Are We Responsible for Vendor Employees' Statutory Payments in Our Factory?

Liability for Statutory Payments in Outsourced Work Arrangements

We have our factory situated in Maharashtra and are producing engineering products. Due to our requirements, we have now outsourced the production of certain components of our final product to various vendors. To monitor the work and ensure quality, we provide the working space and required equipment to these vendors within our factory, and we pay the vendors based on the components produced. We have no control over the number of employees involved in the manufacturing process by the vendors as our contract is specific to the components. The payment is also made based on the number of components produced, but we ensure the safety of these employees. We have our permanent workmen, staff, and temporary workmen and staff working on the same floor.

My query is, are we liable for the statutory payments of these employees who are employed by the vendors, such as bonuses, ESIC, PF, etc.? Additionally, can you suggest some statutory and other complications that we may face in the future with this type of work arrangement?

Thank you.

Understanding Vendor Contracts in Factory Settings

In an arrangement like this, where you have vendors working on your factory premises, it is very difficult to establish that the contract with the vendors is a contract FOR service and not a contract OF service. It is eventually a contract of service because you are obtaining the service of an outside party for manufacturing some components. For that, you supply the materials and have provided the equipment as well. It is true that you pay per unit, but that does not mean there is no in-process supervision. The basic objective of placing them under your own roof is to check the quality of the products before they become final. The fact that you do not have any control over the number of workers engaged will not hold good here.

In order to make the workers of the contractor independent, you should have a buyer and seller arrangement with the contractor. Since the product is manufactured within your factory, the contractor cannot be considered an independent manufacturer with separate sales tax and central excise registration numbers. These obviously require an address, and that cannot be the address of a premise that already has sales tax and central excise registration. Under normal circumstances, the scrap generated during the production process will be the property of the principal organization because they supplied the raw materials. In such a case, again, the buyer-seller relationship cannot be established.

The security measures you have taken to ensure the safe working of the contractor's workers are other important factors that establish that there exists a master-servant relationship. Therefore, such an arrangement will come under the purview of the Contract Labour (Regulation and Abolition) Act. Accordingly, you, being the principal employer, have to ensure that the workers engaged by the contractors receive wages at a rate not below the minimum wages and in a timely manner as per the Payment of Wages Act. You also have to ensure that ESI and EPF are remitted in time by the contractor.

Regards, Madhu.T.K