Is the Contract Sham? Seeking Advice on Tribunal's Role in Employee Termination Dispute

Dear All, I would like to inform you that one employee has filed a termination case against the principal employer, stating that he was an employee of ABC Company (Principal employer) and not AZ Company (Contractor), and that his termination was illegal. The workmen also raised concerns that the contract is sham or bogus. However, the Conciliation Officer issued a Failure Certificate instead of a reference.

Please let me know, in this situation, if the Central Government Industrial Tribunal (CGIT) has the power to decide whether the contract is sham or bogus and if the workmen are employees of ABC (Principal employer) or not. If yes, what is the basis for this decision? Is there any reference to previous court decisions, such as the High Court or Supreme Court? Please help.

Regards, Shyam Singh

It depends on the following points:

1) Nature of the agreement between the contractor and the principal employer.
2) How the principal employer treats employees.
3) Very Important - Who has the power of supervision. This is a determining factor.

See [Things To Remember While Drafting A Valid Employment Contract](http://www.shramsamadhan.com/p/blog-page_16.html)

Dear Shyam,

Please clarify your statement "But the Conciliation officer issued a Failure Certificate instead of a reference. It appears that Conciliation Proceedings failed. The Conciliation Officer will submit a failure report to the Government. The Government will decide whether to refer the dispute or not.

Thank you.

Dear Shyam, CGIT has the power to declare a contract arrangement to be a sham. I am adding some case law.

A contract of employment with any contractor is considered sham and nominal when overall day-to-day administrative control and supervision upon those workers is exercised by the principal employer through its officials. Additionally, if the payment of wages, allowances, and other benefits are borne by the principal employer and the work is of regular nature, the contract is deemed sham. When it is proved that the employment contract with the contractor is sham and nominal, the employees of the contractor will have the right to be absorbed as regular employees of the principal employer.

General Manager, Bharat Heavy Electricals Limited Ranipet vs. Canteen Workers of BHEL

2015 LLR 580 (Mad HC)

When the principal employer is registered under the Act, wages of the contract labor are paid by the contractor, the contractor is a license holder under the Act, and the principal employer makes payments to the contractor, the same contractor supplying contract labor to other companies, and the workman has never worked under the control and supervision of the principal employer, the contractor's workmen would not have a relationship of employer-employee with the principal employer. When workmen fail, by any evidence on record, to prove their direct engagement by the principal employer, they are not entitled to seek any relief from the principal employer by raising an industrial dispute. If a workman fails to prove that in the preceding 12 months he had worked 240 working days, the dispute raised by him in respect of his termination of services or for any other relief under the ID Act is not sustainable, as it is not covered under the 'industrial dispute' as defined under the ID Act 1947.

Management of Turbo Energy Ltd rep. By its Executive Director vs. Presiding Officer, Additional Labour Court, Vellore & Others

2015 LLR 145 (Mad)

Bhavnagar Municipal Corporation etc vs. Jadeja Govubha Chhanubha & Anr

2015 LLR 160 (SC)

A contract between the principal employer and contractor is sham, nominal, and camouflage if the attendance of such workmen is recorded in a register separately kept with the principal employer. Such workmen are to perform duty as per the direction, supervision, and control of the principal employer. If the material record to prove or disprove the relationship of employer-employee is not produced by the principal employer, the contract is considered sham. If the contract between the principal employer and the contractor is proved to be sham, nominal, or camouflage, the employees of the contractor would be treated as employees of the principal employer, entitled to all benefits of regular employees of the principal employer.

A contract is neither sham nor camouflage if the wages are paid to the workman by the contractor, and the right to regulate employment, i.e., appointment, placement, disciplinary action, termination, and ultimate control and supervision, lies with the contractor. The contractor decides where the employee will work, how long he will work, and under what conditions. An employee of the contractor cannot claim to be an employee of the principal employer only by alleging that he has been working under the control, supervision, and direction of the principal employer in relation to the assignment of quantum of work, procedure to complete the work, etc. If the wages are paid to him by the contractor, and the right to regulate employment, i.e., appointment, placement, disciplinary action, termination, etc., is with the contractor, ultimate control and supervision lie with the contractor.

Management of Ramjas Public School (Day boarding) Rep. by its Chairman vs. Dharmender & Ors.

2015 LLR 1126 (Del)

International Airports Authority of India vs. International Air Cargo Workers Union & Anr.

3009 (13) LLR 923 (SC)

Dear Shyam,

I would like to draw your attention to the amendment carried out to Sec. 2-A of the Industrial Disputes Act, 1947, in the year 2010. As per S. 3 of the ID (Amendment) Act, 2010, a new subsection numbered as (2) has been inserted into S. 2-A of the ID Act, 1947. This new subsection enables the workman to directly make an application to the Labor Court or Tribunal about the dispute of his non-employment after the expiry of 3 months from the date of filing his application in this regard to the Conciliation Officer. The Labor Court/Tribunal has to adjudicate upon the dispute as if the dispute was one referred to by the Appropriate Govt. under section 10 of the ID Act, 1947. Therefore, the Conciliation Officer will naturally, within 3 months from the date of receipt of the application under 2-A(1) of the Act, issue only a certificate to the effect that the process of conciliation was exhausted by the workman in the dispute.

Tribunal Powers on Contract Validity

Regarding your second question, the Tribunal has powers to examine whether the contract was sham or bogus as alleged by the workman. If it finds so, it can direct the Principal Employer to absorb the contract labor as his regular workman as per the ratio-decidendi of the honorable Supreme Court in Steel Authority of India Ltd. v. National Union Waterfront Workers [2001(2) LLJ1087].

Thank you.