Date of the Judgment: 05 December 2022
Citation: (2022) INSC 1065
Judges: M.R. Shah, J. and Hima Kohli, J.
Can contract laborers automatically become employees of the principal employer? The Supreme Court of India addressed this critical question in a recent case concerning Kirloskar Brothers Limited. The core issue revolved around whether contract workers could claim direct employment with the principal employer in the absence of a notification prohibiting contract labor under the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act). The Supreme Court bench, comprising Justices M.R. Shah and Hima Kohli, delivered the judgment, with Justice M.R. Shah authoring the opinion.
Case Background
The dispute began when Kirloskar Brothers Limited (the appellant), engaged a contractor (respondent No. 7) on April 22, 1995, to provide labor. This contract was renewed periodically, including on August 1, 1995. The contractor was responsible for employing laborers, including respondents No. 1 to 6. The labor contract ended on October 7, 1996, leading to the termination of the respondents’ services by the contractor. Kirloskar Brothers Limited filed a return under the CLRA Act on January 25, 1997, indicating the end of the contract with respondent No. 7.
The appellant stated that all statutory payments, including wages, were the responsibility of the contractor. However, Kirloskar Brothers Limited deducted ₹7,224 from the contractor’s bill on April 6, 1996, for non-payment of Provident Fund (PF) contributions for May 1995. Subsequently, the respondents approached the Labour Court, claiming they were employees of Kirloskar Brothers Limited and had been wrongfully terminated. They sought reinstatement.
Timeline
| Date | Event |
|---|---|
| April 22, 1995 | Kirloskar Brothers Limited engaged a contractor (respondent No. 7) for labor. |
| August 1, 1995 | The contract with the contractor was renewed. |
| May, 1995 | Contractor failed to deposit PF contribution. |
| April 6, 1996 | Kirloskar Brothers Limited deducted ₹7,224 from the contractor’s bill for non-payment of PF contributions. |
| October 7, 1996 | The labor contract ended, and the contractor terminated the respondents’ services. |
| January 25, 1997 | Kirloskar Brothers Limited filed a return under the CLRA Act, indicating the end of the contract. |
| March 14, 2002 | The Labour Court ruled that the respondents were employees of the contractor, not Kirloskar Brothers Limited. |
| February 5, 2004 | The Industrial Tribunal ordered reinstatement, stating that contract laborers automatically become employees of the principal employer. |
| March 9, 2018 | The Single Judge of the High Court of Madhya Pradesh upheld the Industrial Tribunal’s order. |
| November 12, 2018 | The Division Bench of the High Court dismissed the appeal, confirming the Single Judge’s decision. |
| December 5, 2022 | The Supreme Court of India overturned the High Court’s decision, ruling in favor of Kirloskar Brothers Limited. |
Course of Proceedings
Initially, the Labour Court ruled on March 14, 2002, that the respondents were employees of the contractor, not Kirloskar Brothers Limited. However, the Industrial Tribunal, on appeal, reversed this decision on February 5, 2004, ordering reinstatement and stating that contract laborers automatically become employees of the principal employer. The Industrial Tribunal considered the definitions of ‘employee’ and ‘employer’ under Sections 2(13) and 2(14) of the Madhya Pradesh Industrial Relations Act, 1960 (MPIR Act).
The learned Single Judge of the High Court of Madhya Pradesh at Indore upheld the Industrial Tribunal’s order on March 9, 2018. Subsequently, the Division Bench of the High Court dismissed the appeal on November 12, 2018, confirming the Single Judge’s decision. Kirloskar Brothers Limited then appealed to the Supreme Court.
Legal Framework
The primary legislation involved in this case is the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act). Section 10 of the CLRA Act deals with the prohibition of contract labor. According to this section, the appropriate government, after consulting with the Central or State Advisory Board, can prohibit the employment of contract labor in any process, operation, or other work in any establishment. The decision to prohibit is based on factors such as the conditions of work and benefits provided to the contract labor and other relevant factors.
The court also considered Sections 2(13) and 2(14) of the Madhya Pradesh Industrial Relations Act, 1960 (MPIR Act), which define ‘employee’ and ‘employer’ respectively. However, the Supreme Court noted that the CLRA Act is the relevant legislation in this case, and the MPIR Act should not be invoked in a manner inconsistent with the CLRA Act, in view of Article 254 of the Constitution of India.
Arguments
Appellant (Kirloskar Brothers Limited) Arguments:
- The respondents were employees of the contractor (respondent No. 7), not Kirloskar Brothers Limited.
