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Contract labour can be distinguished from direct labour in terms of employment relationship with the principal establishment and method of wage payment. A workman is deemed to be a contract labour when he/she is hired in connection with the work or contract for service of an establishment by or through a contractor. They are indirect employees; persons who are hired, supervised and remunerated by a contractor who, in turn is compensated by the establishment. In either form, contract labour is neither borne on pay roll or muster roll or wages paid directly to the labour. While a “Contractor” is a person who undertakes to produce a given result for the establishment, other than a mere supply of goods of articles of manufacture to such establishment, through contract labour or who supplies contract labour for any work of the establishment and includes a sub-contractor. The Principal Employer does not have any supervisory control over the workmen of the contractor and the method and manner in which the work was being executed will be supervised by the contractor only. Therefore no direct relationship of the employer and employee would emerge between the Principal Employee and the workmen of the contractor.
Obligations of the Principal Employer
Obligations of an employer under the Contract Labour Act are that of vicarious liability on owners of establishments. The Act provides respite and recourse to contract labour from non-payment of wage by allowing them access to the employer in the occurrence of a default by the contractor.
The main issues under the Act which deals with the obligations of the Principal Employer are as follows:
Can the court impose a condition upon the principal employer to direct the contractor to employ particular employees?
The court cannot direct the principal employer to impose conditions on successive contractors to employ particular workmen. Neither the Contract Labour (Regulation and Abolition) Act nor the Rules made there under provide that upon the abolition of the contract labour in any establishment, the said labour should be directly absorbed by the principal employer of that establishment. Nor is there any provision that pending decision upon an application under section 10 by workers, the said workers should continue to be engaged, at the instance of the principal employer, by the contractor engaged by such principal employer. When the Act does not provide for such measure but contents itself by mere regulation of the conditions of service of employees under the contractor and abolition of contract labour, it is not permissible for the High Court under Art. 226 to direct the appellant federation to impose a condition on the successive contractors engaged by it to employ the employees who had moved the government under section 10 of the Act, till a final order is passed under section 10 by the State Government.
Will the principal employer be liable to pay gratuity and bonus to the employees employed by the contractor?
A principal employer is liable to pay wages to the employees of the contractor if the latter fails to make payment of wages to his employees. However, it has been held in one case that the gratuity and bonus will not be payable by the principal employer since these do not come within the definition of ‘wages’. In Shyamji Srivastava vs. Management of M/s. Public Works Department it was held that Principal employer is liable for payment of wages to the workmen as per section 21(4) of the Contract Labour (Regulation & Abolition) Act when the immediate employer i.e. Contractor fails to discharge his obligation. Even it is categorically stated in section 34 of the Industrial Disputes Act, 1947 that in the event of the contractor failing to pay wages, the principal employer should be liable to pay the wages to the workmen.
When and under what circumstances a principal employer is obligated to seek registration under the Act?
Principal employer means owner or occupier or the person who exercise ultimate control and supervision and manages the affairs of the establishment. The Bombay High Court has held that when a company got a contract from an Electricity Board for work relating to erection of a new power station, the company could not be registered as principal employer under the Contract Labour (Regulation & Abolition) Act, 1970. In fact the Board was principal employer and the company was a contractor who might have engaged subcontractors. In another case the Gujarat High Court has held that when firm ‘A’ was dealing in large transactions with many firms besides the firm ‘B’ for which they were doing stitching work in their own premises. The firm ‘A’ could not be treated as a contractor employing contract labour for doing the job of firm ‘B’ as principal employer under the Contract Labour (Regulation and Abolition) Act.
Whether there can be a principal employer in the absence of an establishment or a site?
The word ‘site’ or the ‘place’ may or may not belong to the principal employer, but this will not stand in the way of the application of the Contract Labour (Regulation and Abolition) Act or in holding that a particular place or work site where industry, trade, business, manufacture or occupation is carried on is not an establishment within the meaning of the Act. For instance, a ship or the vessel in which the work of repairs is carried on is a place and is also an establishment under section 2(1) (e) (ii) of Contract Labour (Regulation & Abolition) Act, 1970.
Will the principal employer be liable to absorb the contract labour which has been abolished by the appropriate Government?
The Delhi High Court while following the Supreme Court ruling of Air India Statutory Corporation has held that on abolition of the contract labour system, the principal employer will absorb such workers provided they are above the minimum age and below the maximum age and also they are medically fit.
 Legal position as on February 16, 2018.
 Section 2(b), The Contract Labour Act, 1970.
 Section 2(c), The Contract Labour Act, 1970.
 A.P, Dairy Development Co-op. Federation vs. K. Ramulu, 1989 –I CLR 407 (A.R.).
 Cominco Binani Zinc Ltd. VS. Pappachan, 1989 LLR 123 (Ker. HC).
 2014 LLR 130
 M/s Gammon India Ltd., Bombay vs. Asslt. Commissioner of Labour, Nagpur and another 1976 Lab. IC 745 (Bom.HC).
 State of Gujarat vs. Vogue Garments and Ors., 1985 LLJ (1) 255 (Gujarat HC).
 Lionel Edward Ltd. Vs. Labour Enforcement Officer, 1977 Lab. IC 1937 (CaI.HC); (1978) 2 Cal.LJ 333;51 FJR 199.
 Air India Statutory Corporation vs. United Labour Union and Others, 1987 LLR 228 (SC)