India’s Supreme Court reiterates the tests to determine whether contract labourers can be employees

Jun 24, 2019

In a recent ruling, India’s Supreme Court (the “SC”) reiterated the basic tests to be applied in determining whether contract labourers can be classified as direct employees.  This update discusses the SC ruling and analyzes the precautions that employers should adopt while employing contract labour.


Bharat Heavy Electronics Limited (“BHEL”) had entered into an agreement with a contractor to engage contract labourers in its factory at Haridwar in North India.  The employment of certain contract labourers was terminated by BHEL, following which those contract labourers approached the Labour Court at Haridwar (the “Labour Court”), seeking reinstatement.  The Labour Court ruled in favour of the contract labourers, basing its analysis on the fact that BHEL exercised supervision, superintendence and administrative control over them.

In BHEL’s appeal, the Uttarakhand High Court upheld the Labour Court’s ruling, holding that as the contract labourers were performing duties identical with BHEL’s regular employees, they were under the command, control and management of BHEL, and the contract with the contractor was a sham.

Thereafter, BHEL appealed to the SC.

The SC’s decision

The SC applied its two-part test (listed below) prescribed in its earlier rulings of General Manager, Bengal Nagpur Cotton Mills, Rajnandgaon v. Bharat Lala and Another, 2011 (1) SCC 635, and International Airport Authority of India v. International Air Cargo Workers’ Union, 2009 (13) SCC 374.

  • Payment of salary:  If the principal employer pays the salary instead of the contractor, the contract labourers will be deemed to be employees of the principal employer.
  • Exercise of control and supervision:  In this regard, it has to be seen who has primary control over the contract labourers, i.e., who controls and regulates the basis of the employment.  The supervision and control rests with the contractor when the contractor decides whether a particular contract labourer will be allocated to a particular principal employer and the conditions of the work.  Once a contract labourer is allocated to a principal employer, the principal employer can control and supervise the contract labourers to the extent the actual work is allotted and assigned to them, and this will not imply that they are direct employees of the principal employer.

In the present case, the contract labourers were being paid salaries by the contractor, and not by BHEL.  Further, the second test was not met as BHEL was merely exercising secondary control over the contract labourers.  Therefore, the SC set aside the judgment of the Uttarakhand High Court and the Labour Court’s award.

Our comments

Principal employers should remain cognizant of the two-part test while employing contract labourers.  In order to mitigate permanency claims, a detailed contract for the supply of contract labour should be in place between the principal employer and the contractor, under which the contractor should be responsible for the payment of salaries.  Further, the contract should lay down the particulars of the contract labourers required, such as the number of contract labourers, the duration for which the contract labourers are required, required skill sets of the contract labourers, and other relevant terms.  The contractor should be free to determine which individuals to allocate to the principal employer, depending on the requirements of the principal employer.  All steps should be taken to ensure that the ultimate supervision and control over the contract labourers rests with the contractor.

It should be noted that such claims by contract workers are not limited to the industrials and manufacturing sectors.  Increasingly, contract workers supplied by big-IT majors in India to their clients are also initiating permanency claims against the clients.

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