- In the absence of a notification under Section 10 of the CLRA Act prohibiting contract labor, and without any finding that the contract was a sham, the respondents could not be deemed employees of the appellant.
- Neither Section 10 of the CLRA Act nor any other provision provides for automatic absorption of contract labor without a notification from the appropriate government.
- The Industrial Tribunal and High Court erred in applying the MPIR Act instead of the CLRA Act, which is inconsistent with Article 254 of the Constitution of India.
- The respondents did not provide any document proving their employment with the appellant, and the ESI card they presented did not even bear the appellant’s name.
- Payment of PF contributions by the appellant was due to their responsibility to ensure statutory compliance by the contractor and does not establish an employer-employee relationship.
- The respondents were supervised and controlled by the contractor, not the appellant.
The appellant relied on the decisions of the Supreme Court in Steel Authority of India Ltd. and Ors. Vs. National Union Waterfront Workers and Ors., (2001) 7 SCC 1 and International Airport Authority of India Vs. International Air Cargo Workers’ Union and Anr. (2009) 13 SCC 374, to support their arguments.
Respondents (Contract Laborers) Arguments:
- The respondents claimed that they were employees of Kirloskar Brothers Limited and had been wrongfully terminated.
- They argued for reinstatement, asserting that their work was directly controlled by the appellant.
The respondents mainly relied on the fact that Kirloskar Brothers Limited had deducted PF contributions, which they argued implied an employer-employee relationship.
Submissions Table
| Main Submission | Sub-Submission (Appellant) | Sub-Submission (Respondents) |
|---|---|---|
| Employer-Employee Relationship |
|
|
| Applicability of Laws |
|
|
| Evidence of Employment |
|
|
| Control and Supervision |
|
|
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame specific issues in a separate section. However, the core issues addressed by the court were:
- Whether the contract laborers could be deemed employees of the principal employer (Kirloskar Brothers Limited) in the absence of a notification under Section 10 of the CLRA Act.
- Whether the Industrial Tribunal and High Court were justified in invoking the MPIR Act instead of the CLRA Act.
- Whether the payment of PF contributions by the principal employer automatically establishes an employer-employee relationship.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether contract laborers can be deemed employees of the principal employer without a notification under Section 10 of the CLRA Act. | No | The Court held that in the absence of a notification under Section 10 of the CLRA Act and without any finding that the contract was a sham, the contract laborers cannot be deemed employees of the principal employer. |
| Whether the MPIR Act was correctly invoked. | No | The Court held that the CLRA Act is the relevant legislation and the MPIR Act should not be invoked in a manner inconsistent with the CLRA Act. |
| Whether the payment of PF contributions by the principal employer automatically establishes an employer-employee relationship. | No | The Court clarified that the payment of PF contributions by the principal employer does not automatically establish an employer-employee relationship, as it is a statutory duty of the principal employer to ensure compliance by the contractor. |
Authorities
The Supreme Court relied on the following authorities:
| Authority | Court | How it was used | Legal Point |
|---|---|---|---|
| Steel Authority of India Ltd. and Ors. Vs. National Union Waterfront Workers and Ors., (2001) 7 SCC 1 | Supreme Court of India | Relied upon to determine that there is no automatic absorption of contract labor without a notification under Section 10 of CLRA Act and that the principal employer is not required to order absorption of contract labor. | Clarified the legal position on absorption of contract labor and the conditions required for it. |
| International Airport Authority of India Vs. International Air Cargo Workers’ Union and Anr. (2009) 13 SCC 374 | Supreme Court of India | Relied upon to determine that where there is no notification under Section 10 of the CLRA Act, and no finding that the contract is a sham, the question of directing the principal employer to absorb the contract labor does not arise. | Clarified that the remedy for a sham contract is under the Industrial Disputes Act, and laid down tests to determine if a contract is a sham. |
| Section 10, Contract Labour (Regulation and Abolition) Act, 1970 | Statute | Explained that the section deals with the prohibition of contract labor by the appropriate government. | Prohibition of contract labor. |
| Sections 2(13) and 2(14), Madhya Pradesh Industrial Relations Act, 1960 | Statute | Discussed in the context of the Industrial Tribunal’s decision but ultimately held to be not applicable in this case. | Definitions of ‘employee’ and ‘employer’. |
| Article 254, Constitution of India | Constitution of India | Cited to emphasize that the CLRA Act prevails over the MPIR Act when there is inconsistency. | Supremacy of Union law over State law in case of inconsistency. |
Judgment
The Supreme Court allowed the appeals filed by Kirloskar Brothers Limited, overturning the judgments of the High Court and the Industrial Tribunal. The Labour Court’s original judgment was restored.
