Prohibition and Absorption or Regularization of Contract Labour under Contract Labour (Regulation & Abolition) Act, 1970

5th September, 2024 - 11:56 am Categories: labour Law 0 Comments

INTRODUCTION

A substantial and expanding employment sector is contract labour. It is widespread in the service sector and practically all industries, job sectors, and related businesses. Workers hired by a contractor on behalf of another company are typically referred to by this term. A major concern for the government is the exploitation of contract workers, who often work in dangerous industries with inadequate facilities and security, limited bargaining power, and no social protection. In order to oversee this system, the government passed the Contract Labour (Regulation & Prohibition) Act, 1970, which abolished contract labourers from specific establishments and guaranteed their status.

Contract labour is a substantial and steadily expanding type of employment when a company hires workers who are contracted by a third party, or contractors. Some benefits that have promoted the use of contract workforce include lower costs, increased productivity, flexibility in the workplace, ease of concentrating on core competencies, etc.

In the case of Sirpur Paper Mills Ltd. v. Commr. of Labour[1], the court upheld this goal, ruling that the purpose of the CLRA was to control the labour force supply and stop worker exploitation. There were measures put in place to safeguard contract labour rights, and both the major employer and the labour contractor were held accountable.

The following statistics shows that the number of contract workers employed in India has gradually increased. In the year “2013-14, the number of Contract Labourers was 1967747 which was gradually increased to 2092673 in 2015-16.”[2]

The increasing use of contract labour in the market, particularly with the emergence of the IT sector, has made the topic of contract labour engagement contentious in India. Notwithstanding the intricacies involved with contract worker employment in India, the arrangement has grown in importance and is becoming a more common type of employment across sectors and industries. This has been brought about by the many benefits that come with it, such as relative pay reductions and relationship termination freedom.

The whole system of Contract labour is based on the structure- Principal Employer, Contractor (Middleman) and Contract Labours. When we talk about Contract labour we will always come through this arrangement.

“Principal Employer means the head of any government office or department, or another officer designated by the Government or the local authority, as the case may be, may specify in this behalf, or the owner or occupier of a factory, and in the event that an individual has been designated as the manager of the factory under the Factories Act, 1948 (63 of 1948), the individual so designated.”^[3]

“Contractor means, with respect to an establishment, to any individual who provides contract labour for any work undertaken by the establishment, including subcontractors, or who undertakes to produce a specific outcome for the establishment through contract labour, other than merely supplying goods or articles of manufacture to such establishment.”^[4]

“Contract Labour means a workman employed in or in connection with the work of an establishment by or through a contractor.”^[5]

An overview of the various aspects related to contract labour engagement in India is given in this paper, which also attempts to offer a limited insight into the laws that are pertinent, the obligations of both employers and contractors, and the various prominent issues that have occasionally taken centre stage.

PROTECTION/RIGHTS PROVIDED TO CONTRACT LABOURS

Contract labourers have been granted a number of statutory rights and conveniences due to their lack of negotiating power and the fact that their rights are not equal to those of regular employees. Various laws grant varying benefits, with the goal of giving contract labourers access to specific legal guarantees. These advantages have been acknowledged by the Legislature as well as in a number of court rulings.

RIGHTS

Payment of Wages

Rate of Wage of Contract worker should not be less than as specified under Minimum Wages Act.^[6] It is incumbent upon the contractor to ensure that all workers engaged under contract labour receive their requisite wages prior to the end of the designated time. The major employer will be responsible for paying the entire amount owed on the contract or any unpaid balance if the contractor does not make the payment within the allotted time. The Commissioner of Labour is responsible for setting the pay.

Health and Welfare

The principal employer is required by Chapter 5 of the Act to make sure that the contractor offers the following facilities in accordance with the regulations set forth by the relevant government.

