Payment Dilemma: Can We Pay Contract Workers Directly from Our Company Account?

We are a manufacturing industry. Can we transfer the payment of wages directly from the company account to the contract workmen working on a daily basis through a contractor?

Direct payment of wages to contract labor shall be done only in special circumstances, such as non-payment of salary by the contractor. If done on a regular basis, it may lead to the contract being deemed as a sham, which carries significant legal risks.

It is not advisable to transfer money from the company to contractor workmen, as this shall form a direct employee-employer relationship between the company and contractor workmen, thereby indemnifying your contractor from his statutory obligations towards his workmen. Why do you want to do this? As a principal employer, you have a number of responsibilities. Why do you want to shoulder this burden also?

You pay your contractor's monthly bill. Let him pay salaries/wages to his workmen.

Ensuring Proper Payment of Wages

To ensure proper payment of wages, you may pass the bill of the contractor after confirming the payment of wages to the workers as per the Minimum Wages Act. Additionally, ensure the payment of legal dues such as PF, ESI, PT, etc., by the contractor. If the contractor fails to produce the required documents along with the bill, you may hold his bill. In cases of underpayment or non-payment, you can exercise your power under Section 21(4) of the Contract Labour (R & A) Act, 1970, to pay the due amount to the worker.

Role of the Contractor

When you have engaged a contractor, allow him to perform his duties as a contractor. Direct payment of wages to contract laborers every month by the Principal Employer may lead to issues regarding the demand for regularization of contract laborers in your company, as rightly advised by knowledgeable friends above.

Risks of Direct Wage Transfers to Contractor's Employees

You should not transfer any wages or payments directly to the bank accounts of workers employed by the contractor. If you do so, it may create problems in the future. For instance, the employees of the contractor might claim that they are employees of the principal employer. If the contractor terminates their services, they could raise an industrial dispute against the principal employer. In such cases, the Labour Court may treat the contract as a sham and could order reinstatement into the services of the principal employer.

Likewise, the employee can raise a claim under the Payment of Wages Act, Minimum Wages Act, or Payment of Gratuity Act against the principal employer.

Regards, Shobhit Kumar Mittal
Labour & Industrial Law Advisor
Delhi/NCR
[Phone Number Removed For Privacy-Reasons], [Phone Number Removed For Privacy-Reasons]