Automating Contractor Billing: Is It Legally Safe and What Precautions Are Needed?

Dear Subject Matter Experts,

An organization is undergoing a complete automation process wherein a large contract labor force is engaged. The attendance process is already automated. All contract labor is supposed to mark their attendance through this system of the Principal Employer. The contractor is reimbursed based on the actual attendance plus his service charges of 10%.

Automation of Contractor Billing

Now, the Principal Employer is in the process of automating the billing of contractors, wherein bills for every contractor will be automatically generated based on the attendance marked in the system. The bill will include the name and other details of their firm, and the contractor can download it, sign it through their system, and send it to the Principal Employer for reimbursement. This process saves a lot of time and effort in checking the bill.

Legal Considerations

Is it advisable to proceed with this automation? What precautions should be taken to ensure it is not treated as a sham contract in the eyes of the law? I would be grateful if any case law could be cited.

The key test of whether the contract is genuine or a sham is who appointed the laborers, who pays them, and most importantly, who supervises them. Where the contractor is paid on the basis of attendance plus 10%, it has the features of a sham contract, ex facie.

The fact is that there are contract laborers deployed on the premises of the Principal Employer. For this purpose, we should follow some golden principles of Contract Labour (CL).

Golden Principles of Contract Labour

1) We should not have a direct relationship with CL. We may supervise the work rather than directly managing CL. For day-to-day instructions, we must rely on the authorized representatives of the agency, such as the supervisor of the contractor.

2) They should not engage in the permanent and perennial work of the establishment.

3) The CL should not perform the same or similar work as regular employees.

4) All the statutory records under the Acts & Rules should be maintained by the agency or its authorized representative.

Dear Questioner,

The principal employer cannot generate the bill on behalf of the contractor because which bill number will the principal employer mark on the bill? One solution could be to allow the principal employer to generate the bill to save their checking effort. The contractor needs to generate their bill based on the details provided by the principal employer and attach the calculations provided by the principal employer with their bill to avoid any confusion.

Your fear is very much justified. As soon as it is proven that the company does the work of even creating the bill and allowing the contractor to simply sign and send it back, the courts will most likely declare that the contract is a sham.

If your company wishes to automate this process, have the contractors input the bill into a bill passing system by entering the amounts in various fields. Then, let an AI-based engine verify this information with the attendance records to automatically approve or reject the vendor's invoice.

I am attaching a screenshot of a similar vendor bill entry system for your reference.

Mr. Banerjee, In my last 15 years, I have never seen any Principal Employer (PE) generating a bill on behalf of a contractor, as my company also works as a contractor and provides services to companies that all have automated systems. If the contract is a sham, then there is no answer for that. We can only discuss legal matters, not support illegal activities or provide solutions for unlawful work.

Hi Indu,

I was not the one who suggested that the Principal Employer (PE) should handle the billing; that was the suggestion of the original post. However, the company wants to automate the process of passing the bills and therefore considered this (really unwise, from a legal perspective) process.

Vendor Invoice Portal

My suggestion is that they should implement a Vendor Invoice Portal where vendors can submit their invoices with the necessary fields and attach the actual invoice as a PDF. Many large companies use this approach. We are also required to do this for our audit invoices. Their system automatically verifies the information we submit on the portal against their Purchase Order (PO) system, and then the invoice processing is automated. This avoids all manual entries in vouchers.

SAP and many other systems offer this feature. I attached an example I found online to show the company how they can achieve this. I hope my point is clear.

Hello All, This is the era of digitalization. Until 5 years ago, we did not dream of so much digitalization. It is only generating a bill. Attendance is computerized. It was a time when the Factory Inspector did not accept computerized attendance.

Further, the Contractor will submit the bill, WHICH WILL BE CHECKED BY THE PRINCIPAL EMPLOYER. That is some work. There can be mistakes and corruption. Hence generating a bill through the system is better and mostly foolproof. The Contractor signing the bill means he is taking the responsibility. Who prepares the bill, whether it's the Contractor's employee or the Principal Employer's employee or the computer, is immaterial.

Friends, go ahead with technology. Don't be afraid of legal threats. As long as you are clear, you need not worry.

Regards, Vibhakar Ramtirthkar.

Even if the documents are prepared by the system, they will be endorsed by the Contract Agency with their signature and seal to the principal employer. Hence, there is no harm in using such system-generated documents for billing purposes. However, we must adhere to all the golden principles for Contract Labour to justify the deployment of the Contractor, as I have clarified in my earlier post.

Mr. Vibhakar, I truly appreciate your confidence. All the best to whoever is following your advice. However, the courts do not share your enthusiasm for digitalization or consider the process of invoices generated by the Principal Employer as valid for the purpose of a real contract. Still, you are entitled to your opinion, and I wish you all the best with your endeavors in the courts.

You mean to say that a foolproof system is installed by the Principal Employer on his premises for monitoring and control purposes. I do not see any issue if the documents generated are endorsed by the contract agency with their signature, seal, and a covering letter on the agency's letterhead.

There are two things:

Legal aspect of contractor labor

First, if you talk about the legal aspect, then practically it is not possible because the law always states that there should not be any relation between the Principal Employer (PE) and the contractor. The Contractor Labour Act is a separate act; however, for the applicability of contractor labor, it may be a query by the concerned labor department for using the PE software to create the monthly invoice. Mostly, the company follows this procedure due to faith and accuracy.

Printing of statutory requirements

Second, if we talk about the printing of statutory requirements by the PE, then it does not create any connection. How can it be proven that all statutory forms are created and printed by the PE? The main job of the PE is only to take care of the dues and other legal formalities done by the contractor. It's a different thing whether it is done by the PE, the contractor, or any other third party.

Labor Contract Act regulations

The Labor Contract Act specifies the rules and regulations and their implementation between the PE and the workers engaged as contractor employees. There is no law that mandates printing the statutory forms.