Understanding Labor Licenses: Why Are They Essential for Contractors and Who Can Shut Down a Non-Compliant Plant?

Dear all,

Please tell me why a labor license is mandatory for a third party or contractor. Also, please let me know who has the authority to close the manufacturing plant if there is any non-compliance.

Your question seems unclear to me. If you have the patience to go through the Contract Labour (Regulation and Abolition) Act, 1970, you can find the answer to your first query. Any license under some law or the other is a form of authorization to undertake some legal activity subject to payment of fees and certain restrictions as laid down in the Act and the corresponding rules.

In any contract of service, there can only be two parties to the contract: the employer and the employees. When a third party, the contractor, enters into the scenario with their own employees for the fulfillment of certain activities relating to the employer anywhere within the geographical area of the latter's activities, such an arrangement between the two becomes a contract for service. This eventually reduces the status of the contractor's employees to indirect labor in relation to the employer, for whose benefit the entire contract is made.

Only to ensure the basic employment benefits of direct labor to the indirect labor employed through a third party or contractor in certain recognized operations or activities of the establishment, the CLRA Act, 1970, designates the person for whose benefit the contract is made as "the Principal Employer," the third party as "the Contractor," and the third party's employees engaged in the activity of the contract as "Contract Labour." It mandates the registration of the principal employer, licensing of the contractors, and the creation of vicarious liability on the principal employers in respect of certain service conditions pertaining to the contract labor thus engaged.

There is no question of closing down the establishment in case of non-compliance. The contract labor would automatically become the employees of the principal employer.

Hope I have answered both the queries.

Regards

I could not understand your question properly. Why is a labor license mandatory? If the provisions of the CLA are applicable, then you have to obtain a labor license.

As far as the closing of a manufacturing plant for non-compliance is concerned, please note that laws are framed to be followed, and breaches of compliance are also compoundable in the honorable court. Closing down the establishment or manufacturing plant for non-compliance under labor laws is not the aim, but to ensure compliance either by providing a satisfactory compliance report to the inspecting authority or by compounding the discrepancies in the honorable court of law during the prosecution process.

Query Regarding Contracts in Private Security Services

I have a query regarding contracts in private security services.

1) What does "Principal Employer" mean in the context of security services being provided by an agency to an establishment?

2) Can a housing society be termed as a principal employer if they avail services of a security service provider?

3) Who is supposed to fulfill statutory compliance against the employees deployed at the client's place?

4) What are the consequences if a service provider doesn’t comply with statutory dues because they are ultimately not being paid for such dues by their client?

5) Out of the two parties, to whom can the notices be served against such non-compliance?

Thank you.

Regards

Understanding Principal Employer (PE) and Contractor Responsibilities

PE is the establishment that engages contract labor in its activities through the contractor. In the deployment of security personnel, the establishment for whose security they are provided by the Security Agency is the PE, the Agency is the contractor, and the security guards are contract labor.

Housing Society and CLRA Act

Normally, the term "housing society" indicates the association of house owners of a residential complex owned and mostly occupied by individual owners. In such a case, they will not become PEs under the CLRA Act. Similarly, the security agency also needs no licensing under the Act concerning the guards deputed for that particular housing society. However, it would be safer for the society to ensure minimum wages for the security guards thus employed through the agency.

Compliance Responsibilities

The primary responsibility for compliance is on the contractor. If the client is a registered PE, he or she has vicarious liability regarding the payment of wages, bonus, gratuity, and other benefits.

If there is a willful failure or inability due to insufficient rates of wages paid by the PE, it is the responsibility of the PE to make statutorily fixed payments and recover them from the contractor.

Notices can be served on both parties, whether the intention of the enforcement authority is only to ensure statutory payments or to launch effective prosecution.

Since you have not defined the nature of your business/establishment, I am considering it under "Other Establishment." Principal Employer Definition In any other establishment, a "principal employer" means any person responsible for the supervision and control of the establishment. "Establishment" means:

(i) any office or department of the Government or a local authority, or

(ii) any place where any industry, trade, business, manufacture, or occupation is carried on.

Housing Society as Principal Employer In my opinion, a housing society should not be termed as a Principal Employer since it does not carry on any industry, trade, business, manufacture, or occupation.

Liability for Statutory Compliance The first liability to fulfill statutory compliance lies with the contractor. However, if he fails to fulfill the same, the Principal Employer bears the last and prime liability. As always stated by expert members, "always obtain statutory compliance records from the contractor and conduct periodic audits as well."

Consequences of Non-Compliance Both the Principal Employer and the Contractor have to face the consequences of non-compliance. Whenever any contract labor approaches the Labor Office, both will be summoned to appear before the Authority.

Primarily, the notice will be served to the contractor; however, the Principal Employer will also be called up if the complainant involves a third party as well.

I hope I clarified your query. Fellow members can shed more light on the matter.

Regards

Thank you, Mr. Umakanthan and Pansingh, for the input. However, I am yet to understand why, if a housing society is a registered co-op housing society, it can't be considered the principal employer. As I understand it, the Co-op Societies Act in any state states that whatever employees they employ for the operations of the society, they are bound to abide by PF and other applicable laws.

