Liability of Principal Employer for payment of Wages and Bonus to Contract Labour – Proposed Wage Code Regime

Engagement of contract labour has been a common industry practice for several decades in India. The system has proved to be beneficial in speedy completion of assigned work according to specifications and easing burden of the principal employer with respect to extensive supervision and control.  

The Existing Regime 

Employment of contract labour, wherever it is not prohibited, is governed by the provisions of the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act). The CLRA Act applies to every contractor who employs 20 or more workmen. This threshold has been recently increased to 50 or more workmen by way of an Ordinance in Goa, Bihar, Gujarat, Himachal Pradesh, Tripura and Karnataka. As per the CLRA Act, a workman is deemed to be employed as ‘contract labour’ in or in relation to work of the establishment, if he is hired for such work by or through a contractor, with or without the knowledge of the principal employer. A ‘contractor’, in relation to an establishment, is defined under the Act to mean a person who undertakes to produce a given result for the establishment, other than a mere supply of goods of articles of manufacture to such establishment, through contract labour or who supplies contract labour for any work of the establishment.  As per the law, the term ‘contractor’ includes a sub-contractor. 

The law casts out certain obligations of the contractor, particularly with regard to licensing under Chapter IV and welfare and health of the contract labour under Chapter V. Section 21 of the CLRA Act, read with Chapter VI of the CLRA Rules, 1971 lay down specific responsibilities of the contractor and the principal employer with regard to payment of wages to contract labour employed by the contractor. It is stipulated that the contractor shall be responsible for payment of wages to each worker employed by him as contract labour and such wages shall be paid before the expiry of such period as may be prescribed. Further, the principal employer shall nominate a representative, duly authorized by him, to be present at the time of disbursement of wages by the contractor and it shall be the duty of such representative to certify the amounts paid as wages . It is also mandated that in the event the contractor fails to make payment of wages or pays less wages, the liability thereof would devolve on the principal employer. The principal employer is liable to make payment in either case and may recover the amount so paid out of the bills payable to the contractor or through other means.  

As regards timely and regular payment of wages, Section 3 of the Payment of Wages Act, 1936 further provides that every employer is responsible for payment of wages to persons employed by him, within the period stipulated under the Act. Section 3 of the Act has been amended in 2005 to clarify that though a contractor or person named by the employer is liable to make payment of wages, employer is still responsible if contractor does not make payment of wages.  

As regards payment of bonus, the same is governed by the provisions of the Payment of Bonus Act, 1965. The Act is applicable to (a) every factory; and (b) every other establishment in which twenty or more persons are employed on any day during an accounting year. As per the definition of employee under the Act, bonus is payable to all persons who are employed in any industry to do any skilled or unskilled, manual, supervisory, managerial, administrative, technical or clerical work for hire or reward and whose salary or wages do not exceed Rs 21,000/- per month, provided they have worked for at least 30 days in the accounting year. Further, the term ‘employer’ is also defined under the Act, which does not state that the principal employer shall be treated as the employer of the workers of the contractors. Section 8 of the Act provides that every employee shall be entitled to be paid bonus by his employer. 

The Proposed Regime  

The Code on Wages, 2019 

As a part of the labour reforms initiatives undertaken by the Ministry of Labour and Employment, Government of India, steps are actively being taken to amalgamate and simplify 38 labour legislations into 4 Codes, the laws under which have been broadly categorized on functional basis into (i) Wages; (ii) Industrial Relations; (iii) Social Security and Welfare; and (iv) Safety and Working Conditions. Parliament has already passed the Code on Wages Bill, 2019. The President of India had given his assent to the Code on Wages (the Code) on August 8, 2019 and the Code has been published in the Gazette of India on the same date. The Code seeks to amend and consolidate the laws relating to wages and bonus and matters connected therewith or incidental thereto, and subsumes the provisions of the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, , the Payment of Bonus Act, 1965, and the Equal Remuneration Act, 1976. As required under Section 1 (3) of the Act, the Central Government is yet to notify in the official gazette, the date from which the Act will come into force.  

