Confused About Principal Employer Duties? Seeking Clarity on Contractor Compliance Issues

Dear Seniors,

I am seeking clarification for the issue provided below. I have recently joined a battery manufacturing plant where around 15 to 16 contractors are working. They have their dependent ESIC and PF numbers, and the contractor license has already been obtained from the labor department to ensure compliance. As a responsible principal employer, we are maintaining all necessary records as per the act, such as wage distribution records and PF & ESIC submission records. An audit was conducted by a third-party agency about a month ago, and some non-compliance issues were identified. However, I believe some of these points are not related to us. For instance, some contractors have failed to maintain records like half-yearly returns, adult registers, advance registers, bonus registers, leave registers, etc.

I would like to clarify my confusion regarding this matter. In my understanding, they are independent contractors, and the principal employer should not interfere in these specific areas. The principal employer is responsible for matters related to wages, PF, and ESIC. Please help clear my doubts on this issue.

What do you mean by an independent contractor?

An independent contractor is a person who undertakes to do specified work for a certain period. They use their own personnel, tools, materials, and time to complete the task. An AMC holder is an independent contractor. You may not know who all are engaged by them to do the maintenance. They perform the work periodically or when a need arises, bringing tools and equipment with them.

Contract of service

A contract of service, on the other hand, is a contract to engage workers who will work for you, using your materials, tools, and equipment that you have installed or supplied, according to the specifications given by you.

In this scenario, you are the principal employer and are responsible for compliance and accountable for any non-compliance by the contractor.

It is surprising that you have 15 such contractors working in your plant. Basically, you can only outsource such works that are not perennial in nature, though that is a different issue. Normally, and practically, other than wage payment records, records of payment of ESI, PF, and Bonus, the other files and records are not important, and nowadays the department is not very concerned about such documents.

Understanding the Distinction Between Employee and Independent Contractor

The tests applied to determine whether a person is an employee or an independent contractor may not automatically apply when assessing whether a contract labor agreement is a sham, nominal, or mere camouflage. For example, if the contract is for the supply of labor, the labor supplied by the contractor will necessarily work under the directions, supervision, and control of the principal employer. However, this does not make the worker a direct employee of the principal employer if the salary is paid by the contractor, the right to regulate employment is with the contractor, and the ultimate supervision and control lie with the contractor.

Role of the Principal Employer and Contractor

The principal employer only controls and directs the work to be done by contract labor when such labor is assigned, allotted, or sent to them. It is the contractor, as an employer, who decides whether the worker is to be assigned or allotted to the principal employer or used otherwise. In short, the worker is the employee of the contractor, and the ultimate supervision and control lie with the contractor, as they decide where the employee will work, how long they will work, and under what conditions. Only when the contractor assigns or sends the worker to work under the principal employer does the worker operate under the supervision and control of the principal employer, but this is secondary control. The primary control is with the contractor. This is only my view, sir.

True. Then what is the issue? Your contract is a genuine one, and from all angles, you have complied with what is required to be followed by a principal employer. You can answer the audit query by stating that you have ensured the contractors have paid salaries to their workmen on time and as per the Minimum Wages notifications of the government. You have verified the Returns of Contributions of ESI and EPF and found them satisfactory, and you have vouched for the payment of bonuses to their workers deployed in your plant.

You can also say that you have given a contract for the supply of labor, and for you, it is only a number and not who is engaged. If one worker is absent on a day, the contractor is expected to send/deploy someone else in his place. You are not concerned about what kind of leave the contractor is giving to his workers. Since you (the principal employer) are not the leave approval authority concerning contract labor, the question of not having gone through the leave book of the contractor does not arise.