How each submission made by the Parties was treated by the Court?
| Submission | Court’s Treatment |
|---|---|
| Appellant’s submission that the respondents were employees of the contractor. | Accepted. The Court agreed that the respondents were employees of the contractor and not of Kirloskar Brothers Limited. |
| Appellant’s submission that no notification under Section 10 of CLRA Act was issued. | Accepted. The Court acknowledged that no notification was issued, which is a key factor in the judgment. |
| Appellant’s submission that the contract was not a sham. | Accepted. The Court noted that there were no allegations or findings that the contract was a sham. |
| Appellant’s submission that there is no automatic absorption under CLRA Act. | Accepted. The Court agreed that there is no provision for automatic absorption of contract labor under the CLRA Act. |
| Appellant’s submission that the MPIR Act was incorrectly applied. | Accepted. The Court held that the CLRA Act should have been applied, not the MPIR Act. |
| Respondents’ submission that they were employees of Kirloskar Brothers Limited. | Rejected. The Court held that the respondents were employees of the contractor. |
| Respondents’ submission that they were wrongfully terminated. | Rejected. The Court found that the termination was valid as the contract with the contractor had ended. |
| Respondents’ submission that the payment of PF contributions implied employment. | Rejected. The Court held that the payment of PF contributions by the appellant was a statutory obligation and did not establish an employer-employee relationship. |
How each authority was viewed by the Court?
The Supreme Court relied heavily on the precedents set in Steel Authority of India Ltd. and Ors. Vs. National Union Waterfront Workers and Ors., (2001) 7 SCC 1 and International Airport Authority of India Vs. International Air Cargo Workers’ Union and Anr. (2009) 13 SCC 374.
- Steel Authority of India Ltd. and Ors. Vs. National Union Waterfront Workers and Ors., (2001) 7 SCC 1: The Court followed this case to reiterate that there is no automatic absorption of contract labor without a notification under Section 10 of the CLRA Act. The Court emphasized that the principal employer cannot be required to absorb contract labor unless the contract is a sham or there is a notification under Section 10.
- International Airport Authority of India Vs. International Air Cargo Workers’ Union and Anr. (2009) 13 SCC 374: The Court relied on this case to clarify that if there is no notification under Section 10 and the contract is not proved to be a sham, the principal employer cannot be directed to absorb or regularize the services of contract labor. It also emphasized that the remedy for a sham contract is under the Industrial Disputes Act.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the following factors:
- Absence of Notification under Section 10 of CLRA Act: The Court emphasized that no notification under Section 10 of the CLRA Act was issued by the appropriate government prohibiting contract labor. This was a critical factor in its decision.
- No Finding of Sham Contract: The Court noted that there were no allegations or findings that the contract between Kirloskar Brothers Limited and the contractor was a sham or a camouflage to evade compliance with labor laws.
- Statutory Compliance: The Court clarified that the payment of PF contributions by the principal employer was a statutory duty and did not automatically establish an employer-employee relationship.
- Precedent: The Court relied heavily on its previous judgments in Steel Authority of India Ltd. and International Airport Authority of India cases, which clarified the legal position on contract labor absorption.
Sentiment Analysis of Reasons
| Reason | Sentiment Score (%) |
|---|---|
| Absence of Notification under Section 10 of CLRA Act | 40% |
| No Finding of Sham Contract | 30% |
| Statutory Compliance (PF Payment) | 20% |
| Precedent | 10% |
Fact:Law Ratio
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Logical Reasoning
The court considered alternative interpretations but rejected them based on the clear provisions of the CLRA Act and the established precedents. The court emphasized that the absence of a notification under Section 10 and the lack of evidence of a sham contract were critical to its final decision.
The court’s decision was based on the following reasons:
- The CLRA Act does not provide for automatic absorption of contract labor without a notification under Section 10.
- The contract was not found to be a sham or a camouflage.
- The payment of PF contributions by the principal employer was a statutory obligation and did not automatically create an employer-employee relationship.
- The court followed the precedents set in Steel Authority of India Ltd. and International Airport Authority of India cases.
The Supreme Court quoted the following from the judgment in Steel Authority of India Ltd.:
“Neither Section 10 of the CLRA Act nor any other provision in the Act, whether expressly or by necessary implication, provides for automatic absorption of contract labour on issuing a notification by the appropriate Government under sub-section (1) of Section 10, prohibiting employment of contract labour, in any process, operation or other work in any establishment.”
