Principal Employer Not Liable as Employer Where Workmen Are Hired Through Contractors

Indian labour jurisprudence has consistently attempted to strike a balance between preventing sham contractual arrangements designed to defeat labour welfare laws and protecting legitimate outsourcing models that are legally recognised under statutory frameworks such as the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act).

A recent authoritative pronouncement of the Delhi High Court in M/s Indraprastha Gas Limited v. Ambrish Kumar decisively clarifies that a principal employer cannot be fastened with liability as an employer merely because workmen perform work at its establishment, when they are hired, paid, and controlled by an independent contractor.

Concept of Principal Employer and Contract Labour

Statutory Framework under the CLRA Act

The Contract Labour (Regulation and Abolition) Act, 1970 recognises the legitimacy of engaging workmen through contractors. The Act defines:

Principal Employer: The owner or occupier of an establishment where contract labour is engaged.

Contractor: A person who undertakes to supply labour or execute work through contract labour for an establishment.

The CLRA Act does not automatically treat contract labour as employees of the principal employer. Instead, it creates a regulated system, imposing obligations on both the principal employer and the contractor, such as registration, licensing, wage payment safeguards, and welfare measures.

Importantly, abolition of contract labour can only occur through a statutory notification under Section 10 of the CLRA Act, not by judicial assumption.

Employer–Employee Relationship: Burden of Proof

Foundational Legal Principle

Indian courts have consistently held that the burden of proving an employer–employee relationship lies on the person asserting it. The Supreme Court, in Workmen of Nilgiri Coop. Mkt. Society Ltd. v. State of Tamil Nadu, clarified that mere performance of work at an establishment does not establish such a relationship.

The workman must demonstrate, through cogent and reliable evidence, that:

• The principal employer appointed him,
• The principal employer paid his wages,
• The principal employer exercised disciplinary and supervisory control over him.

Only upon discharge of this burden does the onus shift to the management.

The “Triple Test” in Determining Employment Relationship

Courts have evolved the “triple test” to determine whether a workman is an employee of the principal employer:

• Who pays the salary?
• Who has the authority to appoint, terminate, or discipline?
• Who exercises effective control and supervision?

Unless these indicators point clearly toward the principal employer, courts have refused to infer an employer–employee relationship.

Factual Background: M/s Indraprastha Gas Limited v. Ambrish Kumar

In M/s Indraprastha Gas Limited v. Ambrish Kumar, the respondent claimed that he was employed directly by Indraprastha Gas Limited (IGL) as a Driveway Salesman and that his services were illegally terminated. The Labour Court accepted this claim and ordered reinstatement with full back wages, holding that the contract between IGL and the contractor was a “sham and camouflage”.

IGL challenged this award before the Delhi High Court, contending that:

• The respondent was employed by a licensed contractor.
• All statutory compliances such as PF and ESI were undertaken by the contractor.
• There was no appointment letter or salary payment by IGL.
• The Labour Court exceeded its jurisdiction by declaring the contract a sham without pleadings.

High Court’s Analysis and Findings

1. Failure to Prove Employer–Employee Relationship

The Delhi High Court reiterated that mere production of identity cards, duty rosters, or internal operational documents does not establish employment. The workman admittedly had:

• No appointment letter,
• No salary slips issued by IGL,
• No PF or ESI contributions made by IGL.

The Court held that the absence of foundational employment documents is fatal to the workman’s claim.

2. Contractor as the Real Employer

The Court gave decisive weight to:

• Wage registers maintained by the contractor,
• PF and ESI records in the contractor’s code,
• Attendance records maintained by the contractor,
• Valid registration of the principal employer and licence of the contractor under the CLRA Act.

These factors clearly established that the contractor was the real employer, not IGL.

3. Sham Contract Cannot Be Presumed Without Pleadings

A crucial aspect of the judgment is the Court’s rejection of the Labour Court’s approach in declaring the contract “sham and bogus”.

The High Court held that:

• There was no pleading by the workman alleging sham or camouflage.
• Courts cannot travel beyond pleadings to invent a case.
• Declaring a contract sham requires specific pleadings and strong evidence, not conjecture.

This reinforces the principle that beneficial legislation cannot override procedural fairness.

4. Government Undertakings and Recruitment Rules

The Court emphasised that public sector undertakings and government companies cannot appoint employees without following recruitment rules, including:

• Advertisement,
• Selection process,
• Issuance of appointment letters.

A claim of “oral appointment” or cash salary was held to be inherently implausible in the context of a government-controlled entity.

5. Consistency with Earlier Judicial Findings

The High Court also relied on an earlier judgment in Vinay Sharma v. Indraprastha Gas Ltd., where similarly placed workmen were held to be contract labour and not direct employees.

The Court observed that once the issue had been conclusively determined, the same factual matrix could not yield a different legal conclusion.

Impact on Illegal Retrenchment Claims

Since the respondent failed to establish that he was an employee of IGL, the provisions of:

• Section 2(oo) (retrenchment), and
• Section 25F (conditions precedent to retrenchment)

of the Industrial Disputes Act, 1947, were held inapplicable.

Without an employer–employee relationship, there can be no illegal retrenchment by the principal employer.

When Can a Principal Employer Still Be Liable?

It must be emphasised that the judgment does not grant blanket immunity to principal employers. Liability may still arise where:

• The contractor is a mere name-lender,
• Wages are paid directly by the principal employer,
• The contractor has no independent business,
• Control and supervision are absolute and pervasive.

In such cases, courts may lift the veil and declare the contract a sham—but only on proper pleadings and proof.

Conclusion

The law is now clear that a principal employer cannot be treated as the employer of workmen merely because they perform work at its establishment when they are engaged, paid, and controlled by an independent contractor under a valid statutory framework. Unless the workman proves, through cogent evidence, the existence of a direct employer–employee relationship or establishes that the contract arrangement is a sham devised to defeat labour rights, liability cannot be fastened on the principal employer.

Beneficial labour legislation cannot be invoked to dispense with foundational proof, and courts must respect contractual structures that comply with the Contract Labour (Regulation and Abolition) Act, 1970, ensuring that legitimate outsourcing is not judicially dismantled in the absence of pleadings and evidence.

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