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 ConditionsParliament 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 dateThe 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 wagesSection 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 and invited objections and suggestions from stakeholders within 45 days from the date of notification. 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 nonpayment 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 paymentRule 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 bonusunder 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 nonpayment 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. 

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B. Chandrashekar Shetty - Advocate

Mr. Chandrashekar Shetty is a Senior Labour Law Compliance Auditor at BCP Associates and has audited multiple client companies across India. He is also a member of our senior legal advisory practice. Previously he has worked as Deputy Controller, Manager-Industrial Relations and Industrial Relations Officer in KPTCL, Bangalore for more than 30 years. Prior to this, he has dealt with Legal, Personnel and IR matters including Wage Settlements, Grievance Machinery, Manpower Study and Social Security Compliances for about 10 years. He is a Faculty member of Labour Law, HRD Centre, KPTCL Bangalore.

Mr. Shetty holds a B.Com. and L.L.B. degree, Post-Graduate Diploma in Business Administration, Diploma in Public Relations from Bangalore University and PG Diploma in Industrial Relations & Personnel Management from Bharatiya Vidya Bhawan. He is enrolled as Advocate in Karnataka Bar Council and is a Govt. Arbitrator of Chit Funds in Karnataka.

S Venugopal Rao

S Venugopal Rao is an experienced labour law and service matters expert and is a member of the senior advisory team at BCP Associates. Having joined the chambers of Mr. B C Prabhakar in 2012, he is knowledgeable and well versed in multiple employment and labour law topics. S Venugopal Rao holds a Bachelor’s degree in Science from Karnataka University, Dharwar and Bachelor of Law from Bangalore University. He enrolled as advocate in Karantaka State Bar Council in 1976. He joined the chamber of Sri. Kolachalam Srinivasa Rao a leading civil advocate. After practicing for 6 years at Ballari, he joined Orient Paper Mills, Orissa (of G P Birla Group). He was designated as Manager (Law) under the Factories Act in 1995. In 1999, he joined Andhra Pradesh Paper Mills Rajahmundry as Manager Legal and was subsequently elevated as Dy. General Manager (Legal). As Factory Manager & Legal Head, he oversaw compliance of Factories Act and Rules there under towards safety, health and welfare, including compliance under Pollutions and Environmental laws and Explosives Act, etc. Additionally, he is well acquainted with Environment Management System ISO 14001: 2004, Occupations, Health and Safety Series 18000:1999. As Legal head in APPM he has briefed and appeared along with Senior Advocate before Appellate Authority constituted under Water (Prevention & Control of Pollution) Act. He retired from the services of Andhra Pradesh Paper Mills in 2011. As legal head he has handled important cases both in Labour and Civil and has experience in drafting and vetting Contracts, Agreements, Lease Agreement, Conveyance Deeds, , Affidavits and scrutiny of several legal and other documents, Preparing and settling Petitions, Appeals, Plaints, Written Statements, Rejoinders, Affidavits and Written Arguments etc. for submission/pleadings for various legal proceedings.

C K Devappa Gowda - Advocate

C.K. Devappa Gowda (CKD) is an Advocate and Labour Law expert. He holds a Bachelor’s Degree in Science from the University of Mysore and a Degree in Bachelor of Law from Bengaluru respectively. He also holds a Diploma in Social Service Administration from the National Institute of Social Science, Bengaluru. After completing his studies, he had enrolled as a Advocate and initially practiced in the Civil Code attached to the office of BCP. He then worked as Personnel Officer in Chemicals and Textile Manufacturing Industries for 5 years. Thereafter took up employment in one of the largest Public Sector Bank. He has worked in different parts of the country and has extensive experience in the cross country IR domain. The significant part of his service was at corporate level overseeing and implementing HR policies and practices and management of IR. He has been a member of personnel committee of Indian Bank Association. After retirement from service, Mr. Gowda has been working with Mr. BC Prabhakar’s firm for the last 12 years. He has expertise in all areas of people management, drafting of documents relating to service matter including the settlements under the ID Act. He has dealt with all employment laws including appearance before the Courts, Tribunal and Authorities under the different Labour Laws. Mr. Gowda is one of the senior Labour Law experts at BCP Associates.

