What Happens if a Contractor Defaults on Payments? Principal Employer's Responsibility Explained

Responsibility of Principal Employer in Case of Contractor Default

I am working for a Public Limited Company. We have engaged contractors for the supply of labor. When fixing the contract amount, we have considered minimum wages, employers' contributions to PF and ESI, WC premium, TDS, bonus, etc., for contract labor. We have Principal Employer registration, and the contractor has a Labor license, PF and ESI registrations, PAN, etc. The bills are paid by cheque. In spite of this, if the contractor, having received all statutory payments, defaults on the statutory payments like PF contributions, ESI, etc., what will be the responsibility of the Principal employer? We have proof of payment to the Contractor.

Kindly advise.

Regards,
CVR.

As the ultimate responsibility lies with the principal employer, you are required to provide proof of statutory remittances by your contractor. We have received notices to settle the outstanding dues for the defaulting contractors, amounting to 10 crores. Proof of payment to the contractor does not matter; you must furnish evidence of the statutory remittances for these contract employees. Before approving the contractors' bills, ensure you obtain copies of essential documents such as attendance records, wage registers, PF challan, PF ECR, ESI Challan, ESI contribution list, bonus register, and half-yearly returns submitted by the contractor.

The issue arises when some contractors complete their work within a year and cease operations. After a few years, we may still be held accountable by the authorities, making it difficult to track down these contractors.

It is advisable to secure the aforementioned documents to protect the company's interests. Feel free to contact us for further clarification.

Please let me know if you need any further assistance.

Regards,

Dear Mr. CVR,

Statutory Compliance in Labor Contracts

Statutory compliance is a vast subject matter in terms of various labor laws, Acts, and Rules prevailing and practiced on a PAN India basis. It's very difficult to give a logical and convincing reply to the queries raised by you.

However, if you really intend to protect the interest of your organization by being a law-abiding company, we would appreciate your response to guide you in the best way towards core statutory compliances.

You may reach me at the mail cell number: [Phone Number Removed For Privacy Reasons].

Regards,
Anil Kumar

Yes, the principal contractor is still liable. I also agree with Mr. Madangopalswamy in that, before releasing each payment against the bill of the contractor concerned, retain, say, 30-40% (equivalent to statutory deductions and a bit more). Release such retention only when the contractor shows proof of correct deduction and payment (challans)/returns and other statutory compliances to your satisfaction in the future. For past transactions, seek legal help and see if the contractor's payment can be withheld even now.

Regards,
A S Bhat

Principal employers are equally responsible in this case. Please conduct the audit of the contractor on a monthly basis to ascertain that compliance is met.