Termination of contract by the principal employer, can the contract workmen claim permanency with the principal employer?

• July 24, 2024

This important issue was dealt with by the Hon Apex court in 2022 in a Civil Appeal numbers 8446 – 8447 of 2022 before the bench. We are happy to unravel and demystify the ratio arising out of the said important verdict. There are important learnings for the businesses who are dependent upon contract workmen and for the CHROs who are responsible for managing the said workforce. 

Kirloskar Brothers Limited vs Ramcharan – the Apex Court held on 5th December 2022 that there is no automatic absorption provided under the Contract Labour (R & A) Act, 1970.

 

BACKGROUND & CASE OVERVIEW

Six workmen, respondents nos 1 to 6 were contractual workmen of the Contractor who was respondent no 7 engaged by the principal employer – Kirloskar Brothers Limited (KBL). The contract was renewed from time to time. During the period  of the contract, necessary compliances under the Contract Labour (R&A) Act, 1970 (CLRA) were completed by both the principal employer and the contractor. The contract ended on October 7, 1996. As a result, the contractor terminated the services of the respondent workers.  Accordingly, KBL filed a return under CLRA which showed that the contract with the contractor had come to an end.  

After the termination of his contract by KBL , all statutory payouts, including the salary of the workmen were paid by the contractor since under the CLRA act, the ultimate responsibility would be upon the KBL being the principal employer if these were not paid by the contractor.

KBL vide a written communication informed and recovered Rs. 7224/- from the bill payable, for non-deposit of PF contribution for the last month of its service.

The respondent six workmen after the termination of their service by their employer, approached Labour Court praying inter alia that they were employees of the principal employer KBL, but were orally terminated by their employer Respondent no 7 and sought to be reinstated in service.  The labour court judge, in appreciation of the evidence returned a categorical finding that the contractor had obtained a licence under the CLRA Act and that the contesting respondents were employees of the contractor and not of the appellant ie KBL.

The respondent workmen challenged the order of the Labour Court before the Industrial Tribunal which ordered reinstatement holding that a contract workman automatically becomes an employee of the principal employer. The Industrial Tribunal considered the definition of ‘employee’ and ‘employer’ as contained in Sections 2(13) and 2(14) of the Madhya Pradesh Industrial Relations Act, 1960 (MPIR Act). The order of the Industrial Tribunal was upheld by a single division of the High Court. The appellant KBL approached the Hon Supreme Court challenging the orders of the Industrial Tribunal which were confirmed by both benches of the High Court. 

The Hon Supreme Court agreed with the contentions of KBL and upheld the order of the Labour Court and set aside the orders of the Industrial Tribunal and both benches of the High Court.  

 

KEY OBSERVATIONS:

The observations of the Hon Supreme Court are significant and a well laid down path for proper utilization of contract workmen. The entire order is presented here in a simple, easy-to-understand manner;

1. It is admitted position that no notification under section 10 of the CLRA Act has been issued by the State government/ appropriate government, prohibiting the contract labour.     

2. Upon entering into the contract, necessary compliance under the CLRA act was completed by the appellant (KBL) and the contractor. 

3. On the labour contract coming to an end, the services of the contesting respondents (workmen) were dispensed with by the contractor.

4. The documentary evidence proves that the contesting respondents were the employees of the appellant.

5. The direct control and supervision of the contesting respondents was always with the contractor. 

6. There is no evidence on record that any of the respondents were given any benefits, uniform or punching cards by the appellant. 

7. Merely because sometimes the payment of salary was made and /or PF contribution was paid   by the appellant, which was due to non-payment of the same by the contractor, the contesting respondents shall not automatically become the employees of the principal employer-appellant.

8. In absence of any notification under Section 10 of the CLRA Act unless there are allegations of findings with regards to a contract being sham, private respondents who are workmen/employees of the contractor, cannot be held to be employees of the appellant and not the contractor.   

9. If the contract is found to be not genuine but a mere camouflage, the so-called contract labour will have to be treated as employees of the principal employer who shall be directed to regularise the services of the contract labour in the establishment concerned subject to the conditions as may be specified.

10. Neither section 10 of the CLRA Act nor any other provision in the Act, expressly or by necessary implication, provides for automatic absorption of contract labour on issuing a notification by the appropriate government and consequently, the principal employer cannot be required to order absorption of the contract labour working in the establishment concerned. 

 

CONCLUSION:

On a detailed perusal of this land mark order, KBL the appellant successfully prevailed in preventing the automatic absorption of contract workmen, because, both KBL in its capacity as the principal employer and the Contractor were scrupulous in implementing the provisions of the CLRA Act in letter and spirit which is a learning for other employers.