Compliance

Do contractors owe staff a 2% annual increment?

Rule 185 of the 2026 OSH Central Rules sets a 2% minimum yearly increment for a contractor's regular workers. Who it covers, and why the number matters.

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For their regular workers, the Central rules say yes. Rule 185 of the OSH (Central) Rules 2026 says a worker "regularly employed by the contractor" on mutually accepted conditions of employment must get "an annual increment of not less than two percent of their wages". The figure gives a number to a test in all three labour codes that decides whether a contractor's worker counts as contract labour at all.

What rule 185 says

One sentence, under the heading "Annual increment of regular worker of a contractor". In full: "A worker who is regularly employed by the contractor for any activity and employment of such worker is governed by mutually accepted standards of the condition of employment shall be such that such worker gets an annual increment of not less than two percent of their wages." The rules were notified as G.S.R. 345(E) on 8 May 2026.

The rule does not cover every worker a contractor supplies. It speaks of a worker regularly employed by the contractor, on accepted conditions of employment: in practice, a staffing firm's or facilities contractor's own permanent staff, moved between client sites, rather than a crew hired for one site's engagement. The rule says nothing about what happens if the increment is not given; that turns on the definition behind it.

The definition the 2% belongs to

"Contract labour" in the OSH Code, the Code on Wages and the Code on Social Security means a worker hired in or in connection with an establishment's work "by or through a contractor". All three definitions then exclude a worker, other than a part-time employee, who is regularly employed by the contractor for any activity of his establishment, whose employment is governed by mutually accepted standards "(including engagement on permanent basis)", and who "gets periodical increment in the pay, social security coverage and other welfare benefits" under the law.

CodeDefinition of contract labourCarve-out for a contractor's regular worker
OSH Code 2020s.2(1)(m)Regular employment, accepted conditions, periodical increment, social security and welfare
Code on Wages 2019s.2(g)The same, in two numbered limbs
Code on Social Security 2020s.2(19)The same, for an employee
OSH (Central) Rules 2026r.185Puts a floor on the increment: 2% of wages a year

The Code itself never said how large the "periodical increment" had to be. Rule 185 now does, for establishments under the Central rules. A part-time employee is outside the carve-out whatever the increment, so a part-time worker supplied by a contractor remains contract labour.

Two ways to read the rule

As a duty, or as a yardstick, and the difference matters. Read as a duty, rule 185 obliges every contractor to give its regular workers at least 2% a year. Read as a yardstick, it fixes what "periodical increment" means in the carve-out: a contractor that wants its regular workers treated as its own employees rather than as contract labour must show increments of at least 2% a year, alongside social security and welfare benefits. The words "shall be such that" fit either, and nothing in the rules says which is meant. Which applies on a given engagement is a question for the site's and the contractor's counsel.

What 2% comes to

Not much in a year, and it compounds. On a monthly wage of ₹15,600, a round figure chosen to divide cleanly and not a rate this site quotes, 2% is ₹312 a month: ₹15,912 after one year, about ₹16,230 after two and about ₹16,555 after three. The rule sets a floor, not a target.

Two questions the rule leaves open. It says "two percent of their wages" without defining the base, and "wages" under the Code on Wages has its own definition, with exclusions above half of total pay added back. And it does not say whether a statutory revision, such as the dearness allowance reset that changes Tamil Nadu's minimum wages every 1 April, counts toward the 2% or must come on top of it [VERIFY: any Ministry clarification on the base and on minimum-wage revisions]. A contractor relying on the rule should be able to show the increment separately in its wage records.

Where Tamil Nadu sites stand, and what to check

Rule 185 is a Central rule; the carve-out it measures is in the Codes, which apply everywhere. A Tamil Nadu factory or warehouse is governed by the State's OSH rules, and the State's 2022 draft does not mention increments at all [VERIFY: whether Tamil Nadu's final OSH rules adopt a figure]. Until it does, the Codes require a "periodical increment" with no number attached, and 2% is the only figure in the rules. For a site taking regular staff from a contractor, the checks are the same either way:

  • Ask how the contractor classifies the workers. Contract labour, or its own regular employees under the carve-out. The answer changes what the contractor should be able to show you.
  • If regular employees, ask for the increment history. Appointment letters showing permanent engagement, and the yearly increment for each worker, shown separately from any minimum-wage revision.
  • Check the rest of the carve-out too. The definition needs social security coverage and welfare benefits as well as the increment, so the PF and ESI records belong in the same file.
  • Keep the classification consistent with your own counts. The same workers should not be counted as contract labour for one purpose and as the contractor's regular staff for another.

How Velura Services helps

Velura builds statutory increments into its wage structures and shows them on each worker's wage slip. Before a contract renews, we walk you through how wage revisions and minimum-wage changes affect the rate, so the increment is planned rather than discovered at audit.

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Sources

Frequently asked questions

Do contractors have to give their workers an annual increment?

For workers regularly employed by the contractor on mutually accepted conditions, rule 185 of the OSH (Central) Rules 2026 requires an annual increment of not less than 2% of wages. The rule applies where the Central rules govern; Tamil Nadu establishments follow the State's OSH rules, whose 2022 draft has no equivalent figure. Workers hired only for one site's engagement are not what the rule describes.

Is a contractor's permanent employee counted as contract labour?

Not if the definition's carve-out is met. The OSH Code, Code on Wages and Code on Social Security exclude a worker, other than a part-time employee, who is regularly employed by the contractor on mutually accepted conditions and gets periodical increments, social security and welfare benefits. Whether a particular worker meets that test is a question for counsel.

How much is a 2% increment in practice?

On an illustrative monthly wage of ₹15,600, 2% is ₹312 a month, taking the wage to ₹15,912 after a year and to about ₹16,555 after three years of compounding. The rule sets a floor. It does not say whether a statutory minimum-wage revision counts toward the 2%, so a contractor should show increments separately in its wage records.

Why does the 2% matter to a principal employer?

Because the increment is part of the test for whether a contractor's worker is contract labour, and the OSH Code's contract-labour provisions, including contractor licensing, apply at fifty or more contract labour. A site taking regular staff from a contractor should know how the contractor classifies them and see the increment, PF and ESI records that support it.