An expert’s take on contract labor compliance

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By Thushara
6 minute read ● August 21, 2017
contract labor compliance

Contract employees working on your premises? You are responsible for their compliance! Pratik Vaidya’s take on how to ensure you stay compliant at all times. Don’t miss out on the Q&A inside!

Host to an Expert Webinar at greytHR, on a topic that addressed the needs of over 500 participants, Pratik Vaidya began with the basics. He paused often to take the quickly mounting questions and in general delivered a session far more interactive and valuable than we could have hoped for.

We didn’t want you to miss out, so here are the highlights.

If you prefer a quick read on key takeaways for the principal employer, head here.

Many organizations employ contract employees in the form of housekeeping staff, security guards, cafeteria personnel, etc. Add to this the rise of the gig economy, and compliance management with regard to contract employees takes on added significance.

Interchangeably called the vendor, supplier, contractor or partner, a contractor is a third party who offers services that deliver results for your own organization. Now, a contractor may be of different types. Here we only look at those who deploy contract employees on-premise at their client (your) location and offer their services to you for 8-9 hours a day for over 240 days a year. In particular, we look at the aspects that you as the principal employer need to look into when enlisting contract employees.

Why should you care?

The law of the land necessitates that all employees - whether direct or indirect - deployed on your premises be compliant with the relevant laws at all times. The responsibility for the benefits and compliance of all such direct employees and contract or indirect employees falls on you - the principal employer.

Defining relationships: Principal employer, contractor, sub-contractor

The occupier of the premises where the deployed employees work is called the principal employer. Such a person should hold a valid Shops and Establishment license or a valid factory license. Now, on the principal employer’s premises, various contractors and sub-contractors may have deployed employees. These contractors and subcontractors must be viewed with an equal eye.

In a (rather big) nutshell: The laws governing contract labor

Various national and state laws govern contract labor. These are:

  • Contract Labour Act: This act adheres to state-based rules and varies from state to state with respect to the threshold headcount for its applicability. In Karnataka, for instance, if the principal employer employs 20 indirect employees, he is to ensure that a registered certificate is procured under the Contract Labour Act. This is the basic premise of the Act. It also mentions benefits, such as drinking water, proper urinals, etc., and the maintenance of the register under the Contract Labour Act. In case you do not meet the requisite number of employees, all records and registers under the Minimum Wages Act/Payment of Wages Act are to be maintained.
  • Provident Fund and Miscellaneous Provisions Act: This act is applicable for any establishment that employs 20 or more individuals in any state, spare Jammu & Kashmir. The basic premise of the act is that the requisite PF deductions are to be made for all employees drawing basic wages of less than Rs.15000. This covers both direct and indirect or contract employees. Even if you employ only 5-6 indirect employees, which then takes your total employee count to over 20 employees, you need to register under the PF Act and ensure that compliance is maintained. Here, penalties can be high, so the timeliness of payment is critical. Also, if any indirect employee chooses to leave the organization, claim settlement needs should be intimated to the principal employer. Having been the site of employment, the principal employer would come into play in case the employee is disgruntled.
  • Employee State Insurance Act: If the total headcount in your organization drawing a gross salary of less than Rs.21000 is over 20, this act is applicable to you. In case of factories, the threshold headcount is 10. This act also covers both direct and indirect employees. For instance, if a company has two offices - one in Pune, one in Bangalore - with 25 direct employees each, and each office employing 10 contract laborers in addition, the total employee count stands at 70. Say 20 of these employees draw less than Rs.21000 as gross salary. The ESI Act is applicable here.However, if, out of the 10 contract laborers, only 5 each in Pune and Bangalore draw below Rs.21000, though the contractor would fall under the Contract Labour Act, you - as principal employer - would not. It is also of note here that it is the responsibility of the principal employer to ensure that all contract employees hold an ESI card.
  • Minimum wages Act: Basic and DA together constitute minimum wages. The amount in question varies from state to state as this is a national act with state rules (simplification of this Act is expected within a year). If one fails to pay out minimum wages to employees, the penalty to be paid to the government stands at 10x of the shortfall.
  • Payment of Wages Act: This act lays out when to make payments to employees and what deductions would be applicable. The wage cycle for employees is to be no longer than 30 days and payouts are to be made within 7 days of the end of the wage cycle for establishments employing less than 1000 employees and within 10 days for others. Here, deductions include PF, ESI, PT, IT, fines, etc. Deductions that are not laid down under this act, such as uniform allowances, those for background verification services, etc., are deemed invalid deductions and amounts to non-compliance. As a principal employer, you need to collect the proof of payment of wages to indirect employees. This payment can not be made in cash but only in the form of bank transfer (on or before the 7th of the month) or check (before the 7th of the month). Here, non-compliance can result in a fine of a minimum of Rs.10000.
  • Payment of Bonus Act: In case of establishments, this Act applies to those employing 20 or more individuals. In case of factories, a headcount of 10 or more defines the applicability of this Act. The entitlement holds only for those working over 30 days in a year. Principal employers are to ensure that the contractor maintains Form C and Form D under the Bonus Act.
  • Payment of Gratuity Act: All compliances with regard to gratuity are to be maintained and managed by the principal employer. Here, collecting Form F from the contractor is important in cases where they may be accidents or mishaps. Form F makes the nominees for the gratuity clear.
  • Respective State Labour Welfare Fund Act: This Act calls for timely deductions from wages of employees depending on applicability. As an organization, you are to have a copy of the registration certificate, failure to produce which can attract penalties. Production of the registration copy may be done within 7 days of the inspection. Here, it is notable that 12-hour contracts are non-compliant. Only 8-hour work days, adding up to a total of 48 hours a week, are permitted by law.

