor, pay less to PF & ESI contribution, never pay leave pay, gratuity, etc., and manage the profit. Saswata Banerjee has already mentioned the control part from the Principal Employer's side. It is essential to check the actual payment to labor and PF & ESI Authority every month before processing the invoice. Also, please keep in mind that Service Tax as per law is now the responsibility of the Principal Employer to deposit 100% in case of any manpower service charges invoice.

The Ideal Condition

Actual wage (obviously minimum or above) + Employer's portion of PF & ESIC contribution + service charge (per labor per month or % basis based on negotiation) less TDS at source 1 or 2% as the case may be. Let's suppose the minimum wage is 7000/- per month (breakup 6000/- basic & DA + 1000 HRA) + PF employer's contribution 13.36% = 802/- + ESIC employer's contribution 4.75% = 333/- + Service Charge say 7% of gross = 570/- = Gross Invoice- 8705/- less TDS say 2% = 8531/- net. After paying properly to labor and then depositing proper PF & ESIC Contribution, there will be some profit to the contractor.

Trust this will clarify your query.

Regards,
S K Bandyopadhyay

USD HR Solutions

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