Contract Labour

Can contract workers claim permanent jobs?

Not automatically, the Supreme Court has held since 2001. But a sham contract makes the crew the site's own employees. What courts check, and why.

A blank white ID card holder on a white lanyard, worn against a black top.

Not automatically. Since Steel Authority of India v National Union Waterfront Workers in 2001, the Supreme Court has held that contract workers have no right to absorption by the principal employer. That holds even where contract labour in the work was prohibited. The exception is a sham contract: if the contractor is only a front, an industrial adjudicator can hold the workers to be the site's direct employees. The OSH Code 2020 has not changed that.

No automatic absorption

A contract worker cannot become a site's permanent employee just by serving long or doing core work. A five-judge bench of the Supreme Court settled this in SAIL v National Union Waterfront Workers (2001), overruling its own 1996 Air India decision, which had ordered automatic absorption [VERIFY: Air India Statutory Corporation v United Labour Union, (1997) 9 SCC 377, as the case overruled]. The Court restated the point in SAIL v State of West Bengal on 25 September 2008, saying the 2001 judgment held that "automatic absorption is not permissible in law". It set aside a High Court order directing absorption.

The 2001 judgment did give contract workers one thing where contract labour was prohibited in a process. If the principal employer then takes on regular workers for that work, it is to give preference to the contract workers who did it, relaxing the age limit for their years of service [VERIFY: the preference direction and the age relaxation, from secondary summaries of SAIL (2001) 7 SCC 1; the 2001 judgment itself was not opened]. That is a right to be considered first, not a right to the job.

When the contract is a sham

Where the contractor is a front, the workers are the site's employees and always were. The 2008 judgment quotes SAIL v Union of India (2006) 12 SCC 233: if a contract "was really a camouflage or a sham one, the employees appointed by the contractor would, in effect and substance, be held to be direct employees of the management". The same passage says who decides: an industrial adjudicator, on evidence, not a writ court. Whether a worker is someone's employee is "essentially a question of fact".

The test the Court has used since is control. In Balwant Rai Saluja v Air India (2014), a three-judge bench held that the question is who holds "effective and absolute control" over the workers, not who has some say in their work. Air India checked the quality of a contracted canteen, but that did not make the canteen staff its employees [VERIFY: holding and citation (2014) 9 SCC 407, from secondary reports; the judgment was not opened]. The table shows the facts courts have weighed.

QuestionPoints to a genuine contractorPoints to a sham
Who chose the workerThe contractor screened and appointed them, and issued the appointment letterThe site's HR picked individuals and the contractor only processed the paperwork
Who paysThe contractor pays from its own account and holds the wage registerThe site sets each worker's pay, or the contractor passes on the site's money at cost
Who supervises the dayThe contractor's supervisor allocates work; the site specifies the resultSite staff give daily instructions to named workers directly
Who disciplinesThe contractor warns, inquires and dismissesThe site's managers issue warnings and decide terminations
Does the contractor have a businessIts own licence, other clients and its own managementNo other clients, no real management, a name on the invoice

What the OSH Code changes, and what it doesn't

The Code prohibits more, but it still does not convert anyone into the site's employee. Section 57(1) of the OSH Code 2020 prohibits contract labour in core activity by statute, with three exceptions. Under the 1970 Act, a prohibition needed a government notification. Section 54 makes it a contravention to engage contract labour through a contractor who lacks a required licence. Neither section says the workers become the principal employer's employees, so a breach is a penalty matter under the Code, not a route to absorption.

  • The contractor's own permanent staff are not "contract labour". Section 2(1)(m) excludes a worker the contractor regularly employs on mutually accepted terms, including permanent engagement, with periodic increments, social security and welfare benefits. A crew on that footing is the contractor's workforce in every sense.
  • Core work done without an exception is still exposure. A site that puts contract labour on its line outside the three exceptions breaches section 57. If the arrangement also fails the control test, it hands the crew the evidence for a sham-contract claim. The two problems often travel together.
  • A direct hire on a fixed term is the lawful middle path. Where the work is core and the need is lasting, a fixed-term contract makes the worker the site's employee from day one, on parity terms. The fixed-term post on this site compares the two routes.
2001the year the Supreme Court ruled out automatic absorption (SAIL v National Union Waterfront Workers, five judges)
3exceptions under which contract labour may do core activity (OSH Code s.57(1))
50contract labour at which the Code's licensing part applies to a site (OSH Code s.45)
25 Sep 2008the Supreme Court restated that automatic absorption is not permissible in law (SAIL v State of West Bengal)

What a site should keep in order

Keep the contractor's control real, and keep the paperwork that shows it. A claim that a contract is a sham is decided on evidence, usually years later, so the records kept now are what a tribunal reads.

  1. Let the contractor appoint. The site can set the skill and the headcount, and veto a worker on safety or conduct grounds. It should not pick or interview individuals for the contractor's roll.
  2. Instruct through the contractor's supervisor. A work order that specifies outputs, and a contractor supervisor on every shift, separates the site's say over the result from control over the worker.
  3. Leave discipline with the contractor. The site may bar a worker from its premises. The warning, the inquiry and the dismissal are the contractor's, under its own standing orders.
  4. Check the contractor is a business. A licence where section 45 requires one, its own PF and ESIC codes, its own wage register, and other clients.
  5. Write down the core-activity call for every contracted role. The core-activity article on this site sets out how; a role on the line with no recorded exception is the weakest point in any later dispute.

Whether a particular contract would be read as genuine or sham depends entirely on its facts, and that is a question for the site's own counsel, and ultimately for an industrial tribunal.

How Velura Services helps

We scope every engagement against the core-activity rules before deployment and keep supervision, records and pay on our side of the line. Supervision, records and pay sit with us, as a genuine contract arrangement requires. Where a role should be permanent, we say so at the Requirement stage.

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Sources

Frequently asked questions

Can a contract worker demand to be made permanent after years on the same site?

No, not as of right. The Supreme Court held in SAIL v National Union Waterfront Workers (2001) that there is no automatic absorption of contract labour by the principal employer, however long the service. The route open to the worker is a claim before an industrial tribunal that the contract was a sham, which has to be proved on evidence of who really controlled the work.

What makes a labour contract a sham in Indian law?

A contract is treated as a sham when the contractor is only a front and the principal employer really controls the workers. Courts look at who selected and appointed them, who paid them, who supervised their daily work and who could discipline or dismiss them. In Balwant Rai Saluja (2014) the Supreme Court asked who held effective and absolute control, not merely some say over the work.

Does the OSH Code make contract workers in core activity the site's employees?

No. Section 57 of the OSH Code 2020 prohibits contract labour in core activity unless one of three exceptions applies, but it does not say what happens to the workers if the prohibition is breached. Nothing in the Code deems them the principal employer's employees, so a breach exposes the site to penalties, while absorption still depends on proving a sham contract.

If a site stops using contract labour for a job, must it hire the same workers?

Not necessarily, but they may have a claim to be considered first. Where contract labour in a process was prohibited, the Supreme Court's 2001 SAIL judgment directed that a principal employer taking on regular workers for that work give preference to the contract workers who had done it, with age relaxation for their service. That is a preference in hiring, not a guarantee of a job.