The scenario presented in the post has two facets - one is legal and the other is ethical.
Basically, employment itself is a direct contractual relationship between the employer and the employee thereby creating certain perceivable mutual rights and obligations till the contract between them subsists. But any practice by whatever name it is called such as outsourcing/ contract labor introduces the element of indirectness into the relationship resulting in the disownment of one of the essential partner of production by the other who is actually the ultimate beneficiary and an identity crisis in the very relationship apart from the denial of certain employment rights and benefits otherwise available to such indirect labor. Of course such a practice of indirect labor can be justified in incidental and intermittent nature of activities in terms of flexibility of hire and fire and economy of operations. When it is adopted in core activities too, it assumes the character of exploitation. To remedy this mischief only, the Contract Labor ( Regulation and Abolition ) Act,1970 was passed by the Government of India.
But, an unbiased analysis of practical experience will certainly prove that this is the Act in the top of the list of poorly enforced Labor Legislations in India. Particularly after the advent of LPG, the status quo is more in contravention than in compliance despite the case laws enunciated by the higher Judiciary about the vicarious liability of the Principal Employer on the service conditions of their contract labor. Employers, always, prove to be more intelligent than the Law-makers everywhere. In order to circumvent the provisions of the CLRA Act, either they found their benami satellite units of production and outsource the sizable core activities or create umbrella labor contracts thus mentioned in the post and reap the consequential benefits of economy of operations, flexibility of hire and fire and prevention of unionization of such employees.Regarding the liability of the PE in respect of payment of gratuity to his contract labor, the Courts do not have consensus of opinion. Particularly, when the contractors get changed periodically before the completion of every 5 years, the question of gratuity becomes all the more difficult in view of the minimum qualifying service under the same employer prescribed by the Payment of Gratuity Act,1972.
Therefore, the only legal remedy available to such contract labour is to raise an industrial dispute u/s 2(k) of the Industrial Disputes Act,1947 for the conferment of equality in service conditions on par with the regular workmen of the principal employer by declaring the contract as a sham one.