Contract labour: The Covid impact

The concept of contract labour is covered by the Contract Labour (Regulation & Abolition) Act, 1970 (“CLARA”) which deems a workman to be employed as “contract labour” “in or in connection with the work of an establishment when he is hired in or in connection with such work by or through a contractor, with or […]

The concept of contract labour is covered by the Contract Labour (Regulation & Abolition) Act, 1970 (“CLARA”) which deems a workman to be employed as “contract labour” “in or in connection with the work of an establishment when he is hired in or in connection with such work by or through a contractor, with or without the knowledge of the principal employer.” This definition must be carefully evaluated in the circumstances arising from Covid-19. It is important to appreciate that, although this act uses the expression “principal employer”, it does not create or give rise to anything more than surrogate (or subrogated) statutory obligations of the principal employer in relation to the contract of employment. That would mean that the principal employer, one who has control over the establishment, has some statutory liabilities under this act when the contractor defaults by not providing amenities to contract labour or not paying them. 

Section 12(2) covers possible conditions of service and essential amenities that may be required by the government, Chapter V provides for canteens, rest rooms and other facilities and Section 21(1) provides for the primary obligation to pay, resting this squarely upon the contractor [“A contractor shall be responsible for payment of wages to each worker employed by him as contract labour”].  Sub-section 21(4) shifts this responsibility onto the principal employer if the contractor does not pay or if he makes short payment, but, as discussed below, the liability remains that of the contractor and the funds can be recovered by the principal employer, hence it may be called a surrogate liability much like an insurer’s liability. It is my understanding that the definition of “principal employer” and the act itself do not change the contractual position whereby the principal employer engages someone (here called the “contractor”) to do something or provide service using manpower that are employed by the contractor under a separate contractual arrangement (an employment agreement).

The contract between the “principal employer” or the client and the contractor thus must be given effect to. The Covid-19 Ministry of Home Affairs orders provide that “all the employers, be it in the Industry or in the shops and commercial establishments shall make payment of wages of their workers on due dates without any deduction”.  It would be difficult (in my opinion, since there is no law on this subject yet) to interpret these words to mean that a principal employer under the CLARA will be deemed liable for payment to workmen who are not his own employees once he has either validly terminated that contract or no payment has accrued due to lack of services under the terms of that arrangement.  In other words, the contractual relationship with the contractor (notwithstanding use of the legal fiction of the client being a “principal employer”) is in fact a separate arrangement and contract for providing services and not an employment contract. This must be understood comparatively in a wider frame by analogy with the IT industry. A client is akin to the “principal employer” even if he has no control over the establishment. Clients based in North America or Europe may pay for hourly, per call, per minute telephone services under a master-services agreement or a call-centre service agreement. Such clients can hardly be told that they are deemed principal employers and are hence obliged to pay for all the contractor’s call-centre staff, even if the establishment is closed and has provided no service (in fact, under CLARA they are not and this is illustrative). In simple terms, if the agreement between the client and the contractor does not involve this liability, the client cannot be held liable for payment and the contractor would be solely liable or responsible to deal with his regular employees, i.e. for contract labour provided to a client establishment. Does CLARA change this for registered principal employers? It would appear not to do so.

The question of “client liability” as the principal employer arises when there are clear statutory obligations created by CLARA or otherwise and there is a defined and registered “principal employer”.  In some cases, sub-section 21(4) of the CLARA will be used to foist liability onto the principal employer or client, that would apply to registered establishments under the Act, where there is a principal employer so declared and even then it is unlikely that the principal employer would be liable if due to the closure, he has terminated the contract with the contractor or if no chargeable services are provided by the contractor as per the service contract. The above approach suggests that although there are clear legal provisions to protect contract labour employed by a contractor, there is nothing to force a client or even a “principal employer” under CLARA to assume the liability for employees who are not his, assuming that there is a contract between the principal employer and the contractor permitting the former to either suspend payments or pay for work actually done (say man days or hourly work). The MHA order itself has now come under some cloud since it has been challenged and the Supreme Court on 27 April granted the Centre two weeks’ time to put its policy on record in respect of the implementation of this order, the outcome of that petition and connected cases will certainly affect the abovereferred grey areas of law. Even if we assume that the MHA order will survive legal challenge, the above analysis suggests that it casts responsibility on the contractor and not on the principal employer who is always at liberty to proceed (under section 21(4) of CLARA) and upon being called upon to pay the relevant wages by the contract labour, “then the principal employer shall be liable to make payment of wages in full or the unpaid balance due, as the case may be, to the contract labour employed by the contractor and recover the amount so paid from the contractor either by deduction from any amount payable to the contractor under any contract or as a debt payable by the contractor”.

The clear language of the law suggests that while there is a mechanism provided to protect contract workers, the original contract between the principal employer and his contractor is not affected and thus if that contract contains a provision for calculating payment based upon man days worked, hourly services provided, etc., it would not be unreasonable to expect all principal employers in India to rely upon such contractual provisions and attempt to avoid payment or to pay the contract labour and recover the funds from the contractor, given the likelihood of a Supreme Court decision soon, this may be done subject to the court’s orders. The government seems to have arrived at hasty decisions aimed at first protecting all employees and then migrant workers. Advisories aside, it remains to be seen whether an order imposing a fine and the risk of prosecution can actually interfere with a contract of employment or for that matter with an ordinary service contract that involves a firewall between the client or principal employer and the employee. The contractor is that firewall, and such arrangements are designed to protect the so-called “principal employer” or client from all sorts of liabilities that would ordinarily arise in the employment relationship. Contractors, so-called “principal employers” and client employers will need to await clarity from the Supreme Court and then act accordingly. Naturally, this analysis reflects one viewpoint in a vastly differing sea of opinions, but there is no doubt that Covid-19 will test the limits of judicial interpretation in unexpected situations that could not ordinarily be anticipated in this context.

The resulting cases will call for balancing not just equities, but also conflicting legal rights and liabilities to determine whether we will move in the direction of fairness making judges amiable compositors acting ex aequo et bono i.e. through equity and good conscience or whether they will incline towards the strict blackletter law. The old court decisions tend to make principal employers automatically liable now leaving scope for further litigation, certainty at this time may be preferable. The final answer and policy must emanate from what we affectionately describe as our Apex Court, we do need to wait and watch! Amir Z. Singh Pasrich is Managing Partner of I.L.A. Pasrich & Company, Advocates. He is co-chair of the India Working Group of the International Bar Association (IBA) and is an elected member of the IBA’s LPD Council, he is also Chairman of the Law & Justice Committee of the PHD Chamber of Commerce.