Navigating Penalties for Job-Work Contractors: Ensuring Compliance with Minimum Wage Laws

Dear all, I am working with a manufacturing company where we have engaged job-work contractors on a piece-rate basis. The per-piece rates were calculated by the company according to the minimum wages based on their daily production. There were penalty clauses for the rejection of per-piece materials, resulting in a reduction of the bill amount to below the minimum wages for the manpower they employed. Therefore, in this matter, how can the contractor ensure statutory compliance as per the law? Additionally, what percentage of penalties can an employer charge them? Please reply.

Penalty Clauses in Piece Rate Production

The agreement between the parties must include a penalty clause. Penalties under piece rate production may vary, and rejections can be attributed to machines, maintenance, human error, and other causes beyond human control.

Governance of Penalties

Under such circumstances, it is important to understand that penalties against rejections should be governed by experts from both parties. It is also important to consider service charges instead of wages for penalties in case of errors due to faulty workmanship.

Thank you for your response.

Recently, I came to know that the rate per piece given to the contractor was less than the number of workers required for the job work. Specifically, the company had calculated the piece rate considering 28 workers but imposed 32 workers for the same task. This discrepancy has caused the contractor to face challenges in completing the statutory compliance fully. Despite this, the company has made partial payments towards PT, PF, and ESIC to meet the statutory compliance obligations. However, due to the incomplete payment of compliance, the contractor's payments have been put on hold for the last two months.

Please suggest what kind of action can be taken in such a situation to resolve the issue between the parties.

Penalty Clauses in Piece-Rate Contracts

Hello Madhu,

Unless you specify the exact penalty clause, it's challenging to provide the best suggestion. Generally, there are two or three methods to address this issue. Firstly, when a piece-rate contract is awarded, the remuneration is based on the rate per piece. Penalties may be applied for two reasons: i) qualitative complaints and ii) time delays, iii) liquidated damages. The amount of penalty to be applied is based on established norms. Many job works involve hiring contractors' personnel at an employer's workplace, where only labor charges and overhead are covered. The employer provides the raw materials, and the job work contractor processes them; the finished goods are then returned to the employer.

In the case of qualitative complaints, the penalty could include charges incurred for rework and small amounts for handling. On the other hand, if there is a time delay, generally slab rates are applied. Sometimes, when the delay causes significant issues for the employer, the entire loss or damage is levied, as in the case of liquidated damages. The slab rate could specify either hours or days of delay. There is also another aspect of liquidated damages that may be applied at a reasonable rate or as per mutually agreed norms. This levy may also be adjusted against security deposits or earnest money deposits, if any.