Audience Questions

Q1. If a person is working as a consultant, is it mandatory to deduct PF and PT for the person?
Ans: The term ‘consultant’ is not mentioned in labor law. If the individual is deployed on premises, and is dedicated to the same client, then he or she is termed a ‘deemed employee’. In this case PF and ESI will apply to him. If he’s not working on your premises, the question of vendor compliance does not arise.

Q2. Can a company have two dfferent salary stuctures at a time, with some employees being paid salaries and others being paid wages?
Ans: You can have any salary structure, but the pay cycle is not to exceed 30 days. Also, once the cycle ends, the payout is to be made in 7 days (if employing less than 1000 employees) or 10 days, depending on the employee headcount.

Q3. We have employees who are paid salaries in line with minimum wages. Our gross salaries are in line but not the basic wages. Is this compliant?
Ans: So long as wages are more than minimum wages, any breakup is okay. But very less basic may attract questions from the PF dept.

Q4. We engage an employee who is deputed on location for 200 hours. Are PF, ESI and PT the responsibilities of the principal employer?
Ans: No matter the conditions of the contract, if an employee is working on your premises, then PF, ESI and all benefits are to be given to the employee.**

Q5. If employees are working on an hourly basis, are PF and ESI to be paid? Ans: Consider a carpenter who puts in 30 minutes of work at your establishment. Here, collect an invoice of material and labor charges from the carpenter, then deduct PF and ESI on the labor charges alone. If only a consolidated invoice is made available, then out of every 100 rupees, 30-35% is to be considered labor charges and PF and ESI paid on that. Now, hiring may also be on a regular basis. If regular, one has to be compliant under the PF and ESI Acts.

Any vendor is to have valid PF and ESI registrations. However, the onus is on you to have their credentials on your code number and extend benefits to employees through your code.

Q6. We do deductions on the uniforms we provide. Is this legitimate?
Ans: If this being done as a part of payslip/wages, then it is non-compliant.

Q7. Do PF and ESI apply to franchise employees if the franchise is a separate entity?
Ans: Given they are a separate entity, they have a Shops and Establishment license in their name. You are not at risk for their PF, ESI compliances.

Q8. We employ 10 individuals in a cafeteria. Should we follow statutory compliances? Ans: Yes. Benefits to these employees are to be extended on your PF and ESI registration code.**

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