• The contractor is required to provide and maintain one or more canteens for the use of contract labour if the contractor is using more than one hundred labourers.
• When working on a project that requires contract workers to stop at night, the contractor is responsible for providing and maintaining restrooms or other appropriate facilities that are clean, pleasant, well-ventilated, and have enough lighting.
• Other amenities like drinking water, separate men’s and women’s restrooms and urinals, laundry facilities, first aid kits, etc., are the contractor’s responsibility.

No female Contract worker can be employed before 6 am in morning and after 7 pm at night. EPF, ESI and EC benefits are also to be provided to contract workers.

In the case of BHEL Workers Assn. v. Union of India^[7], it was decided that contract workers should have the same rights to pay, holidays, work hours, and working conditions as employees who are directly engaged by the establishment’s major employer for the same or a comparable type of work. Based on the specific facts of this case, it was decided that they should have the same working conditions and pay recovery procedures as employees of the major employer under the relevant Industrial and Labour Laws.

As a result, the CLRA places the primary responsibility for carrying out specific statutory compliances / responsibilities pertaining to the contract labour on the contractor, with the caveat that the principal employer would be held accountable if the contractor failed to do so.^[8]

This position was further upheld by the Supreme Court in “People’s Union for Democratic Rights v. Union of India, wherein it was decided that the principal employer would be required to provide all facilities and benefits required by law to contract labourers employed at its establishment in the event that a contractor failed to fulfil its obligations under the Act.”^[9]

[Image Sources: Shutterstock]

Protection

The Contract Labour (Regulation & Abolition) Act, 1970, specifically states in Section 23 that “anyone who violates any rules or provisions pertaining to the employment of contract labour or who violates any condition of a licence granted under this Act will be punished with up to three months in prison, a fine of up to one thousand rupees, or both. This section governs the proper functioning of the Act’s provisions.”^[10]

The Act further stipulates that any company that violates any of its requirements will be held accountable, together with any individuals who were in charge at the time the offence was committed.

No court lower than a Presidency Magistrate or a Magistrate of the First Class shall try any offence punishable under this Act. Section 26 states that a court of law may only take cognizance of an offence upon the complaint of an inspector.

PROHIBITION OF CONTRACT LABOUR

The principal aim of the CLRA was to eliminate contract labour in specific circumstances. The purpose of the CLRA is implemented under Section 10.

According to sub-section (1) of Section 10, “the appropriate government may, after consultation with the Central Board or, as the case may be, a State Board, prohibit, by notification in the Official Gazette, employment of contract labour in any process, operation or other work in any establishment.”^[11]

“Sub-section (2) contains several circumstances and factors which an appropriate government (Central or State) shall take into account before issuing a notification under sub-section (1), which include:

• work is incidental to, or necessary for the industry or occupation that is carried on in an establishment;
• work is of perennial nature;
• work is done ordinarily through regular workmen;
• work is sufficient to employ considerable number of whole-time workmen.”^[12]

According to the information that is currently available, the Central Government, in consultation with the Central Advisory Contract Labour Board, has issued 88 Notifications under Section 10 of the CLRA, abolishing the use of contract labour in certain enterprises / businesses.^[13] The pattern of these notices shows that consideration has been given to the grounds listed in Section 10 sub-section (2).

SHAM ARRANGEMENTS AND ABSORPTION OF CONTRACT LABOUR

The question of whether contract workers should be regarded as direct employees of the company in the event that a notification is made to abolish contract labour under Section 10(1) has generated debate.

It could be pertinent to note that neither section 10 nor any other clause in the CLRA stipulates that contract labourers shall instantly become principal employer employees upon the issue of a prohibition notification by the relevant authorities. Stated differently, the CLRA remains quiet about the automatic absorption of contract employment as long as a relevant government issues a ban notification under section 10 of the CLRA. Considering the aforementioned, the question of absorption has been considered by a number of Indian courts and has generated differing judgements, some of which are covered in the section that follows.

The Supreme Court ruled in the Deena Nath[14] case that the principal employer is not obligated to take on the eliminated contract employment.

