How much penalty can an employer charge to Jobwork contractor?

Dear all,
I am working with a manufacturing company where the we had engaged job-work contractor on piece rate basis. The per piece rates were calculated by the company as per minimum wages as per their daily production. There were some penalty clauses on rejection of per piece material, due to which the bill amount got reduced and it was below the minimum wages as per the manpower engaged by them. Therefor in this matter how is the contractor fulfill the statutory compliance as per law. And how much percentage of penalty can an employer charge to them?
Please reply.

The agreement between the parties must have inclusion of this penalty clause.
Penalties under peice rate production may vary and rejections can be attributed to machines,maintenances and human error and other such causes which are beyond the control of human being.
Under such circumstances, it is therefore to be understood that penalties angainst rejections be governed by experts from both the parties.
Having said this it is also important that instead of wages service charges may be considered for penalty in case of errors on part of faulty workmanship.

Thanks for your response.
Recently I came to know that the rate for per piece given to contractor was less than the number of workers for jobwork, i.e, the company had calculated the piece rate considering 28 workers but imposed 32 workers for the same due to which contractor was not able to complete the statutory compliance fully. But every month they have done some payment towards PT, PF & ESIC payment just to complete the statutory compliance part. Due to incomplete payment of compliance, contractors payment has been put on hold from last two months.
Please suggest what kind of action can be taken during such situation, so that they can resolve the issue between them.

Hello Madhu,
Unless you indicate exact penalty clause it's not appropriate to come out with our best suggestion. Generally there are two/three methods to deal with it. Firstly, when a piece rate contract is awarded the remuneration shall be Rate/piece. And penalty may be applied for two grounds - i) qualitative complaints and ii) time delay iii) liquidated damages. How much of penalty has to be applied is on any body's norms. Many job works are turned out involving hiring of contractor's persons in employer's works where only labour charges + OH are covered. Whereas employer issue the raw materials and job work contractor does the processing thereon and finished goods are returned to employer.
In case of qualitative complaints - the penalty could be charges that is to be incurred for rework + small amounts for handling. On the other hand if it's time delay generally a slab rates are applied. Some times when the delay caused serious troubles to the employer entire loss/damage caused to be levied (as in the case of liquidated damages). The slab rate could be, mentioning either hours or days of delay. There is also one more aspect of liquidated damages which also may be applied to a reasonable rate/as per mutually agreed norms. This levy also may be adjusted against SD/EMD deposits if any.