In the context of security services provided by an agency, under the Maharashtra Private Security Guards Emp. & Reg. Act 1981, it is stated that the statutory wages stipulated by the Security Guard Board must be followed. Additionally, it is binding on the agencies to abide by labor laws as per the Private Security Agency Act 2005.

My query revolves around who will bear the cost of statutory payments due to PF and ESIC (employer contribution) plus other statutory costs if it is not clear who the principal employer is and who has the ultimate compliance responsibility. This issue was particularly challenging for me while providing services to housing societies.

There were other issues connected to this problem. For instance, if a client deducts TDS, how can they say they will not pay for service tax? Also, if service tax is applied, TDS deduction was made on the total bill, which included the amount of service tax as well. This means tax was deducted on service tax where service tax is not considered part of income.

My question is, if all such legal and mandatory deductions like TDS and service tax are followed, why can't such clients be called the principal employer and be obligated to pay the statutory compliance due to them.

The entire confusion is caused by the casual usage of the term "housing society." In common parlance, the term "society" applies to any "association of individuals." Hence, the term "housing society" refers to the association formed by the individual owners of a housing complex or a residents' association. As a provider of security guard services to them, your legal compliance might be restricted to that of the State Private Security Guards Act, about which I have no knowledge. In such a situation, the CLRA Act, 1970 does not come into the picture at all because of the clarification given by Mr. Pansingh in his reply.

On the other hand, if the housing society is a Co-Operative Society registered under the Co-Op Societies Act, the provisions of the CLRA Act will apply to the Co-Op Housing Society as the Principal Employer (PE) and the Security Agency as the contractor. Hence, the legal liabilities and compliance are to the extent mentioned in the CLRA Act.

Employer's contribution to compulsory legal entities such as EPFO and ESIC and optional social security arrangements like Employees' Compensation Insurance, etc., have to be necessarily borne by the contractor and reimbursed by the PE for the obvious reasons that they form part of the contractor's expenses towards the implementation of the contract on one hand and the vicarious liability created by virtue of sec. 21(4) of the CLRA Act on the other.

Regarding the payment of Service Tax, I believe that it is a tax levied on the service charges received by a service provider beyond a certain limit. There is no bar to deduct the service tax paid from the gross income of the service provider. Just because your client effects deduction of TDS from your service charges, can you say that he has to pay your income tax also?

Regards

Dear Mr. Bijay,

There are now more points (queries) beyond the CLA issues. Earlier, you asked only about the applicability of a Labour Licence, but now Statutory Benefits, TDS, and Service Tax are also included in the discussion.

Umakanth sir has clarified the terms related to CLA. In Maharashtra, as per a recent notification, there should be a minimum of 50 workmen required to come under the Labour Licence context. If your deployment at a single site reaches the minimum number, then only do you need to obtain a Labour Licence.

I would like to add a few more points (which can be practically useful for you), for which I need more details, such as your organization's status (Proprietorship, Partnership, Company). What terms and conditions are mentioned in your Agreement (related to statutory, taxation, payment terms, etc.)? Does the Housing Society have any source of regular earnings, or is it being operated/maintained under/by any profitable group? Because the way they are handling Service Tax and TDS, it seems they are working on a large scale. Generally, Co-operative societies don’t want to involve themselves in such things. Moreover, you have not clarified whether the society is ready to provide you with PF-ESI and other mandatory benefits.

First of all, you can approach the labour office in your area, duly mentioning the case history. If the Labour Office issues you any clarification/NOC that the Housing Society does not come under the purview of CLA, then you can exclude those employees from the statutory compliances.

However, if the society is ready to provide you with the benefits in your monthly rates, you should not have any problem. If the client delays your payments, then you have to maintain the backlog of paying the salary and statutory liability.

Regarding TDS, you are right; the TDS should be deducted only on basic prices. Service Tax should be excluded while deducting TDS. If you are a non-company, then Service Tax is applicable under the reverse charge mechanism. Under the reverse charge mechanism, the liability of depositing the service tax lies with the Service Recipient. You have to submit/share your service tax number with them. However, you have to mention the clause in your invoices. If you are a company, then they must pay you the Service Tax.

I hope the points are now clear. However, for a better framework, I advise consulting a professional on these matters.

Clarification on Security Services and Legal Obligations

Greetings and thanks for further clarifying my doubts in detail.

I am a Security Services Consultant Freelancer, and many private security agencies providing services face the following issues:

1) Convincing co-op societies about who the principal employer is and what their obligations are as the principal employer.

2) Explaining that private security agencies' business is governed under a separate act and the applicability of the CL Act.

3) Clarifying how TDS deduction is to be applied and who is responsible for service tax obligations.

Many agencies I deal with are proprietors, and hence they quote service tax in the invoice. I had approached the Labour Office, but they routed us to the Guard Board.

Umakantan Sir has also mentioned that if security services are governed under a separate act, then the applicability of the CL Act may not be relevant.

For all these queries, I was searching for any notification or some kind of authorized notice but could not find any. This led me to join the discussion to learn more.

Recently, I referred to the Co-Op Societies Act, where I found that if the society is a registered society (residential) and avails services from other parties/vendors for its operations, they must abide by the relevant applicable labor welfare laws and comply accordingly.

If you have any inputs regarding the Registered Societies Co-op Act, especially in the context of its applicability with security agencies, please let me know, Sir.

Once again, thank you, Sir.