However, after that, there were persistent reports that the contract workers were being fired from their jobs. Thus, concerns about the act’s treatment of labour that had been terminated surfaced. The Supreme Court overruled the two-member bench decision in the Deena Nath Case on the important issue of the aftereffects of the abolition of contract labour.

Prior to 2001, the majority of contract labour cases were decided by courts using the precedent established by the decision of Hon’ble Supreme Court in the Air India Statutory Corporation v. United Labour Union^[15].

“Ramaswamy, J.” observed:

1. Although the CLRA Act does not specifically address absorption of contract labour, once contract labour engagement is prohibited due to Section 10(1) of the Act’s publication, the principal employer is unable to continue contract labour and a direct relationship between the workers and the employer is established;
2. The Act did not intend to remove contract workers from their employment or take away their means of development or source of income and
3. In a proper case, the Court, must order the relevant authority to submit a report. If it is determined that the workers were employed in violation of the Act’s provisions or that their employment was continued as contract labour despite section 10(1)’s prohibition on such work, the High Court is obligated by the Constitution to uphold the law and provide them with the necessary relief, such as absorption into the principal employer’s workforce.

The Hon’ble Court also cited an implicit legislative intent found in Section 10’s provision that, upon the elimination of contract labour, the former contract workers would become direct employees of the employer whose establishment they had previously worked on, enjoying all Act-guaranteed benefits in that same establishment.

The Hon’ble Supreme Court’s Constitutional Bench overruled the ruling of “Air India Statutory Corporation v. United Labour Union” in Steel Authority of India Ltd. v. National Union Waterfront Workers (SAIL)^[16] in 2001.

The court stated that even in the Standard Vacuum^[17] case, which served as the impetus for the Act, the Hon. Supreme Court’s Constitutional Bench held that the Act did not mandate automatic absorption by the principal employer upon the termination of contract labour.  In the SAIL case, it was argued that the Act does not mention the idea of contract labour automatically being absorbed as a result of notification under Section 10 issued by the relevant Government, and that any such notification would result in penalties as specified by the Act. Consequently, the Air India ruling was overturned by the Honourable Supreme Court prospectively.

Therefore, till now the Sail judgement is followed when we look at the contention of automatic absorption of contract labours and a mere notification under Section 10(1) does not allow for automatic absorption of contract labour by the principal employer. However, there is still conflict between principal employers and contract workers. There are still many documented instances when contract workers maintain that they are employees of the principal company even after a prohibition letter has been issued.

SHAM ARRANGEMENTS AND ABSORPTION OF CONTRACT LABOUR

Under some circumstances, the relationship between the principal employer and contract labour is such that, on the surface, it might seem to be a valid contract labour arrangement, but in reality, it’s just a plot to deny those workers the benefits to which they would have been eligible if they had been hired as regular employees. The courts have referred to this type of arrangement as a “sham arrangement.” In these situations, courts have “pierced the veil” to ascertain the real nature of workers’ roles and engagement.

In the SAIL’s case which is referred above also the Court stated that in cases where the contract was discovered to be a sham and nominal rather than a disguise, the contract labourers employed by the major employer were deemed to be, in actuality, the principal employer’s employees. In actuality, these cases deal with situations where the court lifted the curtain and established the truth about the situation at the point where using contract labour was forbidden, rather than the outlawing of it.

The Jural relation between employee and employer has to be determined in order to term the relation as a “sham arrangement” but there is no such test which determines it and can be adopted as rule to determine it, so on basis of facts and circumstances of each case the relation is to be determined.

