What are the various Indian employment laws that are applicable to Outsourced Employees?

The Contract Labour (Regulation & Abolition) Act, 1970 [in short ‘CL (R&A) Act’]:

This labour law Regulates the employment of Outsourced labour in establishments. Sec. 2(e) of the CL (R&A) Act defines establishments as any place where any industry, trade business, manufacture or occupation is carried on. The definition of ‘establishment’ is wide enough cover factories, shops, office, laboratories etc.

As per Sec. 2 (b) of CL (R&A) Act a workman is deemed to be employed as an Outsourced labourer in connection with work done in an establishment when he is hired by or through a Service Provider, with or without the knowledge of the principal employer.

Workman is defined under Sec. 2(i) of the CL (R&A) Act and excludes the following from it’s definition:

  • Who is employed mainly in a managerial or administrative capacity; or
  • Who, being employed in a supervisory capacity draws wages exceeding five hundred rupees per mensem or exercises, 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
  • Who is an out-worker, that is to say, a person 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 to be carried out either in the home of the out-worker or in some other premises, not being premises under the control and management of the principal employer.

Sec. 2 (c) of CL (R & A) act defines Service Providers as persons who undertake to produce a given result for the establishment, other than a mere supply of goods of articles of manufacture to such establishment, through Outsourced labour or who supplies Outsourced labour for any work of the establishment.

As per Sec. 1(4) CL (R & A) Act applies to:

  • Establishments: employing 20 or more workmen as Outsourced labour on any day of preceding 12 months.
  • Service Provider : employing 20 or more workmen as Outsourced labour on any day of the preceding 12 months.

Sec. 21 (4) of the CL (R & A) Act lays down that in case the Service Provider fails to make payment of wages within the prescribed period or makes short payment, then the principal employer shall be liable for the same. Principal employer is liable for all receivables in the nature of wages attributable to Outsourced labour.

Payment of Bonus Act, 1972 –

Payment of Bonus Act, 1972 (in short “Bonus Act”) is applicable to every factory and every other establishment in which 20 or more persons are employed on any day during an accounting year.

As per Sec. 2(14) (ii) of the Bonus Act “employer” includes;

“in relation to any other establishment, the person who, or the authority which, has the ultimate control over the affairs of the establishment and where the said affairs are entrusted to a manager, managing director or managing agent, such manager, managing director or managing agent”

Establishment, as mentioned in the Bonus Act has a generic meaning. Enterprises run by Service Providers are generally registered under the Bombay Shops and Establishments Act, 1948 as ‘Commercial Establishments’ or ‘Establishments’ providing services housekeeping, security, maintenance etc. to various clients. The definition of ‘establishment’ perceived under the Bonus Act includes ‘Commercial Establishments’ and ‘Establishments’ registered under Bombay Shops and Establishments Act, 1948.

Hence the manager, managing director or managing agent or any person who has the ultimate control over the affairs of the establishment of a Service Provider registered under Bombay Shops and Establishments Act, 1948 can be considered as an ‘employer’ under the Bonus Act.

By the virtue of the reasons above mentioned a Service Provider is liable to pay bonus as accrued to workmen who are employed as Outsourced labour by him subject to the following conditions;

  • If the establishment is new it is not liable to pay bonus for minimum 5 years, if it does not make any profit in the first five accounting years, following the year in which it sells goods produced by it or renders services. (Sec. 16A)
  • Employee drawing a salary of more than Rs. 10,000/- is not entitled to bonus [Sec. 2(13)]
  • Employee who has worked less than 30 working days in the relevant accounting year is not entitled to bonus. (Sec. 8)

Now, in Cominco Binani Zinc Ltd. V/s Pappachan, as decided on 28. 12. 1988 the Kerala High Court had laid down that Outsourced labourers cannot claim Bonus from principal employer. The High Court stated that;

‘The principal-employer’s liability to pay wages is recognised in Section 21(4) of the Contract Labour (Regulation and-Abolition) Act, 1970 as well. If the Service Provider fails to pay the wages the petitioner will be bound to pay the same. The wages due to the workmen does not include bonus or gratuity. This is made clear by the definition of wages in the Industrial Disputes Act and Payment of Wages Act. While defining the term “wages”, the above mentioned Acts specifically excludes bonus and gratuity from its purview.’

Further, Sec. 2(rr) of the Industrial Disputes Act, 1947 does not include bonus as a part of the wages. Hence workmen employed as Outsourced labour cannot claim bonus from the principal employer.

Sec. 2(vi) of the Payment of Wages Act, 1936 excludes from the purview of wages any bonus (whether under a scheme of profit sharing or otherwise) which does not form a part of the remuneration payable under the terms of employment or which is not payable under any award or settlement between the parties or the order of a Court.

However, to be on the safer side the principal employer should ensure that due bonus is paid to the Outsourced labourers by the Service Provider himself and necessary registers for the same are maintained at the Service Provider’s end to avoid any chance of future litigation.

Minimum Wages Act, 1948 –

Minimum Wages Act, 1948 is applicable to employments specified in the schedule u/s 2(g) as well as any employment which is added to the schedule by the Appropriate Government by notification u/s 27. The employer is required to go through the items mentioned in the Schedule so as to ascertain whether he is covered or not. (Sec. 1 r/w Sec. 2(g) & Sec. 27)

If the employer is covered by one of the scheduled employments, he cannot pay less than the minimum wages fixed for the specific class of work in that scheduled employment.

A workman employed as Outsourced labour is covered under the definition of ‘employee’ as per Minimum Wages Act, 1948, hence Minimum Wages Act, 1948 is applicable to Outsourced labour.

The principal employer is required to pay wages to Outsourced workers. Further Sec. 21(4) of the CL (R&A) Act also fixes the liability on the principal to pay wages to the Outsourced labour, in case the Service Provider fails to do so.

In the state of Maharashtra, Rule 25(iv) (a) of Maharashtra Contract Labour (Regulation & Abolition) Rules, 1971 makes it mandatory that rate of wages payable to the Outsourced workman shall not be less than the minimum rates of wages fixed under Minimum Wages Act. Where rates have been fixed by agreement, settlement or award then rate of wages payable shall not be less than such rates so fixed. The higher of the two abovementioned rates shall be considered for the purpose of making payment to Outsourced labour.

Further, Rule 25(iv) (b) of Maharashtra Contract Labour (Regulation & Abolition) Rules, 1971 further lays down that where, Outsourced workmen perform same kind of work as workmen or class of workmen directly employed by the principal employer, the rates of wages payable to the Outsourced workmen shall be same as payable to workmen directly employed by the principal employer.