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This article is written by Nishank Govil, pursuing a Diploma in Labour, Employment and Industrial Laws (including POSH) for HR Managers from Lawsikho.


Around 200 workers from a Chinese smartphone manufacturing facility in India were sacked without notice in 2018. They were working on a contractual basis in the company but due to a shortage of raw material, the company asked the contractor not to supply these workers. Thereafter the agitated workers resorted to violence in the factory. This and several other incidents reveal the atrocities faced by the contract workers throughout the country. Poor working conditions, lack of job security, no bargaining power or proper payroll, casual or seasonal nature of work etc are some of the most common problems faced by these contract workers. So, let’s find out who these contract workers are, why companies employ them, what are the tests to check whether someone is a contract employee or not, is there any legislative protection available to them or do we need new laws to address these issues. 

Who are contract labourers and why do companies hire them?

Contract Labour refers to any employed person, hired to work in a company by a contractor for a specific job and a finite time. These contract workers are not directly recruited by the company but through a contractor. There are many reasons, as to why companies engage contract workers in the first place. The main reason is to reduce employment costs because if a company hires a direct employee, then apart from wages, it has to provide additional benefits to its employee like insurance, bonus, gratuity, paid leaves etc. On the other hand, engaging a contract worker will save this additional cost for the company, and also saves time and cost incurred in hiring and firing employees. 

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Problems faced by contract labour

But more often than not, all these practices work against contract workers resulting in their exploitation. Once the contract between the contractor and the principal employer is over, these contract workers are left unemployed. Though the responsibility of providing another employment lies with the contractor but unfortunately in most cases, the contractor is least bothered to take that responsibility. Dismayed by unemployment, these workers ultimately fall back on their principal employer to provide them employment. 

Secondly, these contract workers have no or little bargaining power, with their employer because of the lack of unionization. Since the work done by these contract workers is of temporary nature, their employment is not fixed with a particular contractor, once the contractor’s agreement ceases with the principal employer, they have to look for employment with another contractor. That’s why unionization of these contract workers is very difficult. Also, the existing union of the principal employer doesn’t care to raise the issues faced by these contract workers. 

Case law to check whether contract workers are direct employees or not 

In the recent supreme court’s decision in the case of Bharat Heavy Electricals Limited vs Mahendra Prasad Jakhmola and others (2019), the Supreme Court reiterates the test to find out whether contract workers are direct employees or not. 


BHEL has engaged a contractor to provide labourers at the Haridwar plant. The employment of few contractors was revoked suddenly by the principal employer, following which these contract workers approached labour court, seeking reinstatement. The labour court gave the decision in favour of the contract workers stating that the principal employer was directly controlling and supervising the work done by these contract workers. Later an appeal was filed, by BHEL in Uttarakhand High court, which upheld the decision given by the labour court stating that the work carried out by the contract workers were of similar nature, like that of direct employees and were under direct control and supervision of BHEL, therefore the contract with the contractor is a sham contract. 

Thereafter the BHEL appealed in the Supreme Court, the Supreme Court reiterated two tests from its earlier ruling in the case of General Manager, Bengal Nagpur Cotton Mills, Rajnandgaon v. Bharat Lala and Another, 2011 and International Airport Authority of India v. International Air Cargo Workers’ Union, 2009

  1. Whether the principal employer pays the salary instead of the contractor?
  2. Whether the principal employer has the power to directly control the employment of the contract worker or is just limited to supervision of his work?

In the present case, the contract labourers were paid salaries by the contractor, not by BHEL. Secondly, BHEL controlled and supervised their work because these workers were sent to work in BHEL’s premises, therefore BHEL is a secondary controller But, the primary control lies with the contractor as it was he who decided which worker will go to which principal employer and also the authority to take disciplinary action or dismissal lies with the contractor. Therefore, these workers were not direct employees of BHEL, setting aside the decision made by the High court and the Labour Court.    

This remarkable judgement was given by the Supreme Court, which advertised the removal of all ambiguities in order to test whether the contract workers are direct employees or not. But the main reason, to why these contract workers demand absorption as direct employees is because of lack of job security. Therefore, it’s also the responsibility of the principal employer to protect the rights of these contract workers.  

Responsibilities of the principal employer under Contract Labour Act, 1970

As per the Contract Labour (Regulation and Abolition) Act, 1970, any establishment that employs 20 or more contract workers on any day of the preceding 12 months comes under this act. The principal employer must get a licence from the registering officer under this act, before employing the contract workers. Usually, the core activity or perennial work of the principal employer cannot be contracted out. Only the work which is specialized & the organisation doesn’t have enough arrangement to do the work can be contracted out. In some cases when the type of work or process, about to become redundant in the near future due to change in technology or lack of demand, then that work also can be given on a contract basis. 

  1. Any contractor employing 20 or more employees on any day preceding 12 months has to get a licence under this act. Therefore, it’s the responsibility of the principal employer to make sure that the contractor has a valid licence to start contract work. 
  2. The employer should check whether the contractor is registered with the EPF and ESIC, and can ask for a challan payment receipt from the contractor in order to ensure that the contract employees are covered under the social security scheme.  
  3. The principal employer should ensure that the wages to the contract workers are paid on time, in this case, the principal employer can ask for the wage slip issued to the employees or the bank remittance details from the contractor.  
  4. The principal employer should ensure that proper drinking water and washrooms are available for these contract workers and in case, if the principal employer engages more than 100 contract workers, then they should arrange for a canteen as well. Though all these arrangements should be made by the contractor if the contractor fails to provide these facilities, then the obligation lies with the principal employer to provide the same. 


Following are a few suggestions which will help in improving the situation of these contract workers. 

  1. Contract workers should be given preference for direct employment in the company for any new openings. This is not only beneficial for the company but also for the contract work as well, on one hand, the contract employee is getting direct employment with the company and is entitled to more employment benefits at par with direct employees. On the other hand, the company also doesn’t have to spend money on hiring new employees because the contract employee is already working with them and is very well acquainted with the standards and practices followed in the company thereby saving training costs as well. Therefore, the appropriate government should make it mandatory for the companies to absorb a minimum number or percentage of contract workers that should be absorbed in the company every year. 
  2. The appropriate government should also work on fixing the number of contract workers employed with a company unless justified. This will reduce the engagement of contract workers especially for the core activity of the company. In case, any company engages more contract workers than required then heavy taxes should be imposed on the company in order to check such engagements.
  3. The appropriate government should create a central and state contract workers board to address the grievances of these contract workers. Being unable to raise their voice because of lack of unionization these contract workers can reach out to these boards in case of any issues faced by them. And these boards should have equal participation from employers, contractors and contract workers.  

These are a few suggestions which will help in improving the situation of these contract workers and provide them with more opportunities for direct employment. 


Even after the introduction of the CLRA Act, the situation of these contract workers has changed much. The new wage code has made some amendments by explicitly defining a contractor as an employer, which means that the contractor has to comply with all those compliances pertaining to a regular employer. But still, we need newer legislation to deal with the above-mentioned issues faced by these contract workers.   


  1. Bharat Heavy Electricals Ltd. vs Mahendra Prasad Jakhmola . on 20 February 2019
  2. Contract Labour (Regulation & Abolition) Act, 1970

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