Checkpoints for the principal employer – contractor relationship

The most popular question is what are the points to be kept in mind, while entering into an arrangement with a contractor.

One of the most important factors to keep in mind while drafting agreements and/ or during appointment of contractor is employee registrations such as provident fund (PF) / employees’ state insurance (ESI) etc.

 It is recommended that one always award contracts for services to the establishment which has establishment code numbers under the Employees Provident Fund Act, ESI Act, etc. for the reasons set forth below:

1.      The Principal Employer is likely to get better services from a contractor with the registrations as it would generally be an established company having large manpower support, business with various other companies and better management practices;

2.      The Contractors will be required to comply with the provisions of these Acts i.e. the employer welfare legislation as employers and hence you as the Principal Employer don’t have to take the pain of compliance on behalf of your Contractors.

Prior to finalizing the appointment of a Contractor, the principal employer must insist that the Contractor produce proof of remittance of contributions under the relevant legislations in respect of the employees i.e. the contract labour deployed in your establishment. This should also be a precondition for approving bills owed to the Contractor. The idea is to avoid any insinuation of default by the authorities in respect of the Principal Employer.

In many cases where the Contractor is a petty contractor having less than 20 employees altogether on his roll and working exclusively for you, he would not be liable to be registered himself with provident fund authorities.  In such case, the Principal Employer would need to bring the contract labour under its PF code.

Checkpoints prior to entering into a Principal Employer – Contractor relationship

1. The principal employer should obtain registration under Section 7 of the Act read with Rule 17 of the Contract Labour Rules. (We are assuming here that the Contract Labour Act applies to this establishment. For details on establishments that do not fall within the purview of the Contract Labour Act, see here.)
2. The Principal Employer should not intend to have any supervision or control over the contract worker.

 Vis-à-vis Contractor

1. The Principal Employer should issue form V to contractors.
2. The Principal Employer should check whether the Contractor has obtained license under Section 12 of the Act read with Rule 21 of the Contract Labour Rules.
3. The Contractor shall provide intimation of commencement of work within 15 days in accordance with Rule 25 (2) (viii) of the Contract Labour Rules.
4. Penalties / liquidated damages for non-payment of wages or other statutory dues to contract labour by the Contractor.
5. The Contractor should be responsible for and should provide proof of completing documentation in relation to the contract labour provided to the Principal Employer.
6. The Contractor shall pay at least minimum wages to workers as mentioned in the contract with Principal Employer.
7. That contractor shall submit the proof of remittance (original challans) of ESIC and EPF every month on time.
8. The Contractor to renew license from time to time as per Rule 29 of the Contract Labour Rules.

Ongoing matters

1. Contractor shall disburse payment to the labour in the presence of a representative of the Principal Employer.
2. Principal Employer to notify contractor in writing regarding delay of even one day in payment of wages to contract labour.
3. The Principal Employer should maintain registers and records including for detailing the visit of the Contractor or Contractor’s supervisor in the “in and out” register.
4. Principal Employer shall never take disciplinary action against the contract labour and / or sanction their leave or reduce their hours of work.
5. The Principal Employer should not provide advances to the contract labour.
6. The Contractor should intimate any change in number of workmen used under the license obtained or conditions of work as per Rule 25 (2) (vii).

Contractual requirements

In addition to the above, the Principal Employer should keep the following principles in mind while entering into an agreement with the Contractor:

• The contract should explicitly mention that the Principal Employer shall not exercise any supervision or control over the contract workers / labour.
• Adequate representations regarding past dues and compliances by the Contractor, including in respect of labour welfare legislations.
• The contract should provide that the Principal Employer cannot take disciplinary action against the contract labour and / or sanction their leave or hours of work.
• The Contractor shall undertake an obligation that compliance with all applicable labour welfare legislations are to the account of the contractor.
• The Principal Employer shall be entitled to impose penalties / liquidated damages for non-payment of wages or other statutory dues to contract labour by the Contractor.
• Detailed indemnities should be included in the agreement for any losses incurred by the Principal Employer on account of any act or omission of the Contractor.
• The Contractor shall not appoint a sub-contractor without the prior written permission of the Principal Employer.
• The wages paid by the Contractor to employees shall always be higher than minimum wage. This should be representation on behalf of the Contractor and an on going obligation.
• The written agreement should be properly executed and stamped as per the relevant state laws. The Principal Employer should retain the original.
• The Agreement should be promptly renewed from time to time.