License Swap Dilemma: What Are the Risks of Changing a Contractor's License Name?

Hi Folks,

One of my labor contractors wanted to cancel his old license and take a new one in his relative's name and continue the labors working under his old license. What are the implications, complications, and consequences for this act?

License Suspension and Termination

There is no such cancellation of a license, but there can be a suspension of a license by the Licensing Officer if he finds that the license has been obtained by misrepresentation or if the rules are not being followed by the contractor. He can also amend it. The license will stand canceled if he does not renew it after its expiry.

Contract Termination and Legal Formalities

Now, if he does not want to be a contractor, he can terminate the contract with you. After that, you can issue Form VI to his relatives so that he can take a fresh license in his name and continue working with the same employees. These are the possible ways by which he can get away from the legal formalities. But I would say that, as a principal employer, you should not encourage it. Keeping the employees unchanged under various contractors would be viewed as an attempt to defray the legal rights of workers, and the contract will be treated just as a camouflage or windscreen and thus a sham contract.

Implications of a Sham Contract

Once it is established that the contract is a sham or is executed for namesake only, you will be in trouble and may even lead to the regularization of service of contract workers. Taking legal opinion on behalf of the contractor itself is evidence to show that your contract with the contractor is a sham. Therefore, get out of it if your firm believes in genuineness.

Regards,
Madhu.T.K

A better way is for the contractor to sell his business to his relative and inform you of the same with a request to transfer the contract. However, you must make sure that the agreement for sale includes a clause to protect gratuity dues of the workers.

Contractor Licensing and Labor Deployment

In our establishment, we outsource intermittent jobs to contractors. Sometimes, it happens that one contractor succeeds in getting multiple jobs (say three) through a competitive bidding process. He deploys 19 laborers in each contract, resulting in the deployment of 57 laborers on a particular day. However, he doesn't have the required license.

We consulted the Regional Labour Commissioner, who informed us that since he is deploying 19 laborers in one contract, he doesn't need any specific license. The Contract Labor (CL) Act pertains to the employment of contract laborers, not deployment. Your esteemed opinion on this matter would be greatly appreciated.

Precautions for Principal Employers

Furthermore, what precautions should a Principal Employer (PE) take when a contract laborer changes their contractor within the same establishment?

Thank you for your attention to this matter.

Sincerely
Regards

Common Changeover Practices in Outsourcing

This type of changeover is very common in offloading or outsourcing certain regular work of medium and large industries or companies with a view to averting demands for regularization, payment of bonuses, gratuity, and other benefits. However, your problems as a Principal Employer (PE) are not going to be solved forever since the same workers are going to continue almost the same duties.

It would be better to close the contract after completing the work order assigned by fulfilling the formalities, especially wages overdue, EPF/ESI contributions, and other dues, and then hire a fresh contractor.

I think either you conveyed the wrong information to the RLC or on the forum. Otherwise, I don't understand how the RLC can give such a reply. If a contractor has more than 19 workers at one site, he needs a license. It does not matter what each of them is doing or whether the contracts are single or multiple. So, in your case, the contractor should have obtained a license. You, as PE, should not have allowed him to deploy the 20th worker without a license from the RLC. The only difference would be if the contractor was deploying people under different organizations—say in partnership with different individuals. However, in an investigation, it would not stand scrutiny. Either the PE will be penalized, or the workers made permanent, both of which you would like to avoid.

As pointed out by Saswata, if you are the principal employer for 57 laborers deployed by the same contractor, though for three different works of the same principal employer, you are in trouble, and you should ensure that the contractor has a license.

Madhu.T.K: Contract Labour

Madhu.T.K

Dear all, If I had furnished false information, I would not have discussed it in the forum. I'm an old subscriber to this forum and have added various inputs to different queries for which I have received appreciation. Contributing members should be respected. Anyway, the issue is very real. I tried to clarify it through our senior HR bosses, but I received conflicting views. When the RLC of the Bilaspur region visited our area, I specifically asked him this question. His contention was that since PE is issuing Form-V for individual works separately for the purpose of licensing, the deployment of 57 contract laborers in three contracts absolves him of the responsibility of issuing Form-V due to less than 20 laborers in each contract. I tried to convince the RLC that in the CL Act, when a contract uses the word "employs," not "deploys." Contractors are naturally very happy with this ruling, and if I take any further action without legal or official confirmation, I would be considered a threat to the present system.

What Course Should I Follow to Rectify This?

Thanks and regards

It is true if you issue Form V to separate contractors, but you have issued three Form V to one contractor. What will you show in your Register of Contractors (a register required to be maintained wherein the names and addresses of all contractors will be listed)? You will be writing one name only. That means you have only one contractor who has deployed 57 workers in your establishment. This is what we have said is not as per the law.

Hope that your establishment has obtained Registration under the CLRA Act.

Regards,
Madhu.T.K

I agree with Madhu T K in the immediately preceding mail in the thread. You are the Principal Employer (PE). In case of contravention, no one will look at the contractor because most probably, he will vanish into thin air. You will be held responsible for all his actions or lack of actions.

Things to Be Careful Of

You have also asked what other things you should be careful of. Before you pay his bills, ask him to provide proof of payment of wages to his workers. Ensure minimum wages are being paid to his workers, overtime (OT) is being paid as per rules, and proof of PF payment/returns, ESI payment/returns, and so on. If you pay him without verifying all these documents, you are in trouble with the labor officer of your area.

Regards,
A S Bhat

You have issued 3 Form V for the same contractor. In each of the Form V, you have stated that the contractor has only 19 workers deployed in your factory. That is definitely falsification of records and, in effect, a fraudulent activity. A complaint by any worker will bring the entire government machinery on you like a ton of bricks. Your RLC would not have given you the ruling in writing.

Thanks to all. Yes, we are registered under the CL Act. In the Register of Contractors (Form-12), we mention the name of the contractor, his work period, and the maximum number of labor deployed. It is possible that the same contractor name is found in the register with the same or different work period. Madhu sir is right in this regard. Since the nature of the job is different, we see no wrong, and RLC has also inspected this without any comments.

In spite of what the RLC has said, you are going to get into trouble for allowing a contractor to have more than 20 workers to work without a license. The law requires a license for each contractor, not for each contract or activity.

I hasten to add that the process of verification of all records of the contractors' compliance with statutory obligations should be followed before payment of each monthly bill.

A. S. Bhat

Thanks to all once again. I want elaboration on Mr. Banarjee's thread that "The law requires a license for each contractor, not for each contract or activity."

Please refer to section 1 of the act. It very clearly states that the act applies to all contractors who have 20 or more contract workers. There is no stretch of imagination by which it can be said that it will only apply to each different activity in the same factory.

Mr. S. Banerjee has given his valuable opinion on your query in the thread by interacting with the posts step by step regarding your contractor's license. Other members have also elaborated on their opinions in the thread. I hope that with this, you now understand your query without any further interpretation on the law.

Adoni Suguresh
Labour Laws Consultant