Srijatha Ghosh - POSH Specialist & Advocate

Srijata Ghosh serves as external member on the Internal Committee of several Companies across various sectors. She handles all kinds of POSH related matters including investigations and inquiries. She provides Training on Sexual Harassment across all verticals for Managers and Senior Management, General Awareness for all employees and Internal Committee members on the legislation (The Sexual Harassment of Women at Workplace Prevention, Prohibition and Redressal Act, 2013). She also formulates Policies for Prevention of Sexual Harassment at Workplace (“POSH”) and advises Companies on setting up of their Internal Committees. Srijata is involved in providing Legal Advisory services on POSH and other labour law matters for various clients.

In her previous experience, she has extensively dealt with End-to-End Contract Management, Due Diligence, POSH Compliances, Legal Advisory, etc. Srijata worked with Companies like Accenture India Private Limited, Quess Corp., Capgemini Business Services (India) Limited and Pramata Knowledge Solutions Private Limited. Srijata has handled varied legal issues including drafting, vetting and negotiation of contracts, drafting policies of various organizations. She has resolved issues relating to employment laws and has worked closely with the HR teams. She has provided legal advisory services to senior management. She was also associated with Kolkata High Court in counselling clients with legal matters such as Property, Due Diligence etc. Srijata has worked in an LPO Service Firm, Manthan Legal Services Private Limited for Legal Research, depositions, medical summaries, demand drafting etc.

Srijata completed her B.A.LL.B from M. S. Ramaiah College of Law, Bangalore University in 2009. Srijata is a member of the Karnataka Bar Council since 2010. She is also a member of the Gender Sensitivity Sub Committee of Karnataka Employer Association (KEA).

Caroline Lobo - POSH Specialist & Advocate

Caroline Lobo has been with BCP Associates for the past 2+ years. She has been handling matters and Inquiries related to the POSH Act including conducting inquiries and trainings/awareness programmes for Senior Management, employees as well as members of the Internal Committee on the POSH Legislation (The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“Act”) to address Workplace Harassment of Women. She is a member of the Internal Committee for many varied companies and organisations and has reviewed and scrutinized numerous hearings and inquiries on matters relating to sexual harassment at workplace.

She has also handled matters relating to employer-employee related Enquiries, wherein she has reviewed and conducted hearings and enquired into the matters and has guided the Internal Committee and provided guidance in providing recommendations to the management. She is also a Member of the Gender Sensitivity Sub-committee of Karnataka Employer Association (KEA).

Prior to joining BCP Associates, Caroline has has a wide range of experience in corporate, commercial and contract law, mergers and acquisition and has undertaken drafting, vetting, negotiating and finalizing legal and commercial transactions. She started her career in litigation then moved onto the Corporate sector. In the span of 13 years, she has worked at Chambers of Advocate Jayashree Murali, Krishnamurthy and Co. Legal Consultants, Colt Technology Services and Oracle India Pvt. Ltd. She always had a keen interest in Women and Child related issues. She has worked with Child Welfare Committee and NGOS’s. In addition, she has worked with Swasthi Health Resource and Centre, where she was the External member to the Internal Committee (IC). She worked closely with the committee in strategizing, planning, reviewing and implementing the assigned tasks, which included building material to raise awareness against sexual harassment at workplace. Further, she has been involved in conducting inquiries into matters related to sexual harassment at workplace.

Caroline earned her Law degree from University Law College, Bangalore, from where she graduated in the year 2005.

Manoj Kumar – Senior Associate

At BCP Associates, Manoj Kumar is involved in managing and conducting labour law compliance audits of principal employer and contractors. He is also involved in client co-ordination and conducting labour law training programs for vendors. He has conducted on-ground labour law audit for factories. Manoj also provides support in advising vendor clients on labour law queries. He completed B.A., LL.B. from BMS College of Law, Bangalore in 2016

Rashmitha Venkatachalam Das - POSH Specialist & Advocate

Rashmitha Venkatachalam Das is the External Member of the Internal Committee of several reputed Organizations across various sectors. Handling complex inquiries has been her forte and she is extremely passionate about it. She is actively involved in providing Training on Sexual Harassment (Prevention, Prohibition and Redressal) Act, 2013 across all verticals for Managers and Senior Management, General Awareness for all employees and Internal Committee members. Rashmitha possesses capabilities in delivering sessions in Hindi and Kannada, in addition to English. She has formulated Policies for Prevention of Sexual Harassment at Workplace (“POSH”), advised companies on setting up of their Committee. Rashmitha is involved in providing Legal Advisory services on POSH for various clients spread across diverse sectors. She has also been handling domestic enquiries for various clients. 

