Is the Principal Employer Responsible for Unpaid Wages in Outsourced Jobs?

One of the public sector companies located in Gujarat outsources many jobs through contractors. One contractor has not paid wages to his workers. Now, workers are claiming from the principal employer. So, is the principal employer liable for payment of wages if the provision in the agreement with the contractor states that the contractor is solely liable for payment of wages?

Applicability of the CLRA Act, 1970

On the applicability of the CLRA Act, 1970 to both the principal employer and the contractor, not only is the responsibility for payment of wages included, but also all other legal obligations to the contract labor employed through such a contractor for the works of the establishment are saddled on the principal employer in the event of failure by the contractor, based on the principle of vicarious liability. Therefore, the principal employer cannot disown his statutory liability based upon any contra clause contained in a bilateral agreement between them.

Compliance Checklist for Principal Employers

As a Principal Employer (PE), I suggest devising a checklist outlining the compliance requirements (such as PF/ESI/insurance under the Employee Compensation Act, Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act, etc.) expected under different statutes. These checks should be completed before releasing payments to all contractors operating within your premises. Only after ensuring that all compliance obligations are fulfilled by the contractor(s) should the monthly bill be approved for release. This process should be conducted regularly, on a monthly basis.

I have observed instances where contractors maintain two sets of pay-sheets to reduce bonus obligations, although this is a separate issue. The main concern is that contractors often exhibit laxity in settling various dues or in filing required returns, which can potentially shift the liability to the PE. I have recently provided similar advice on this topic within this forum.

Regards

Dear Umakantham.M Sir,

You have used the term "principle of vicarious liability". Please explain it.