Liabilities of a Principal Employer under the Contract Labour (Regulation and Abolition) Act, 1970

The liabilities of a principal employer under the Contract Labour Act are examples of vicarious liability on owners of establishments. The Contract Labour Act provides respite and recourse to contract labour from non-payment of wage by allowing them access to the principal employer in the event of a default by the contractor.

A “principal employer” as defined under the Act covers any person responsible for the supervision and control of the establishment. In the case of a factory, such person would include the owner or occupier of the factory or a manager under the Factories Act, 1948. Any establishment where there were 20 or more workers employed as contract labour in any day of the preceding 12 months would be covered under the Contract Labour Act.

The principal employer is required to ensure that a representative be present while the contractor is disbursing payment to the contract labour (Section 21(2)). The Act is silent on what is the role of such representative. Subsection 4 of Section 21 provides that in the event of a default on the part of the contractor to make payment of wages to the labour employed, the principal employer may need to step in and make good such payment or shortfall.

It therefore, becomes imperative that, the representative of the principal employer fully understand the nature of his duties and be authorized to take necessary steps in the event of a default. The representative should be briefed / trained by the concerned department in the organization. Such steps could include issuing notice to the contractor and terminating the relationship, if required. Care should be taken while drafting the agreement with the contractor to ensure the same.

The Contract Labour Act prescribes that the contractor shall provide certain amenities to the labour employed by it. The rules prescribe time periods within which such amenities may be provided. These facilities include:

–       Canteen provisions;

–       Rest-rooms; and

–       First aid facilities.

In the event that the contractor fails to provide the same, the obligation automatically falls upon the principal employer. The law also provides that it may be recoverable from the contractor.

While legal recourse to recover expenses incurred by the principal employer does offer some consolation, it would be prudent to establish and clearly define mutual rights, duties and obligations in an agreement executed with the contractor, within the confines of the law. Conditions may be imposed upon the contractor in the agreement to ensure compliance with the Contract Labour Act. Employers should provide for indemnity provisions that protect the principal employer in cases of default.

In case of large corporates employing a vast number of persons under the Act (whether it be for housekeeping or security or for any other purpose), it would be prudent to obtain representations, in the nature of those provided below, from the contractor that in the past :

–       the contractor has been in compliance with the relevant provisions of the Act;

–       has a valid license / registration under the Act; and

–       has not been in default of payment to labour provided by him to another principal employer.

A certain amount of due diligence may also be done to determine whether or not the contractor has been in default or in violation of the Contract Labour Act.

Due diligence would be of significance where contractual safeguards may not offer adequate protection to principal employers. The law imposes very strict liabilities on the owners to ensure that the contract labour employed does not suffer in any manner. This needs to be kept in mind while drafting any agreement with a contractor for this purpose.

While there are monetary liabilities on corporates, additional liabilities are imposed on directors of companies. The penalty for non-compliance with provisions of the Contract Labour Act while employing contract labour is imprisonment for 3 months or fine or both. Though the quantum of fines imposed is not high, directors, particularly, the independent directors, would not want the dagger of criminal proceedings hanging over their heads. This alone should operate as sufficient thrust to ensure compliance with this Act.

The next part on contract labour is intended to detail the commercial and other legal considerations for drafting / reviewing an agreement with a contractor.

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12 thoughts on “Liabilities of a Principal Employer under the Contract Labour (Regulation and Abolition) Act, 1970

  1. Sunil Nair says:

    Sir,

    We are sub contractors, but our main contractor (company allotted work to us) is not paying our payments. My question is the Principal Employer is liable to pay our payment by debiting main contractor.

    • agamalaw says:

      The principal employer is only liable to make payment to contract labour and not the contractor. If you have entered into a service agreement, you only have contractual dues outstanding with your contractor who in turn has an agreement with the principal employer. The law does not protect contractual liability but only payment of wages / fees due to each individual contract labour. Trust to have clarified. For more details please write in to info@agamalaw.com.

  2. Swami says:

    Good Report. We have given a lump sum contract to an agency to take care of the house keeping and in the contract, there is nothing mentioned about number of workmen. Are we responsible for the labour payment as ours is a lump sum contract and not on the labour contract. if that is the case, can we ask for wage sheet from the contractor ?

  3. Gautam Patankar says:

    Hi,
    We have employed a person to complete fabrication and other jobs. The payment made to him is based on Kg of material delivered to us by the person.
    The person alone is responsible for the number of workers which he needs, their wage payment, their safety etc.
    We provide power, water and the other consumables required for the job.
    Will we be covered by the contract labour act?
    There is no “labour supply” as such since the payment is made on Kg basis and not on number of workmen provided.

    • agamalaw says:

      Hi Gautam The general principle is that any one supplying labour over that magic number is required to be registered and ensure the person supplying has license to do so. A person employed to do fabrication is someone who is doing job work. It would be advisable to get a job-work agreement in place with the commercial terms. You will need to get GST advice on the transaction. hope to have clarified.

      • Gautam Patankar says:

        Thank you for the clarification ma’am,
        However, will this kind of an arrangement be covered under the contract labour act?
        The reason for this question is, if the contractor does not pay for the PF/ESIC of the workers, will we be liable to do so?
        What about all the other matters like accidents etc?

  4. Madhur Gupta says:

    Hello ma’am

    If a company hires a contractor and that contractor is not depositing Contribution in PF Fund on time so is there any liability on company for this?

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