Maharashtra Wage Hike: How Should Contractors Handle the Unexpected Cost Increase?

Maharashtra Government Wage Increase

This time, the Maharashtra government has increased wages by 100% on the basic plus VDA as well. However, when contracting with government departments, they require three quotations every six months, taking VDA into account. Initially, the increase was going perfectly at 7-10% VDA yearly. But now, who will bear this burden? It can't be assumed or predicted while quoting. If one tries to do so, they may not get the contract. Even if they do, the department might not award the tender as they find the rates too high compared to their estimate.

Kindly advise on who will cover this additional payment.

Dear Suresh,

Vicarious Liability Under the CLRA Act, 1970

Section 21(4) of the CLRA Act, 1970 imposes vicarious liability on the Principal Employer for the payment of wages to contract labor engaged by him. It includes the obligation of paying wages not less than the statutory minimum wages as well. Therefore, the reasons cited in your post as a defense are quite untenable. The Principal Employer, particularly being a Government department, cannot approve any tender quoting a lesser amount comprising wages falling short of the statutory minimum rates of wages during the currency of such a contract.

Cost Escalation Due to Minimum Wage Hike

I would like to add that if there is a steep hike in the minimum wages during the currency of any contract, it is certainly a situation of cost escalation necessitated by the operation of law. Therefore, the contractor can legally demand an enhancement of his charges under the escalation clause in the original contract. No government agency or department would simply turn down such a fresh demand by any existing contractor because the contractor can stop his work forthwith, and a change of contractor would not be possible at this juncture on the pre-revised rates.

Common Issue in Government Departments

This is a common problem in government departments. Most of the departments are now including a line stating, "Whenever there is a change in Basic/VDA, the contractor will first pay the difference to the workers and then claim reimbursement from the principal employer by showing proof of payment." The Delhi High Court, in its judgment dated 20th September 2012 in the case of Peoples Union for Democratic Rights & Ors vs. Union of India, suggested on page no. 61 that if any establishment floats a tender where the minimum wage rate is less than the one which is to be amended or even the current one, then the tender shall be rejected with a penalty.

Dear Suresh, This problem exists everywhere but mostly for those who have closed contracts. In cases where the contract is signed for a longer period with an escalation clause to address such issues, you need to include a separate clause in the Letter of Intent (LOI) or Work Order issued to the contractor.

In every contract, there is a clause for reimbursing costs if they significantly exceed the quoted rate, or if there are new taxes and duties imposed. Therefore, you should discuss the matter with the principal employer to either amend the contract or include the necessary clause.

Please let me know if you need further clarification or assistance.

Thank you.