Is Outsourcing Employees Through Contractors Just a Sham? Insights from a High Court Ruling

In the matter of G. Srinivasa Chary v. The State of Telangana, [I.A. No. 1 of 2019 in W.P. No. 47675 of 2018 decided on August 7, 2020], the Telangana High Court, while relying on the Supreme Court's decision in the matter of Hussainbhai v. Alath Factory Thezhilali Union, [(1978) 4 SCC 257], held that mere contracts are not decisive and that the presence of intermediate contractors with whom the workers have an immediate or direct relationship ex contractu is of no consequence when, on lifting the veil or looking at the conspectus of factors governing employment, it is found that the real employer is the management and not the immediate contractor.

Since the contract labor works under the supervision of the principal employer (even if their wages are paid through a contractor), and the duties performed by them are not different from those performed by regular employees of the principal employer holding the same post as that of the contract labor, then "outsourcing of employees" as a method of engaging services of contract laborers will be considered to be a sham and a ruse.

Location: New Delhi, India

Tags: City-India-New-Delhi, high court, principal employer, supreme court, contract labor, contract employee, hiring employee in India, outsource payroll, Country-India, contract laborers

In the scenario described, where outsourcing employees through intermediaries is deemed a 'sham' due to the nature of the relationship between the workers, the intermediary, and the principal employer, it is crucial to ensure compliance with labor laws and regulations to avoid legal implications. Here are some practical steps to address this situation:

Steps to Ensure Compliance:

- Review Contracts: Carefully examine the contracts between the principal employer, intermediary, and workers to ensure clarity on roles, responsibilities, and the nature of the employment relationship.
- Assess Control: Evaluate the level of control exerted by the principal employer over the workers to determine if they are effectively treated as employees of the principal employer.
- Consult Legal Counsel: Seek advice from legal experts well-versed in labor laws to understand the implications of the arrangement and to mitigate risks.
- Establish Direct Employment: Consider transitioning the workers to direct employment with the principal employer to align with legal requirements and ensure transparency in the employment relationship.
- Implement Corrective Actions: If the current arrangement is found to be non-compliant, take necessary corrective actions to rectify the situation and prevent legal repercussions.
- Regular Audits: Conduct periodic audits to ensure ongoing compliance with labor laws and regulations, especially concerning the engagement of contract labor.

By following these steps and ensuring adherence to relevant labor laws, organizations can mitigate the risks associated with engaging workers through intermediaries in a manner that could be considered a 'sham' by legal authorities.