"They're the contractor's workers, not ours": what the CLRA Act 1970 actually says about principal employer liability

Walk into almost any factory, warehouse, IT park or hospital in India and ask the finance head about the housekeeping staff, the security guards or the packing line workers, and you will hear a version of the same sentence: "Those aren't our employees. They're on the contractor's rolls. We just pay the invoice."

That sentence is the single most expensive misunderstanding in Indian labour compliance. Under the Contract Labour (Regulation and Abolition) Act, 1970 — the CLRA Act — the principal employer does not get to hand off responsibility along with the invoice. The Act deliberately creates a joint and several liability structure: when the contractor fails to pay wages, fails to provide statutory facilities, or fails to remit EPF and ESIC, the liability lands squarely back on the principal employer. Not as a moral obligation. As a statutory one, recoverable from the amounts payable to the contractor or as a debt.

This article sets out what the law actually requires, what the registration and licensing architecture looks like, where the joint liability trap sits, and the practical steps a principal employer should take before the next labour inspection.

What the law actually says

Applicability — the twin 20-worker thresholds

The CLRA Act operates on two independent thresholds, and confusing them is a common error.

For the principal employer (Section 1(4)(a)): the Act applies to every establishment in which twenty or more workmen are employed, or were employed on any day of the preceding twelve months, as contract labour.

For the contractor (Section 1(4)(b)): the Act applies to every contractor who employs, or employed on any day of the preceding twelve months, twenty or more workmen.

Two points matter here. First, the threshold is not headcount on the day of inspection — it is the peak on any day in the trailing twelve months. A manufacturing unit that ran 35 contract workers during a festive-season surge in November remains covered in the following September even if the current count is eight. Second, several states have exercised the power under the proviso to Section 1(4) to notify a lower threshold, and a number of states apply the Act at ten or more contract workmen. The applicable number is a function of where the establishment is located, not of the Central Act read in isolation.

Section 1(5) carves out work of an intermittent or casual nature. But the carve-out is narrower than most employers assume: work is not deemed intermittent if it was performed for more than 120 days in the preceding twelve months, and it is not deemed seasonal if performed for more than 60 days in a year. Where there is a dispute about whether work is intermittent, the question is decided by the appropriate Government, not by the employer's own characterisation in the service agreement.

The registration and licensing architecture

The Act builds a paper trail with a specific sequence, and each document depends on the one before it.

Step one — Principal employer registration (Section 7, Form I). The principal employer applies to the Registering Officer in Form I, with the prescribed fee, for registration of the establishment. On registration, a certificate is issued in Form II. The critical consequence sits in Section 9: an establishment that is required to be registered but is not registered — or whose registration has been revoked under Section 8 — cannot lawfully employ contract labour at all. It is not a fine-and-continue situation. The engagement itself becomes unlawful.

Step two — Form V, the certificate that unlocks the contractor's licence. This is the form the topic of this article turns on, and it is routinely misunderstood. Form V is not a registration form the principal employer files for itself. It is a certificate issued by the principal employer to the contractor, confirming that the principal employer is registered under the Act and that he has engaged the contractor for the work described. The contractor cannot obtain a licence without it.

Step three — Contractor's licence (Section 12, Form IV). The contractor applies in Form IV, and the application must be accompanied by the Form V certificate from the principal employer. Without Form V, the licensing officer will not process the application. The licence is granted in Form VI, is establishment-specific and work-specific, carries a stated maximum number of workmen, and must be renewed periodically as prescribed by the relevant State Rules. Section 12 is unambiguous: no contractor to whom the Act applies shall undertake or execute work through contract labour except under and in accordance with a licence.

The practical result of this sequence is that a principal employer who issues Form V casually — to a contractor whose licence has lapsed, or for a headcount that exceeds the licence ceiling — is not merely a bystander to the contractor's non-compliance. He is the instrument of it.

Where the joint liability actually bites

Three provisions do the heavy lifting, and together they defeat the "not our workers" defence.

Section 20 — amenities. If the contractor fails to provide the facilities required under Sections 16 to 19 — canteens where prescribed, rest rooms, drinking water, latrines and urinals, washing facilities and first-aid — within the prescribed time, the principal employer shall provide them. The cost is then recoverable from the contractor, either by deduction from any amount payable to him under the contract or as a debt.