The Code defines employer in Section 2(l) to mean a person who employs, whether directly or through any person, or on his behalf or on behalf of any person, one or more employees in his establishment. The definition also includes the contractor. As regards payment of wages, Section 17 of the Code ensures that the employees be given their salary on a timely basis by stipulating that employees in receipt of monthly payment will receive the same by the 7th day of the next month. It further provides that those employees working on a weekly basis will receive their salary on the last day of the week, and daily wagers, on the same day. As regards payment of bonus, the Code provides that every employee whose wage does not exceed a specified monthly amount, as notified by the Central and State Governments, will be entitled to receive an annual bonus as specified therein.  

Section 43 is an umbrella provision creating liability of the principal employer with regard to payment of all amounts due to employee by the employer. The section provides that every employer shall pay all amounts required to be paid under this Code to every employee employed by him. Proviso to the same stipulates that where such employer fails to make such payment in accordance with this Code, then the principal employer, in whose establishment the employee is employed, shall be responsible for such payment. 

The Code further lays down penalties for offences committed by an employer for contravention of any of the provisions under the Code. The extent of penalties differ according to the nature of the offence, with a maximum penalty set at imprisonment of up to 3 months and fine of up to Rs. 1,00,000/- 

Draft Wage Code Rules 

The Ministry of Labour and Employment, Government of India has notified draft Wage Code Rules (Draft Rules), made in exercise of the powers conferred by the Code on Wages, 2019 on July 7th, 2020. Chapter IX of the draft Rules lay down responsibility with regard to payment of wages and bonus to the employees.  

As regards payment of wages, Rule 55 of the draft Rules mandates that where the employees are employed in an establishment through contractor, then the principal employer shall pay to the contractor, the amount payable to him before the date of payment of wages so that payment of wages to the employees shall be made positively in accordance with the provisions of Section 17 of the Code. As regards payment of bonus, Rule 57 of the draft Rules carve out specific responsibility of the principal employer. It stipulates that where contractor fails to pay minimum bonus to employees engaged through it, then, the principal employer shall pay such minimum bonus to the employees. However, the Rule explicitly provides that such payment by the principal employer shall be preceded by a written information by the employees or any registered trade union or unions of which the employees are members with regard to non-payment of bonus by the contractor and confirmation by the principal employer of such fact of non–payment of bonus.  

BCPA’s view 

When examined against the present regime, the proposed regime creates onerous liability in addition to the existing stringent liability of the principal employer for dues to employees engaged by it through the contractor. As the industry practice prevalent with regard to payment of wages by the principal employer to the contractor, the same is largely governed by the terms of the contract between the principal employer and the contractor. Generally, such terms clearly provide for timely payment of the wages by the contractor to the contract labour and reimbursement of the same by the contractor from the principal employer only after production and verification by the principal employer of the fact of payment of the said wages. This also ensured that the terms of the contract are strictly adhered to and no lapses originate with regard to such payment. Rule 55 of the draft Rules, however, lays down an additional mandate for the principal employer to make timely payment to the contractor through which contract labour is engaged. This seems to create practical difficulties in ensuring adherence to the terms of the contract as principal employer would have nil or little opportunity to verify payment of wages to the contract labour by the contractor, before making payment against the same to the contractor.  

As regards payment of bonus, under the present regime, principal employer cannot be held liable for payment of bonus to the workers of the contractor as the employer responsible for payment of bonus in respect of the employees engaged through the contractors is the contractor. This is also laid down by decisions of various High Courts in India [See Kerala State Civil Supplier Corporation vs. Industrial Tribunal reported in 2007 (115) FLR 569 and Mr. Shachindra Kumar vs. State of Karnataka reported in 2013 (138) FLR 193]. The proposed regime under Rule 57 of the Draft Rules, however, creates clear liability on the part of the principal employer for payment of bonus to the employees engaged through contractor in case of non–payment of same by the contractor and confirmation of such fact by the principal employer.  

The above rules, read with Section 43 of the Wage Code, creates an all encompassing liability of the principal employer for all dues by the contractor to the contract labour, in case of failure to make such payments by the contractor. Besides creating hurdles from the practical standpoint, the proposed regime has potential to dilute the utility and incentive of the contract labour system by increasing risk of prosecution of the principal employer for payment lapses by the contractor.