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India

Deemed Employment Risks in India

Nov 19 2014

1. Background

The practice of engaging contractors by employers is prevalent throughout India, similar to various other jurisdictions, for improving their overall competitiveness in the globalised market economy. Increasing labour cost and the need for flexibility in managing manpower to respond to market conditions and customers’ demands have caused employers to prefer contractors in a number of circumstances. However, the employment of contractors is subject to certain risks wherein such contractors may be reclassified and deemed to be direct employees of the employer in specific situations. This article provides an overview of the law governing the employment of contractors in India and the allied risks of reclassification of such contractors as direct employees.

2. Legal Framework

The law governing the hiring of Contractors in India is primarily regulated by the Contract Labour (Regulation and Abolition) Act, 1970 (hereinafter the “Act”) and rules and regulations issued thereunder. Without delving into the technicalities of the Act, it is nevertheless imperative to understand certain key definitions of the Act to comprehend its objective and mechanism. The employer is termed as a ‘Principal Employer’, the contractor employee is termed as ‘Contract Labour’ and the agency/company that supplies such contractor employees to the employer is termed as the ‘Contractor’. As an example, in a contract engagement where an automobile manufacturer employs or subcontracts to another company a certain portion of a manufacturing deliverable in lieu of due consideration, the Act would stipulate the automobile manufacturer to be the ‘Principal Employer’, the company would be the ‘Contractor’ and employees of the company working on that specific work assignment would become the ‘Contract Labour’.

However, the following individuals have been excluded from the classification of Contract Labour
and therefore outside the purview of the Act:

  1. Individuals employed mainly in a managerial or administrative capacity; or
  2. Individuals employed in a supervisory capacity exercising, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature; or
  3. Individuals who are out-workers, that is to say, persons to whom any articles or materials are given out by or on behalf of the Principal Employer to be made up, cleaned, washed, altered, ornamented, finished, repaired, adapted or otherwise processed for sale for the purposes of the trade or business of the Principal Employer and the process is carried out either in the home of the out-worker or some other premises, that are not under the control and management of the Principal Employer.

3. Deemed Employment of Contract Labour

Despite the framework of the Act, there are circumstances in which the relationship of Contract Labour may be reclassified as direct employment and the Contract Labour engaged by a Principal Employer may be considered to be employees of the Principal Employer. Though there is no specific legislation in India regulating reclassification of Contract Labour as employees of the Principal Employer, there are several strictures passed by Indian courts through judicial pronouncements which govern the reclassification of Contract Labour as employees of the Principal Employer. Due to content limitations, a few of these judicial pronouncements have been discussed in the paragraphs that follow.

The Supreme Court of India, in 1995, in the case of Parimal Chandra Raha and Others v. Life Insurance Corporation of India and Others evolved the “control test” and held that a direct relationship of employer and employee is characterised by the employer not only having the right to direct the employee to perform work in connection with the employment, but also a right to instruct the employee as regards to the manner in which the work is to be performed. Applying the “control test”, the Supreme Court held that in spite of a claim by a Principal Employer that it has engaged Contract Labour for the performance of work in its establishment, the presence of sufficient control and supervision by the Principal Employer over the activities of the Contract Labour as regards to the manner in which such work is to be performed, would result in reclassification of the relationship of Contract Labour as that of an employer and employee. The Supreme Court also found that where Contract Labour is engaged for work in connection with services which are essential conditions of the service of the Principal Employer’s regular employees, it would constitute a relevant factor in the reclassification of Contract Labour as employees of the Principal Employer.

As recently as in 2014, the Supreme Court in the matter of Balwant Rai Saluja v. Air India Ltd., further evolved the “control test” by observing that effective and absolute control over the workmen is required in order to constitute such workmen as employees of the Principal Employer. The question before the Supreme Court was whether workmen engaged in canteens (required to be maintained under law) of the Principal Employer through a Contractor could be treated as employees of the Principal Employer. It was held that the mere fact that the Principal Employer had a certain degree of control over the workmen did not mean that they constituted its employees. Since the workmen could not be said to be under the effective and absolute control of the Principal Employer, who merely had control of supervision over working of the canteen and further since there was no parity in the nature of work and mode of appointment between regular employees and workmen of the canteen, it was held that the workmen could not be placed in the same footing as regular employees of the Principal Employer.

In addition to the “control test”, the Supreme Court has also evolved the “integration test” to determine the true nature of the relationship between Principal Employer and Contract Labour by examining whether the Contract Labour was fully integrated into the Principal Employer’s concern or remained apart from and independent of it. The other factors considered in order to determine the level of integration of Contract Labour in the Principal Employer’s concern are: who has the power to select and dismiss the Contract Labour, pay remuneration, deduct insurance contributions, organise work, supply tools and materials along with a general assessment of the mutual obligations between the Principal Employer and the Contract Labour.

4. Mitigation of Deemed Employment Risks

In light of the aforementioned judicial pronouncements and principles, certain indicative contractual and practical devices to avoid reclassification of Contract Labour as direct employees of the Principal Employer have been set out below:

  1. The agreement (the “Contract for Service”) with the Contractor should be structured so as to clearly indicate that it is a contract for services and not a contract of service. The Contract for Service should merely outline the specific skill sets/qualifications the Contract Labour should possess and should not grant the Principal Employer a direct right to appoint the Contract Labour.
  2. The Contract for Service should clearly state that the Principal Employer will not direct or control the Contract Labour and the manner in which the work should be performed, subject of course to satisfaction of certain required quality controls and customisations desired by the Principal Employer.
  3. Payment of remuneration and satisfaction of statutory requirements as regards to the Contract Labour should be the sole responsibility of the Contractor and the Principal Employer should not be, under any circumstances, responsible for satisfaction of the same, save what is required under the Act.
  4. The Principal Employer should retain the right to terminate the Contract for Service at will, without ascribing any reason whatsoever for such termination.
  5. The Principal Employer should ensure that it does not engage in any decision making as regards to the formal internal appraisal or compensation payable to the Contract Labour and should not take up such responsibilities at the behest of the Contractor under any circumstances.
  6. The Principal Employer should ensure that it is not the sole client of the Contractor.
  7. The Principal Employer should also refrain from engaging in practices such as maintaining attendance of the Contract Labour, provision of email addresses to the Contract Labour having the Principal Employer’s domain name, issue of identification badges to the Contract Labour which are identical to those issued to its regular employees and provision of such other benefits, programs and exercises to the Contract Labour which are intrinsic to the Principal Employer’s organisation and are typically provided to its regular employees.
  8. In the case of individual contractors/consultants being engaged directly by employers, without the involvement of an intermediary agency/company, care should be taken to ensure that the employer treats the individual contractors/consultants substantively different from its own permanent employees. Such differences include but are not limited to:
    • Different identity cards for individual contractors/consultants and permanent employees of the employers.
    • The nature of work and job profiles to be substantively different. For instance, it is not advisable for an employer to have the exact same nature of tasks be performed by both its own permanent employees and the individual contractors/consultants.
    • Different sets of internal policies to be applied to individual contractors/consultants and permanent employees.
    • It is highly recommended that the benefits that are generally provided to permanent
      employees should not be provided to the individual contractors/consultants.