The Supreme Court ruled in “Workmen of Nilgiri Coop. Mktg. Society Ltd. v. State of T.N., that each case’s question must be decided with consideration for the particular facts at hand. It was decided that no one test, including the organisation, control, and other tests, had ever been found to be the deciding factor in determining the legal relationship between an employer and employee. The Court held that several factors that would have a bearing on the issue, are: who is appointing authority, who is the pay master, who can dismiss, how long alternative service lasts, the extent of control and supervision, the nature of the job, e.g. whether, it is professional or skilled work, nature of establishment, the right to reject.”^[18][19]

The National Airport Authority v. Bangalore Airport Service Coop. Society¹⁹ and Hussainbhai v. Alath Factory Thezhilali Union^[20] ruling also established the standards for determining an employer-employee relationship in the context of contract work.

“The workers of the purported contractor may file an industrial dispute if the contract is fraudulent or not legitimate in order to assert that they were always employed by the principal employer and to demand the proper terms of service. The provisions of section 10 of the Act will not prevent the raising or resolution of the disagreement since, when such a dispute is raised, it is not a dispute for the abolition of the labour contract. The industrial adjudicator must determine whether the contract is real or fraudulent when such a dispute is brought up.”^[21]

In the recent case of “Kirloskar Brothers Ltd. v. Ramcharan and others, Court stated that for absorption of contract workers directly by principal employer two things have to there- First notification by appropriate government that there can be no contract workers in this business structure and an allegation or finding with regard to same has to be there in order to say that it is a sham contract, if these two are present then there can be automatic absorption of contract labour as a regular worker.”^[22]

STATUTORY OBLIGATION OF PRINCIPAL EMPLOYER AND ABSORPTION

The Supreme Court’s constitution bench has been consistent with the well-established position in cases decided, which states that contract workers should be absorbed as regular employees upon the abolition of such a system if the principal employer is required by law to maintain a canteen in a factory or establishment.

Therefore, the contractor would be on a different footing where they were required to fulfil the principal employer’s statutory obligations, and it would be impossible to infer from them the general legal principle that, in the event that the contract labour system is abolished under section 10(1) of the CLRA Act, contract labourers working in the principal employer’s establishment would not be required to integrate into the establishment as regular employees.  The Supreme Court ruled in Saraspur Mills Co. Ltd. v. Ramanlal Chimanlal^[23] that workers employed in a canteen, even if it is managed by a cooperative society, were considered “workers” because, according to section 46^[24][25] of the Factories Act, 1948, the factory’s occupier is required to maintain and operate a canteen.

A prominent case on the matter is “Parimal Chandra Raha v. LIC. In this case, the Supreme Court decided:

1. When an employer is Statutorily obligated (such as under the Factories Act, 1948) to supply and operate a canteen for the use of its workers, the canteen becomes a part of the business, and the staff members who work there are management staff members;
2. When an employer is required by law to provide a canteen as part of their services but is not required by statute to do so, the canteen becomes a part of the business, and the people who work there are management employees;

• The canteen does not become a part of the establishment in situations when there is no requirement to furnish one but there is a requirement to supply the facilities needed to run one;”²⁵

In “Indian Petrochemicals Corpn. Ltd. v. Shramik Sena, however, this ruling was given a new interpretation when it was said that the presumption pertaining to such workers under the Factories Act is only accessible during the duration of the Act. The Supreme Court ruled that the rights of employees with regard to hiring, seniority, promotions, retirement benefits, etc. are not governed by the Factories Act, 1948. These are subject to different laws, regulations. Employees of the statutory canteen cannot, therefore, automatically become the establishment’s employees for all intents and purposes.”^[26]

The ruling in the case of “Haldia Refinery Canteen Employees Union v. Indian Oil Corpn. Ltd., established that the appointment, disciplinary action, dismissal, or removal from service of workers employed in the canteen is unrelated to this matter. The mere fact that management has this kind of power does not imply that the workers in the canteen are workers of Principal employer. The management is using this kind of supervisory control to make sure that the employees are suitably qualified and able to provide the management’s staff with appropriate service.”^[27]

The Supreme Court held in Barat Fritz Werner Ltd. v. State of Karnataka that workers in canteens, regardless of whether they are hired by the contractor, must be considered “workers” and that the term “worker” cannot be narrowly interpreted even in situations where the Factories Act, 1948, does not apply to the establishment but the provision of a canteen facility is a requirement for employment.”^[28]

Therefore, we can see that there is disparity in the approach adopted by courts to come to a conclusion on this issue but majorly the decision given in the SAIL’s case is followed.

