Contract labour act

In India, contract labourers are protected by the Contract Labour (Regulation and Abolition
Act), 1970. A contract labourer is defined as one who is hired in connection with the work of
an establishment by a principal employer through a contractor. While a contractor is the
supplier of contract labour for the organization, a principal employer is the person
responsible for the control of the establishment.

Are Contract Labourers Direct Employees: The Two Prong Test

The question of whether contract labourers qualify as direct employees has been raised
multiple times. In a recent ruling, Bharat Heavy Electricals Limited vs. Mahendra Prasad
Jakhmola & Ors (Civil Appeal No. 1799-1800 of 2019), the Supreme Court of India reiterated
the basic tests to be applied in determining whether contract labourers can be classified as
direct employees.

Bharat Heavy Electronics Limited ("BHEL") had entered into an agreement with a contractor
to engage contract labourers in its factory at Haridwar in North India. The employment of
certain contract labourers was terminated by BHEL, following which the contract labourers
approached the Labour Court at Haridwar, seeking reinstatement. The Labour Court ruled in
favour of the contract labourers, basing its analysis on the fact that BHEL exercised
supervision, superintendence and administrative control over them. In BHEL's appeal, the
Uttarakhand High Court upheld the Labour Court's ruling, holding that as the contract
labourers were performing duties identical with BHEL's regular employees, they were under
the command, control and management of BHEL, and the contract with the contractor was a
sham .Thereafter, BHEL appealed to the Supreme Court.

The Apex Court,in order to decide the dispute relied on the test laid down by it in General
Manager, (OSD), Bengal Nagpur Cotton Mills, Rajnandgaon v. Bharat Lala and Another
((2011) 1 SCC 635), which is as follows:"Two of the well-recognized tests to find out
whether the contract labourers are the direct employees of the principal employer
are: (i) whether the principal employer pays the salary instead of the contractor; and
(ii) whether the principal employer controls and supervises the work of the
employee."
Control and Supervision

The Supreme Court in International Airport Authority of India v. International Air Cargo
Workers' Union ((2009) 13 SCC 374) explained the expression, 'Exercise of control and
supervision'. The Court held that "If the contract is for supply of labour, necessarily, the
labour supplied by the contractor will work under the directions, supervision and control of
the principal employer but that would not make the worker a direct employee of the principal
employer, if: (i) the salary is paid by a contractor;(ii) the right to regulate the employment is
with the contractor; and (iii) the ultimate supervision and control lies with the contractor. The
principal employer only controls and directs the work to be done by a contract labour, when
such labour is assigned to him. But it is the contractor as employer, who chooses whether
the worker is to be assigned/ allotted to the principal employer or used otherwise. In short,
worker being the employee of the contractor, the ultimate supervision and control lies with
the contractor as he decides where the employee will work and how long he will work and
subject to what conditions. Only when the contractor assigns/sends the worker to work under
the principal employer, the worker works under the supervision and control of the principal
employer but that is secondary control. The primary control is with the contractor."

In the present case, the contract labourers were being paid salaries by the contractor, and
not by BHEL.  Further, the second test was not met as BHEL was merely exercising
secondary control over the contract labourers. Therefore, the SC set aside the judgment of
the Uttarakhand High Court and the Labour Court's award.

Conclusion

Permanency claims against the principal employers are not a recent finding. Many such
cases have been witnessed in industrial, manufacturing and IT majors in India. It is very
important for principal employers to be conscious of the two-part test while employing
contract labourers. In order to avoid such claims, a detailed contract for the supply of
contract labour should be in place between the principal employer and the contractor.
Further, the contract should explicitly lay down the rights and obligations of the principal
employer and the contractor, for instance who shall pay the employed contract labourers. All
steps should be taken to ensure that the ultimate supervision and control over the contract
labourers rests with the contractor.