Navigating Contractor Agreements: On-Job vs. Labor Contracts and Compliance Concerns

Dear HR Professionals, Kindly suggest, can we give an on-job contract rather than a labor contract to a contractor who is hiring daily laborers to complete the job? He typically has fewer than 20 laborers each day, and they are not fixed as he recruits them from the roadside. As a principal employer, are we required to adhere to any statutory compliance in this scenario? Additionally, is the contractor complying with any statutory regulations? Please advise.

Thank you.

What do you mean by a Job Contract, and how does it differ from a Labour Contract?

Compliance with the CLRA Act
If the contractor is to supply manpower, then you should comply with the provisions of the CLRA Act. Though a single contractor may be supplying fewer than 20 workers, if you have 20 or more such workers through different contractors, you should obtain registration under the CLRA. Even otherwise, the responsibility of a principal employer towards ESI, PF, and payment of minimum wages cannot be ruled out.

On a job contract, it means you have a quantum of work that you are giving to a contractor to complete, irrespective of how many laborers he will deploy. It's purely about the completion of the job, similar to how we give a contract for the renovation of our house. I need expert advice on this.

If a contractor is using the materials you supply and is producing the goods by engaging his workers on your premises, supervision is established. In such cases, the provisions of the CLRA Act and acts like ESI and EPF will apply. On the other hand, if he is producing the goods from his own premises using materials he purchased according to your specifications and then 'selling' them to you, it will be outside the purview of labor acts. In the former scenario, intermittent supervision of quality will be available, whereas in the latter scenario, only final inspection of quality will be available.

Court verdicts on the subject show that it is very important to establish supervision over the work beyond final inspection to prove a master-servant relationship, thereby bringing the application of labor laws in an outsourcing activity.

Dear Sanjay,

Definition of contract labor

The definition of contract labor basically states that any person working on your premises under an agreement with their direct employer to deliver a result, other than the pure sale of goods, is a contract worker (except those in part-time or purely administrative roles).

Principal employer responsibilities

Regardless of whether the individual has a labor supply contract or a job contract, the responsibility and liability remain the same for the Principal Employer (PE). The determining factor for applicability is whether the workers (not necessarily the same individual) regularly work on your premises.

License applicability in Maharashtra

In Maharashtra, the threshold for license applicability has been raised from 20 to 50 workers, eliminating the need for a license. There is an ongoing debate (not yet resolved by courts) regarding whether the act applies even when a license is not required. To safeguard yourself, ensure verification of fair wage payment (including minimum wages), overtime at double rates, provision of required leaves and holidays as per the law, and payment of all statutory dues.

Compliance with safety regulations

Additionally, ensure compliance with safety regulations and, if ESIC (Employees' State Insurance Corporation) does not apply, confirm the presence of a workmen's compensation insurance policy. As mentioned by Madhu-ji, avoid direct involvement in controlling or managing the contractor's employees, except as necessary for quality control purposes.

By adhering to the above guidelines, you are less likely to encounter issues.

Many principal employers have come up with the idea of a job contract instead of a work contract to save themselves from the liabilities of labor laws. However, this is not the correct system. For example, a principal employer makes an agreement with the contractor to clean a certain square footage area, and rates are fixed based on the area cleaned without considering the requirement of workers for specific tasks. By implementing such a provision, the principal employer believes they can avoid responsibilities under labor laws such as payment of minimum wages, PF, ESI, etc.

Definitions of Contractor, Contract Labor, and Principal Employer

The definitions of the contractor, contract labor, and principal employer cover all job contracts where contract laborers are employed for any work, with or without the knowledge of the principal employer. The contractor is responsible for paying minimum wages to the contract laborers employed at their premises for the contracted work. If the workers are covered under PF and ESI, LWF, PT, all dues must be paid/deposited with the relevant authorities, and the principal employer cannot evade its responsibilities.

The most important thing to note to differentiate a contract that will attract labor laws from one that will not is its nature. A contract for service is one in which the master-servant relationship is absent, whereas a contract of service is one in which the element of the master-servant relationship is present.