CONCLUSION

In India, contract employment is still widely used in a variety of industries and occupations, including skilled, semi-skilled, and unskilled labour, despite the negative effects. It could seem like an attempt to get around labour regulations is behind the system of contract labour. But today, there has been a steady move towards effective contract workforce management, which includes paying benefits on par with regular employees (under specific conditions). Even though contract labourers might not always have the same level of security and respect as permanent employees, there is still a rising market for them. Consequently, in light of these circumstances, it is necessary to amend the law to guarantee that contract labourers’ rights can be improved.

The SAIL Judgment aftermath has left the court’s position on contract work completely clear. It is now evident that sub-section (1) of Section 10 of the CLRA, which forbids the employment of contract labour in any process, operation, or other work in any establishment, and no other provision in the CLRA, either expressly or necessary impliedly, provide for the automatic absorption of contract labour upon the issuance of a notification by the appropriate Government. Contract labour employed by the relevant company may not be absorbed by the principal employer.

The role of contract workers must be considered in light of the expanding tendency of breaking down the production process into its component pieces and outsourcing the supply of those elements to various producing units. The majority of this practice has grown along with information technology. A higher overall demand for these services and thus the creation of jobs could arise from such outsourcing if it results in a greater specialisation in the provision of these services, with advances in efficiency and decreased costs.

Thus, in order to safeguard the interests of both the industry as a whole and these contract labourers specifically, regulations must be put in place regarding the system of contract employment, which is a necessary evil. Even if actions have been done in the modern era to safeguard individuals’ rights (contract labour), the industry’s interests must also be taken into account. Giving people job possibilities is also crucial because restricting or discouraging behaviour might result in less opportunities for work.

Author: Himanshu Chimaniya, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[1] 2010 SCC OnLine AP 658.

[2] Ministry of Labour and Employment, Violation of Contract Labour, Press Information Bureau, (April 10th, 2017), http://pib.nic.in/newsite/pmreleases.aspx?mincode=21. (Last visited on August 17th, 2024).

[3] Contract Labour (Regulation & Abolition) Act, 1970, Section 2(1) (g).

[4] Contract Labour (Regulation & Abolition) Act, 1970, Section 2 (1) (c).

[5] Contract Labour (Regulation & Abolition) Act, 1970, Section 2 (1) (b).

[6] Minimum Wages Act, 1948.

[7] (1985) 1 SCC 630.

[8] Contract Labour (Regulation & Abolition) Act, 1970, Section 20.

[9] (1982) 3 SCC 235.

[10] Contract Labour (Regulation & Abolition) Act, 1970, Section 23.

[11] Contract Labour (Regulation & Abolition) Act, 1970, Section 10 (1).

[12] Contract Labour (Regulation & Abolition) Act, 1970, Section 10 (2).

[13] Ministry of Labour and Employment, Annual Report, Government of India, New Delhi, 2016-17. ¹⁴ AIR 1991 SC 3026.

[14] AIR 1991 SC 3026.

[15] AIR 1997 SC 645.

[16] AIR 2001 SC 3527.

[17] AIR 1960 SC 948.

[18] (2004) 3 SCC 514.

[19] SCC OnLine Kar 273.

[20] (1978) 4 SCC 257.

[21] Gujarat Electricity Board v. Hind Mazdoor Sabha, (1995) 5 SCC 27.

[22] (2023) 1 SCC 463.

[23] (1974) 3 SCC 66.

[24] Factories Act, 1948, Section 46.

[25] Supp (2) SCC 611.

[26] (1999) 6 SCC 439.

[27] (2005) 5 SCC 51.

[28] (2001) 4 SCC 498.