Rashmitha possesses experience both at Law Firms and Corporates in various capacities. She started her career at Krishnamurthy and Co, Legal Consultants and then moved on to work as an In- House Legal Counsel with Companies such as Biocon Limited, Columbia Asia Hospitals Private Limited, Adecco India Private Limited. With a long stint in the Corporate side, Rashmitha decided to pursue further education in Law with a specialization in Labour and Employment Laws. She has rich experience in drafting, vetting and negotiation of various types of contracts, providing legal opinions and has driven the team in formulating process and procedures and their implementation. She has drafted several employment related policies in Corporates. Rashmitha has been a part of various key committees in Organizations and assisted committees in scrutiny of documents pertaining to human organ transplant as well as clinical trials.

Rashmitha holds an LL.M. in Labour and Employment Laws from University Law College, Bangalore, which she completed in the year 2018 with Two Gold Medals. She is also a Rank Holder at the University. She has completed BA, LL.B. from Bangalore Institute of Legal Studies, Bangalore University in the year 2009. Rashmitha is a member of the Karnataka Bar Council since 2009 and also a member of the Gender Sensitivity Sub Committee of Karnataka Employer Association (KEA).

Manisha Vidyadhar – Senior Associate

At BCP Associates, Manisha Vidyadhar is involved in managing and conducting labour law compliance audits of principal employer and contractors. She is also involved in client co-ordination and conducting labour law training programs for vendors. She has conducted on-ground labour law audit for factories. Manisha also provides support in advising vendor clients on labour law queries.  She completed B.A., LL.B. from BMS College of Law, Bangalore in 2016.

Amrutha Ananth – Senior Associate

At BCP Associates, Amrutha Ananth is involved in managing and conducting labour law compliance audits of principal employer and contractors. She is also involved in client co-ordination and conducting labour law training programs for vendors. She has conducted on-ground labour law audit for factories. She also provides support in advising vendor clients on labour law queries.

Amrutha is also part of the labour law advisory and HR Policy practice and is actively involved in drafting opinions on various aspects of labour laws and formulate and review employment policies and procedure.

Amrutha completed B.A., LL.B. from Christ University, Bangalore in 2015. She is also a semi-qualified Company Secretary.

Sunil Arya – Principle Associate

At BCP Associates, Sunil Arya is part of the labour and employment law advisory and HR Policy practice and is actively involved in drafting and reviewing of employment contracts, opinions, HR policies, employee handbook, show cause notice, etc. for various clients spread across diverse sectors. He conducts training on labour and employment laws. Sunil is also involved in labour law compliance audits of principal employer and contractors and has conducted on-ground labour law audit for factories. In addition, he is engaged in knowledge creation and management of the firm and keenly writes on developments in labour and employment laws.

Prior to joining BCP Associates, Sunil has 10 years of post-qualification experience in diversified portfolios of advisory, drafting, policy analysis and dispute in the domains of contracts, general civil matters, employment law, competition law and construction arbitration matters. Sunil started his career as a Law Researcher in Delhi High Court. He moved on to be part of regulatory analysis team of CIRC, a unit of CUTS International. In addition, Sunil has been part of legal team of Jindal India Thermal Power Limited. He has also taught competition law, tax law and investment law at VIPS, Delhi.

Sunil holds LL.M. from The Indian Law Institute, Delhi. He is First Rank Holder in his thesis. He completed B.A, L.L.B. (Hons.) from I.P. University, Delhi. He also holds First Rank in P.G. Diploma in Competition Policy and Laws from The National Law University, Delhi.

Chandrakala K A – Principle Associate

At BCP Associates, Chandrakala has 12+ years of experience in conducting and managing labour law compliance audits of principal employer and contractors. She is also involved in co-ordination with many clients. She has conducted on-ground labour law audit for factories. She also provides support in advising vendors on labour law queries. Chandrakala is actively involved in research and providing valuable inputs to the firm pertaining to updation in labour law audit function.

Chandrakala started her career in litigation in chamber of Sri. Ashok where she was involved in drafting, pleading and appearance before Karnataka High Courts and lower courts on the criminal side.

Chandrakala completed B.A in Arts from Kuvempu University, Shimoga in 2003 and LL.B. from Mangalore University in 2006.

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