OUTSOURSING (BPO)

&
PROVISIONS OF THE
CONTRACT LABOUR (REGULATION & ABOLITION) ACT, 1970
~ KM Naik Advocate High Court & Chief Labour & Industrial Laws Advisor to Tata
Group of Companies, Mumbai
PRELUDE

With the opening of world economy, it has become expedient to engage Contract
Labour in any industry in our country. One of the ways of remaining in
competition effectively is to engage Contract Labour, which is cheaper than the
regular labour. Even prior to the Act of 1970, employers were invariably
engaging Contract Labour. With the passage of time, the system led to rampant
exploitation of Contract Labour by contractors as well as by principal employers.
Therefore the said Act, namely the Contract Labour (Regulation & Abolition) Act
1970 was passed by the Parliament in the year 1970.

The object of the said Act is mainly to regulate the employment of Contract
Labour and their service conditions and to abolish the Contract Labour wherever
it is found necessary.

SAILENT FEATURES:

1 The Act applies to an establishment of a Principal Employer in which

twenty or more workmen are employed as contract labour. To constitute
the number of 20 contract labour, not only the workers employed by one
contractor is to be counted, but the total number of contract labour
engaged by different contractors have to be counted.

2 Under Section 7 of the Act, a Principal Employer has to obtain registration,

even when the establishment engages less than 20 contract labour
through one Contractor, but engages 20 or more contract labour through
different Contractors.

3 Similarly, the Act applies to a Contractor who employs twenty or more

workmen in one or more than one establishment. To constitute the
number of 20 workmen, not only the workers employed by the Contractor
in one establishment of the Principle Employer is to be counted, but the
total number of workmen employed by the Contractor in different
establishments of different Principal Employers are to be counted.

4 Under Section 12, a Contractor has to obtain licence to operate as a

contractor, even when he employs less than 20 workmen in one
establishment, but employs 20 or more workmen in more than one
establishments.
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5 The dominant object of the Act in the first instance is to regulate the
service conditions of contract labour and in the second instance in a given
case to abolish the contract labour.

6 Under Section 10 of the Act, the Govt. has got power to abolish the
contract labour by applying the criteria laid down in the said Section.

7 The object of the Act is also to prevent exploitation of contract labour, as

the principal employer may employ contract labour mainly to get cheap
labour.

8 Failure either to obtain registration by the principal employer or licence by

a contractor is fatal and consequently the workmen of the contractor may
claim to be the workmen of the principal employer, in law.

9 Under Rule 25 of the Maharashtra Contract Labour (Regulation &

Abolition) Rules 1971, framed under the said Act, the workmen of the
contractor have a right to enjoy the same wages, hours of work and other
service conditions as enjoyed by the direct workmen of the principal
employer if the work done by the contract workmen and the workmen of
the principal employer is the same.

10 Contract labour, in law, is classified in two categories (1) bonafide contract

labour and (2) malafide contract labour. Bonafide contract labour means
there is no bogus/sham contract between a contractor and the principal
employer. Malafide contract labour means where a contract is bogus or
sham. When the contract is bonafide, the Govt. can abolish the contract
labour u/s. 10 of the Act. When the contract is malafide, Industrial
Tribunals have power to declare the contract workmen as the workmen of
the principal employer. Such a declaration is given after lifting the veil,
considering the factors such as control, supervision, direction etc. by the
principal employer. This depends upon the facts of each case.

11 The Hon’ble Apex Court has handed down a landmark judgement in the
case of Steel Authority of India Ltd. vs. National Union Water Front
Workers & Ors. (2001 III CLR 349 SC = 2001 II LLJ 1087 SC) on the
issue of abolition of Contract Labour u/s. 10 of the said Act. The highlights
of the said judgement are as follows :

i. Under Section 10 of the Contract Labour (Regulation & Abolition)

Act 1970, the appropriate government is empowered to abolish the
contract labour in any establishment after satisfying certain
conditions laid down in the said section.

ii. There were conflicting decisions of the Supreme Court as well as of

various High Courts on the issue of automatic absorption of
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contract labour into the direct employment of principal employer

consequent upon abolition of contract labour under the said Act.

iii. However, in the case of Air India Statutory Corporation and

others vs. United Labour Union and others [1997 (9) SCC 377],
the Supreme Court, consisting of 3 Judges, had handed down a
judgement holding that once the appropriate government abolishes
the contract labour in any establishment under Section 10 of the
said Act, such contract labour automatically become the direct
labour of principal employer.

iv. The said issue of automatic absorption was also pending before the
Supreme Court in various other cases, including the case of Steel
Authority of India Ltd. (SAIL).

v. The case of SAIL was recently heard by the Constitution Bench of

the Supreme Court, consisting of 5 Judges, as the earlier
judgement in the case of Air India was handed down by a Bench of
3 Judges.

vi. The Constitution Bench of 5 Judges has now in the said case of
SAIL by its judgement dated 30.8.2001 set the said controversy at
rest by holding that upon abolition of contract labour by the
government in exercise of the powers u/s. 10 of the said Act, there
cannot be automatic absorption of such contract labour into the
direct employment of the principal employer. By this judgement,
the contrary view of the Supreme Court in the said case of Air India
has been specifically overruled.

vii. The Constitution Bench of 5 Judges has also held that the
judgement in the case of SAIL has no retrospective effect, but has
only prospective effect. This means, if any company like Air India
had already absorbed the contract labour into their direct
employment upon abolition, those cases cannot be reopened
based on the said judgement of SAIL.