The Supreme Court also quoted the following from the judgment in International Airport Authority of India:
“The tests that are applied to find out whether a person is an employee or an independent contractor may not automatically apply in finding out whether the contract labour agreement is a sham, nominal and is a mere camouflage.”
The Supreme Court further quoted the following from the judgment in International Airport Authority of India:
“The principal employer only controls and directs the work to be done by a contract labour, when such labour is assigned/allotted/sent to him. But it is the contractor as employer, who chooses whether the worker is to be assigned/allotted to the principal employer or used otherwise. In short, worker being the employee of the contractor, the ultimate supervision and control lies with the contractor as he decides where the employee will work and how long he will work and subject to what conditions. Only when the contractor assigns/sends the worker to work under the principal employer, the worker works under the supervision and control of the principal employer but that is secondary control. The primary control is with the contractor.”
There were no dissenting opinions in this case. The bench was unanimous in its decision.
Key Takeaways
The key implications of this judgment are:
- Contract laborers cannot automatically claim direct employment with the principal employer unless there is a notification under Section 10 of the CLRA Act prohibiting contract labor.
- The contract between the principal employer and the contractor must be proven to be a sham for contract laborers to be considered direct employees of the principal employer.
- Payment of PF contributions by the principal employer does not automatically establish an employer-employee relationship.
- The CLRA Act is the primary legislation governing contract labor issues, and other state-level acts like the MPIR Act should not be invoked in a manner inconsistent with it.
This judgment reinforces the legal position regarding contract labor and provides clarity on the conditions required for contract laborers to claim direct employment with the principal employer. It also emphasizes the importance of compliance with the CLRA Act and the need for a notification under Section 10 for automatic absorption of contract labor.
Directions
The Supreme Court did not issue any specific directions other than setting aside the judgments of the High Court and the Industrial Tribunal and restoring the Labour Court’s original judgment.
Development of Law
The ratio decidendi of this case is that contract laborers cannot be deemed employees of the principal employer in the absence of a notification under Section 10 of the CLRA Act and without a finding that the contract is a sham. This decision reinforces the existing legal position as clarified in Steel Authority of India Ltd. and International Airport Authority of India cases. There is no change in the previous positions of law, but this judgment reiterates and solidifies the existing legal principles.
Conclusion
In conclusion, the Supreme Court’s judgment in Kirloskar Brothers Limited vs. Ramcharan clarifies that contract laborers are not automatically absorbed as employees of the principal employer without a notification under Section 10 of the CLRA Act or proof that the contract is a sham. The Court upheld the primacy of the CLRA Act and emphasized that statutory compliance by the principal employer does not create an employer-employee relationship. This decision reinforces the existing legal framework and provides clarity for both employers and contract laborers.
Category
Parent Category: Contract Labour (Regulation and Abolition) Act, 1970
- Child Category: Section 10, Contract Labour (Regulation and Abolition) Act, 1970
- Child Category: Absorption of Contract Labour
- Child Category: Sham Contract
- Child Category: Employer-Employee Relationship
Parent Category: Industrial Disputes Act, 1947
- Child Category: Contract Labour Disputes
Parent Category: Madhya Pradesh Industrial Relations Act, 1960
- Child Category: Section 2(13) and 2(14), Madhya Pradesh Industrial Relations Act, 1960
Parent Category: Labour Law
- Child Category: Contract Labour
- Child Category: Industrial Relations
FAQ
Q: Can contract laborers automatically become employees of the principal employer?
A: No, contract laborers do not automatically become employees of the principal employer. There must be a notification under Section 10 of the CLRA Act prohibiting contract labor, or the contract must be proven to be a sham.
Q: What is Section 10 of the CLRA Act?
A: Section 10 of the CLRA Act allows the appropriate government to prohibit the employment of contract labor in any process, operation, or other work in any establishment, after consulting with the advisory board.
Q: What does it mean if a contract is a ‘sham’?
A: A sham contract is one that is not genuine and is merely a camouflage to evade compliance with labor laws. If a contract is found to be a sham, the contract laborers may be treated as employees of the principal employer.
Q: Does the payment of PF contributions by the principal employer mean the contract laborers are their employees?
A: No, the payment of PF contributions by the principal employer is a statutory obligation and does not automatically establish an employer-employee relationship.
Q: What should contract laborers do if they believe their contract is a sham?
A: Contract laborers who believe their contract is a sham should approach the industrial adjudicator under the Industrial Disputes Act to seek relief.
Q: What is the significance of this judgment for employers?
A: This judgment clarifies that employers are not automatically required to absorb contract laborers as their employees unless there is a notification under Section 10 of the CLRA Act or the contract is found to be a sham.