The Contract Labour (Regulation and Abolition) Act, 1970 was enacted in response to the vulnerabilities and exploitation inherent in the existing contract labor engagement system. The Act’s main goals were twofold: firstly, to abolish contract labor in specific categories as identified by the appropriate government using predefined criteria, and secondly, to regulate the service conditions of contract labor in cases where complete abolition was not considered feasible. The Act sought to address both the elimination and, when necessary, the regulation of contract labor to ensure fair and just working conditions.

Understanding Contractual Labour

Contractual Labour- a workman shall be deemed to be employed as “contract labour” in or in connection with the work of an establishment when he is hired in or in connection with such work by or through a contractor, with or without the knowledge of the principal employer.

Hiring Through a Contractor by Principal Employer

As per the Landmark Judgment by the Apex Court of India in The Steel Authority of India Ltd. and Ors. vs. National Union Water Front Workers and Ors, Contract Labour is reproduced as under:

Where a workman is hired in or in connection with the work of an establishment by the principal employer through a contractor he merely acts as an agent so there will be master and servant relationship between the principal employer and the workman. But where a workman is hired in or in connection with the work of an establishment by a contractor, either because he has undertaken to produce a given result for the establishment or because he supplies workman for any work of the establishment a question might arise whether the contractor is a mere camouflage. “

This statement may lead to the fact that ‘Hiring through a Contractor’ may turn into master-servant relationship.

The complex Relationship of Principal Employer and Contractor

The concepts of ‘Principal Employer’ and ‘Contractor’ in the context of contract labor is paramount for a comprehensive grasp of the Contract Labor Act. The roles, responsibilities, and authority of these two entities in managing contract labor can be a slippery slope, as even a single misstep in managing them can lead to substantial liabilities for a company.

The relationship between the Principal Employer and the Contractor should ideally be characterized as ‘Principal to Principal.’ In other words, these entities engage in a business-to-business partnership where the Principal Employer outsources certain work to the Contractor. Importantly, there should be no direct employment relationship between the Principal Employer and the Contract Labor.

Contract for Service and Contract of Service

It is critical to recognize that the distinction between a ‘Contract of Service’ and a ‘Contract for Service’ can be subtle. A ‘Contract of Service’ implies an employment relationship where the laborer is considered an employee of the Principal Employer, potentially leading to the ‘sham’ classification of the contract. The risk of regularization primarily stems from the manifestation of a “master-servant” relationship between the principal employer and the contract labor. In such cases, contract labor may claim that they have effectively become regular employees of the organization, entitled to the same benefits, protections, and job security as permanent staff. Such misclassification can result in labor regularization and incur significant costs for the company.

Therefore, vigilance and precision in managing the contract labor relationship, well-defined roles and responsibilities, and adherence to legal standards are imperative. Companies must ensure that their engagement with contract labor remains genuinely contractual, maintaining the integrity of the Principal-to-Principal arrangement and preventing unintended labor regularization, which could have severe financial and legal consequences.


A Sham Contract is an employment under a veil. It is a situation where a formal written contract or agreement is established, but its terms and conditions do not reflect the true nature of the relationship between the parties involved. In essence, a sham contract is a deceptive or fraudulent agreement that masks the actual working arrangement between the parties.


S.noFactorResponsibility of
1Who is responsible for Payment of SalaryCONTRACTOR
2Who is responsible for Supervision of Contractual LabourCONTRACTOR
3Who is responsible for Assessment of Contractual LabourCONTRACTOR
4Who is responsible for Termination of Contractual LabourCONTRACTOR
5Who is responsible for Grievance HandlingCONTRACTOR
6Who is responsible for providing Maternity BenefitsCONTRACTOR
7Who provides Contractual Labour with different benefits.CONTRACTOR
8Who is responsible for making sure that Equal Remuneration is provided to both male and female contractual labour.CONTRACTOR
9Who is responsible for overseeing the basic amenities are provided to Contractual Labour.CONTRACTOR
10Who is responsible for ESI and other benefitsCONTRACTOR

This list is not exhaustive and can include many such provisions.

The Responsibility of Supervision and Control typically, rests with the contractor. There may be exceptions to this, such as when the contractor allocates labor to the Principal to supervise (only secondary control). it’s important to note that the line between a “contract of service” and a “contract for service” can be quite thin. In such cases, it becomes imperative to provide transparent and well-documented reasons and SOP to demonstrate that the relationship remains contractual and not an employment one.

In some case, in case of Failure of Responsibility of Contractor, the onus falls on the Principal Employer like payment of salary, wages, other benefits, provision of basic amenities etc.

In essence, the primary responsibility lies with the contractor, and not the Principal Employer. The Principal Employer’s accountability typically comes into play when the Contractor fails to fulfill certain obligations only in specific cases.

Contractor Code of Conduct

A well-structured contractor code of conduct serves as a crucial document to clarify and manage the working relationship between the principal employer, contractors, subcontractors, and contract labor. It can act as a safety net. It not only mitigates the risk of regularization but also fosters a positive and efficient work environment, promotes transparency, accountability, and adherence to relevant laws and regulations, and ensures minimizing potential legal and employment-related issues.

For companies that employ a large number of contract laborers across various divisions, establishing a clear Chain of Command becomes of paramount importance. This is because, in this complex landscape, the relationships between the Principal Employer, Contractor, and Contract Labor need to be carefully delineated to prevent inadvertent labor regularization.



The relationship between the Principal Employer and Contractor often operates in a nebulous space, leading to ambiguity in their working dynamics and overlapping responsibilities. Unfortunately, this lack of clarity extends to the provision of proper benefits, leaving both parties without clear guidelines.

In the specific context of contractual labor employed in third party premises (like malls) for a company, the uncertainty further intensifies when it comes to addressing grievances related to the Prevention of Sexual Harassment (POSH) Act. The current legal framework fails to clearly delineate the channels through which complaints under the POSH Act should be directed in such scenarios.

While existing laws remain somewhat ambiguous on these critical aspects, it is noteworthy that legal frameworks are in a constant state of evolution. The hope lies in anticipating that future laws will bring greater precision and clarity to the regulation of contract labor, addressing the current gaps and uncertainties

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