Can Employers Legally Withhold Contractor Payments Over Theft Suspicions?

Withholding Payments Due to Suspicion of Theft

Can the principal employer withhold payments to the contractor on the grounds of suspicion that contract labor is involved in inventory theft at the principal employer's factory? A police complaint has been registered, and the police are investigating. Can the principal employer hold the contractor's dues?

Please provide the letter format for intimating these reasons to the contractor.

Principal Employer's Rights Regarding Contractor Employee Misconduct

The principal employer has the full right to recover the cost of any property owned by the principal employer that is damaged, missing, or stolen by the contractor's employees from the contractor's bill. However, if an item is stolen by a contractor employee, this must be proven beyond any doubt. Before recovering the money, the principal employer must communicate with the contractor in writing.

As stated by Mr. Nair, you can recover the losses caused by the contractor or their staff. However, before doing this, I recommend you order a domestic enquiry. Let the culpability of the theft be established clearly. You cannot recover the losses on the grounds of "suspicion."

When the enquiry is ordered, send a formal letter to the contractor about the initiation of the enquiry. This will set the ground for your future correspondence.

Check the contract agreement with the contractor and find out whether any clause exists on the recovery of the losses.

Conducting a Domestic Enquiry

Secondly, a domestic enquiry should be conducted to investigate the lapses in the existing system. The focus of the enquiry should be on the system and not on the person. Your goal is not just to recover the money but to avoid theft cases in the future too.

Many times, theft cases happen because the proper records are not maintained or the security processes are inadequate. If adequate controls are not established, then theft cases are bound to happen. Therefore, after the enquiry, consider what remedial action needs to be taken.

Thanks,

Dinesh Divekar

Withholding Contractor's Payment: Considerations and Justice

Withholding the contractor's entire payment pending completion of the inquiry will impact the disbursement of the salary of his other employees as well. Just because of one culprit, why punish other innocent persons? It would be against the principles of natural justice.

Fair Treatment for All Employees

Secondly, please think about what punishment you would have awarded if the defaulting employee were a regular employee. There is a tendency among employers to show leniency to their own employees and show harshness toward contract employees. There should be no discrimination at all.

Assessing Loss and Payment Withholding

Coming back to your question on withholding the payment of the contractor, identify the estimated losses because of the theft, identify what percentage of recovery is possible, and withhold that much payment only, not the entire payment.

Contract Agreement Provisions

Lastly, please check the provisions of the contract agreement as well. When framing the contract, have you made provisions to recover losses arising out of theft?

Thanks,

Dinesh Divekar

We don't have a contract with them, but we have a Letter of Intent (LOI) with the vendor wherein all the terms and conditions, including the clauses about remedial action against theft and misconduct of the employees deployed by the contractor, are outlined. Could you please provide the letter format?

Dear Bindu, I suggest the following actions:

1. Since your LOL provides enabling remedial clauses for theft by the contractor's employee, you should determine the ballpark figure of the amount involved in the theft and withhold that amount pending an investigation.

2. When drafting the letter to the contractor, I advise you to attempt the drafting and send it for expert comments. Spoon-feeding in this manner is not appreciated.

3. Before taking the action of withholding the contractor's pro rata payment, conduct an internal investigation to ascertain the facts and ensure there is a prima facie case warranting the withholding of payments.

4. The suggestion to hold a domestic enquiry by the Principal Employer is inappropriate as the theft is alleged to have been committed by the Contractor's employee. It is the contractor who should arrange to conduct an independent inquiry and share the findings report with the Principal Employer for information.

5. The most important part is to confirm that the theft has indeed occurred, resulting in monetary losses, and that the LOL empowers the company to withhold payments.

Regards