Section 21 — wages. This is the provision most often quoted and least often planned for. The contractor is responsible for payment of wages to the contract labour within the prescribed period. But Section 21(4) requires the principal employer to nominate a representative to be present at the time of disbursement of wages by the contractor, and that representative must certify the amounts paid. And Section 21(4) read with 21(2) provides that where the contractor fails to make payment within the prescribed period, or makes short payment, the principal employer shall be liable to make payment of the wages in full, or the unpaid balance — again recoverable from the contractor.

Read that again in operational terms. The principal employer is required to have a named person physically present, or verifiably present through the payment process, on the contractor's wage disbursement day. Most establishments do not do this. When a contractor absconds mid-project having paid three weeks of wages, the establishment discovers Section 21 for the first time — and discovers simultaneously that it has no certified record of what was actually paid, and therefore no defensible position on what remains owed.

EPF and ESIC. The exposure is not confined to the CLRA Act. Under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 and the regulations framed under it, the definition of "employee" reaches persons employed by or through a contractor in connection with the work of the establishment. The principal employer is liable for contributions in respect of contract labour where the contractor defaults, with recovery available against the contractor. The position under the Employees' State Insurance Act, 1948 is materially similar — the "immediate employer / principal employer" structure in that statute places primary recovery on the principal employer. A contractor with an independent EPF code who simply stops filing ECRs does not extinguish the establishment's exposure; it converts it into a demand with interest under Section 7Q and damages under Section 14B.

What the Act does not do

For completeness, and because this is where a good deal of litigation has been generated: registration under the CLRA Act and compliance with it does not, by itself, create a relationship of employment between the principal employer and the contract labour. Regularisation or absorption is not an automatic consequence of the principal employer discharging statutory obligations under Sections 20 and 21. The Act regulates the engagement; abolition of contract labour in a particular process or operation is a separate act of the appropriate Government under Section 10, exercised after considering the conditions of work, whether the work is perennial, whether it is incidental to the industry, and whether it is ordinarily done through regular workmen in similar establishments.

Where the arrangement is a sham or camouflage — where the contractor is a paper entity, the principal employer controls recruitment, supervision, discipline and wage-setting, and the contractor exists only to interpose a legal buffer — courts have consistently looked through the arrangement. That is a factual finding about control and supervision, not a consequence of the Act's compliance provisions.

Practical implications

Consider a manufacturing company in Karnataka running a plant with 180 direct employees and, at peak, 46 contract workers across housekeeping, material handling and packing, engaged through two contractors.

The registration position. The establishment crosses the twenty-workman threshold and must hold Form II registration. Both contractors, each employing more than twenty, must hold Form VI licences, and each licence must be supported by a Form V certificate issued by the company.

The exposure if Contractor B defaults on one month's wages for 22 workers. Assume the applicable minimum wage plus statutory components works out to Rs.19,500 per worker per month. The unpaid wage liability that falls on the principal employer under Section 21 is 22 x Rs.19,500 = Rs.4,29,000. That is the direct wage exposure alone.

The EPF and ESIC layer. On the same wage base, employer EPF at 12% is approximately Rs.51,480 for the month; ESIC employer contribution at 3.25% on wages within the Rs.21,000 ceiling adds roughly Rs.13,942. If the default runs across, say, eight months before it surfaces in an inspection, the principal contribution exposure alone approaches Rs.5.2 lakh, before interest under Section 7Q and damages under Section 14B — and damages can run to a substantial percentage of the arrears depending on the period of default.

The penal layer. Section 23 of the CLRA Act penalises contravention of provisions regarding employment of contract labour. Section 24 covers other offences under the Act and rules. Section 25 extends liability to directors, managers, secretaries and other officers of a company where the offence is proved to have been committed with their consent or connivance, or is attributable to their neglect. This is the provision that converts a compliance failure into a personal exposure for the officer who signed the Form V certificate without checking the licence.

The commercial layer. Recovery against a contractor who has already collapsed is theoretical. The Act gives the principal employer a right of deduction from amounts payable under the contract — but that right is worth exactly as much as the retention still held. An establishment that pays contractor invoices in full within 15 days of submission has, in practical terms, waived its own statutory recovery mechanism.