viii. Therefore, in future, if the appropriate government (either Central or

State as the case may be) abolishes contract labour in exercise of
its powers u/s. 10 of the said Act in any establishment, the contract
labour cannot automatically become the direct labour of the
principal employer.

ix. The said judgement in the case of SAIL, apart from being a
landmark judgement, is also in the nature of trend-setting in the
matter of employment of contract labour, because many employers
were apprehensive that upon abolition of contract labour, they
would automatically become the direct employees of the principal
employer based on the judgement of the Supreme Court in the said
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case of Air India. The judgement in the case of SAIL has now
allayed the fears of employers and they are now free to engage
contract labour through a contractor without any such
apprehension.

x. Notwithstanding the above position in law, the Supreme Court in

the said case of SAIL has reiterated that if the workmen of the
contractor claimed to be the workmen of the principal employer on
the ground that the contract entered into between the contractor
and the principal employer is a sham/bogus/camaflogue contract,
and also that for all purposes the principal employer in effect
directly controls and supervises the work of the so called
contractor’s workmen, in that case, if the matter travels to the
Court, the Court has power to lift the veil and see the reality as to
who actually assigns the work and effectively controls and
supervises the work. And if it is found that for all purposes the
principal employer has been directly/effectively exercising the
power of control and supervision, in law, the workmen of such a
contractor can in law be declared as the workmen of principal
employer.

xi. Therefore, the Companies are advised that they should not in any
way interfere with the working of a contractor vis-à-vis his workmen.
They should also ensure that their personnel, such as
officers/supervisors do not exercise direct control or supervision
over the day to day working of the workmen of the contractor.

xii. In nutshell, if any company wants to ensure that the workmen of a

contractor should not be treated as the workmen of the company (i.
e. principal employer), the contractor should be allowed to function
like any other independent employer right from the inception of
employment of contract labour, i.e. issuing letters of appointment by
the contractor on his letterhead; determining wages and other
service conditions of the contract workmen by the contractor by
directly signing settlements between the contractor and his
workmen; supervision and control is exercised by the contractors in
respect of their workmen; assigning of work by contractors to their
workmen etc.

xiii. If the above guidelines are observed strictly, it would be almost

impossible for any contract workmen to claim to be the workmen of
the principal employer before the Court of law.

xiv. The Constitution Bench of the Supreme Court in the said case of
SAIL has also dealt with other related issues, which are not
germane for the purpose of this note.
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xv. In a way, the Supreme Court by its judgement in the SAIL case has
substantially achieved by its judicial activism what the Central Govt.
has been struggling to achieve by way of legislation, which got
stalled for political reasons.

CARES TO BE EXERCISED WHILE ENGAGING CONTRACT LABOUR -

GUIDELINES

The Courts are flooded with cases throughout the country where the
workmen of contractors have claimed to be the workmen of principal
employers. Several cases have been decided in favour of contract labour,
holding them as workmen of principal employer, because the arrangement
between the contractors and principal employers have been found to be
sham/bogus and that the contractors have been merely name lenders and
not real employers of the workmen. Therefore, while engaging the
services of a contractor, some factors that should be borne in mind are :

a) Contractor preferably should have his own office premises. Before

engaging him as a contractor for any services, there should be
correspondence between the contractor and the principal employer.
A contractor should use his own letterheads for correspondence.
He should state clearly as to whether he is a proprietary concern or
partnership firm or limited company.

b) After the correspondence is over, preliminary enquiries as to the

nature of the services to be availed, amount of consideration to be
agreed upon etc. should be incorporated in the contract between
the parties, which should be signed on a stamp paper.

c) In the contract, there should not be any clause which amounts to

controlling the business and administration of the contractor by the
principal employer, for e.g. the contract should not state that the
contractor shall engage a particular number of workmen for any
operations or he shall pay a particular rate of wages to his workmen
or the contractor shall have to remove a particular workmen if his
conduct is not found satisfactory etc.

d) A lumpsum amount should be fixed by way of consideration to be

paid to the contractor for the services to be rendered by him.

e) The contractor should interview his workmen, issue letters of

appointment on his letterhead clearly stating therein the job for
which the workmen is employed, rate of wages, hours of work,
transfer of services etc.

f) The principal employer should preferably engage a contractor who

provides services to some other establishments also.
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g) The contractor or his supervisor should supervise, control or direct

the workmen.

h) Under no circumstances, the supervision, control and direction

should be done by any person of the principal employer.

i) Attendance register, wage register etc. should not be maintained

by the principal employer, but by the contractor alone and these
registers should carry the name and address of the contractor.

j) Wages must be disbursed by the contractor or his person to the

contract workmen and not by any person of the principal employer.

k) Any disciplinary action should not be taken by the principal

employer. Such action should be taken only by the contractor.

l) Revision of wages should be done not by the principal employer,

but by the contractor himself by issuing letters on his letterhead.
Wage revision can be by way of an agreement by the contractor
with the union of his workmen.

m) Contractor should transfer his workmen from one establishment to

another.

n) Principal employer must ensure that contractor pays minimum

wages to his workmen or such wages as specified by
Commissioner of Labour under Rule 25 or the same wages of the
direct employees if the work done by the contract workmen is the
same as done by the direct workmen of the principal employer.

o) Principal employer must ensure that the contractor covers his

employees under P. F. and E.S.I. Acts. Principal employer should
never pay any amount by way of ex-gratia, bonus etc. to the
contract workmen, but the contractor alone should pay such
amount to his workmen.

p) Principal employer should not give company uniform to the

workmen of the contractor.