Step-by-step: what to do

• Reconstruct the trailing twelve-month peak contract-labour headcount. Not the current number. Pull the gate register, the contractor's attendance sheets and the security log, and identify the highest single-day count across the last twelve months. Then check the threshold notified by your State — do not assume twenty.
• Verify your own Form II registration is live and accurate. Registration is establishment-specific and reflects the nature of work and the maximum number of workmen stated at the time of application. If the scope of contracted work has changed materially, the registration needs to be amended, not merely retained in a file.
• Collect and date-check every contractor's Form VI licence. For each contractor, confirm the licence is current, that it names your establishment, and that the maximum number of workmen stated on it is not less than the number actually deployed. Deployment beyond the licensed ceiling is a contravention regardless of how well wages are paid.
• Audit your Form V certificates. Every Form V you have issued should map to a live Form VI licence. Any Form V issued for a contractor whose licence has since lapsed is a live exposure. Institute a rule that Form V is issued only on the signature of a named compliance owner, and never as a routine procurement step.
• Implement the Section 21(4) wage-disbursement certification. Nominate a representative in writing. Have that person present at each contractor's disbursement, and have them sign the wage register certifying the amounts actually paid. This is not optional good practice — it is the statutory mechanism, and it is the only contemporaneous evidence that will protect you when a contractor disputes what was disbursed.
• Move contractor payment to arrears with retention. Structure contractor invoices so that payment follows proof of wage disbursement, EPF ECR filing and ESIC challan for the relevant month. Hold a retention of a defined percentage against statutory dues. This is the only way the Section 20 and Section 21 recovery rights are worth anything in practice.
• Obtain monthly statutory proof, not annual assurance. Every month, for every contractor: the ECR receipt with the UAN-wise breakdown covering the workers deployed at your site, the ESIC contribution challan, and the certified wage register. An annual undertaking from the contractor that "all statutory dues are paid" has no evidentiary value.
• Maintain the registers and returns the State Rules prescribe. The Central Rules and the corresponding State Rules require the principal employer and the contractor to maintain registers of contractors, of workmen employed, wage registers, wage slips, and to file the prescribed annual and half-yearly returns. Inspections begin with the registers; a clean register set changes the character of an inspection before the substantive questions start.
• Test each arrangement for the sham indicators. Ask, for each contracted function: who recruits, who supervises day to day, who sets the wage, who disciplines, and whose tools and premises are used. Where the answer is consistently "we do", the arrangement is a contract of employment wearing a contractor's coat, and the CLRA compliance file will not save it.
• Bring the review into the annual compliance calendar. Contract-labour compliance fails through drift — a licence lapses, a headcount creeps past the ceiling, a new vendor is onboarded through procurement without a Form V check. A dated quarterly review with a named owner is the control that actually works.

FAQ

We use a manpower agency that has its own EPF and ESIC codes and files independently. Are we still exposed?

Yes. An independent code changes who files first; it does not change who is liable when filing stops. Under the EPF Act the definition of employee covers persons employed through a contractor in connection with the work of the establishment, and under the ESI Act the principal employer is liable in respect of the immediate employer's workers. The practical protection is not the contractor's code number — it is your monthly verification of the ECR and the ESIC challan against the specific workers deployed at your site, plus retention held until that verification is done.

Our contract workers number 14. Do we need to register at all?

Under the Central threshold of twenty, no — but that is the wrong place to stop. Check two things. First, whether your State has notified a lower threshold; several have applied the Act at ten or more contract workmen. Second, whether fourteen is genuinely your trailing twelve-month peak, or merely today's number. If a seasonal surge took you to twenty-two in the last year, the Act applies now. And separately, EPF and ESIC obligations for contract workers are governed by their own thresholds and are not switched off by falling below the CLRA number.

The contractor absconded owing three weeks of wages. Can we simply refuse to pay and let the workers pursue him?

No. Section 21 makes the principal employer liable to pay the wages in full where the contractor fails to pay within the prescribed period. Your remedy is recovery from the contractor — by deduction from amounts payable under the contract, or as a debt. Which is why the retention structure and the arrears payment cycle matter more than any clause in the service agreement. Pay the workers, then recover what you are holding. Disputing the primary liability will cost you more in inspection and litigation than the wages did.

Does complying with Sections 20 and 21 mean we have effectively admitted these are our employees?

No. Discharging the statutory obligations the Act imposes on a principal employer does not create an employment relationship with the contract labour, and it is not a route to automatic absorption. Abolition of contract labour in a given process is a separate exercise by the appropriate Government under Section 10, on defined considerations. What does create exposure is not compliance — it is a sham arrangement where you control recruitment, supervision, discipline and wages while a paper contractor sits in between. Compliance is the defence, not the admission.

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See Also

• "We're too small for POSH": what the Act actually requires from 10 employees onward
• "Leave encashment is fully tax-free": What ITA 2025 actually says
• "Professional tax is a central tax on professionals": What the law actually says

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