The system of engaging contract labour in India is presently governed by the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act), supported by the Central Rules, 1971 and respective state rules. This framework was introduced to regulate the conditions under which contract workers are employed and to prevent their exploitation. It mandates that principal employers (PEs) engaging 20 or more contract workers must obtain a Certificate of Registration, while contractors employing 20 or more workers must obtain a licence. The Act also prescribes welfare measures, maintenance of records, and accountability of both PEs and contractors to ensure transparency and fair treatment.

In 2020, the government consolidated multiple labour laws, including the CLRA Act, into the Occupational Safety, Health and Working Conditions Code (OSH Code, 2020). This new Code aims to simplify compliance through single registration and licensing provisions. However, until it is fully notified and implemented, businesses must continue to comply with the requirements of the CLRA Act and its rules.

In this article, CA Manish Mishra talks about Contract Labour Registration: Rules, Procedure, and Compliance.

Applicability and Scope

Thresholds for Applicability

The Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act) applies when the engagement of contract workers crosses a specific threshold.

• For Establishments: If any establishment engages 20 or more contract workers on any day in the preceding 12 months, the Act becomes applicable. This includes industries, commercial establishments, and service organisations.

• For Contractors: Any contractor who employs 20 or more workers to supply labour to one or more establishments also comes under the purview of the Act.

This ensures that medium and large-scale contract labour usage is regulated, while smaller, temporary or casual arrangements are exempted to avoid unnecessary compliance.

Coverage of Principal Employer

The law clearly identifies who is considered the Principal Employer (PE) in different scenarios to avoid confusion over responsibility.

• Factories: The occupier (the person having control over the affairs of the factory) and the manager appointed under the Factories Act.

• Government Departments: The Head of Department/Office, such as a Chief Engineer, District Collector, or other designated authority.

• Private Companies: The Director of the company or an officer authorised by the Board of Directors.

By defining the principal employer, the Act ensures that there is always a clearly accountable person/entity responsible for obtaining registration, monitoring contractors, and ensuring workers’ rights.

Prohibition of Contract Labour (Section 10 of CLRA Act)

The Act also empowers the appropriate government (Central Government for central establishments, State Government for others) to prohibit the use of contract labour in certain cases. Under Section 10, contract labour can be abolished in a process, operation, or work if:

• The work is perennial in nature: meaning it is continuous and not seasonal or temporary.

• The work is necessary to the establishment: essential for the functioning of the business.

• The work is ordinarily performed by regular employees: typically handled by permanent staff and not suited for outsourcing.

For example:

• Permitted: Housekeeping, security services, canteen services, and support staff, which are non-core functions.

• Prohibited: Core manufacturing processes in a factory, loading/unloading in perennial industries like coal mines, or permanent departmental functions in government organisations.

Why Applicability and Scope Matter

The CLRA Act matters because it clearly defines who must comply, ensures contract labour is used only for legitimate non-core work, protects workers by guaranteeing wages, welfare, and social security, and holds the Principal Employer accountable if contractors default.

Registration of Principal Employer

Mandatory Registration

Under the Contract Labour (Regulation and Abolition) Act, 1970, every Principal Employer (PE) is required to obtain a Certificate of Registration before engaging any contractor to employ contract labour. This certificate acts as official permission for the establishment to legally hire contract workers. If a PE fails to register, the engagement of contractors becomes unlawful, and penalties may be imposed. This rule ensures that all establishments are identified, monitored, and held accountable for compliance with labour welfare provisions.

Procedure for Registration

The registration process has been simplified through online systems like the Unified Shram Suvidha Portal (USSP) for central establishments, and separate state labour portals for state-regulated establishments.

• Application: The PE must submit an online application with establishment details such as name, address, type of work, and number of workers.

• Nature of Work & Contractors: Information about the kind of work to be done through contract labour and details of contractors engaged must be provided.

• Payment of Fees: Prescribed government fees, based on the number of workers, must be paid online.

• Issuance of Certificate: After verification, a digitally signed Certificate of Registration is issued, which legally authorises the PE to engage contract workers through licensed contractors.

Licensing of Contractors

Requirement for Licence

Under the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act), any contractor who employs 20 or more contract workers must obtain a separate licence for each establishment where the workers are engaged. This licence is a legal authorisation to supply and manage contract labour.

The licence specifies:

• The maximum number of workers the contractor is permitted to employ.

• The conditions of employment, including compliance with wage rates, working hours, and social security laws.

• The welfare facilities to be provided, such as drinking water, restrooms, first aid, and canteens (where applicable).

Without a valid licence, a contractor cannot legally supply workers, and the engagement would be considered unlawful.

Licensing Procedure

The process for obtaining a contractor’s licence is standardised and requires the following steps:

• Application: The contractor submits an application in Form IV, furnishing details about the establishment, number of workers, and type of work.

• Form V from Principal Employer: A certificate from the Principal Employer (PE), confirming that the contractor has been engaged, must be attached.

• Payment of Fees and Security Deposit: Fees depend on the number of workers, and a refundable security deposit must be paid to ensure compliance with licence conditions.

• Issuance of Licence: After verification by the licensing officer, the contractor receives the licence, which mentions its validity period. Licences are renewable upon expiry.

Compliance Obligations

For Principal Employers (PEs)

The Principal Employer (PE) is the main entity that hires contract labour through contractors. Even though workers are employed by the contractor, the law makes the PE ultimately responsible for ensuring that labour rights are protected.

1. Maintaining a Register of Contractors (Form XII)

Every PE must maintain Form XII, which records details of all contractors engaged by the establishment. This includes the contractor’s name, address, type of work, number of workers supplied, and period of contract. This register acts as an official record for inspections and ensures that the PE has full visibility of all contract labour engaged.

2. Ensuring Legal Compliance by Contractors

The PE is responsible for verifying that contractors comply with all labour laws. This includes:

• Timely payment of wages.

• Deduction and deposit of Provident Fund (PF) contributions.

• Coverage under the Employees’ State Insurance (ESI) scheme, wherever applicable.

• Adherence to statutory provisions on working hours, overtime, and safety.

If the contractor fails in these obligations, the PE cannot escape responsibility.

3. Providing Welfare Amenities

The CLRA Act ensures workers are not denied basic facilities. If a contractor does not provide essential amenities like canteens (for 100+ workers), safe drinking water, restrooms, or first-aid facilities, the duty automatically shifts to the PE. This prevents exploitation and guarantees minimum welfare standards for all contract labour.

For Contractors

Contractors are the direct employers of contract labour since they hire, manage, and pay the workers on behalf of the Principal Employer (PE). The law places several compliance duties on them to ensure transparency, worker protection, and fair treatment.

1. Maintaining Statutory Records

Contractors must keep detailed registers as evidence of compliance:

• Muster Roll (attendance): Daily attendance of workers.

• Wage Register: Records of wages paid, including overtime, bonuses, and deductions.

• Deduction Register: Records of deductions like fines, PF contributions, or advances.

These registers are critical for inspections and protect workers from wage fraud or irregularities.

2. Issuing Employment Cards and Wage Slips

Every contract worker must be given:

• An Employment Card/Identity Card stating their name, job, and contractor’s details.

• A Wage Slip every month showing gross wages, deductions, and net pay.

These documents act as proof of employment and protect workers in disputes about wages or service conditions.

3. Providing Welfare Facilities

Contractors are also responsible for providing welfare amenities at worksites:

• Canteens: Mandatory where 100 or more contract workers are employed.

• Restrooms and Shelters: To ensure workers have safe and hygienic rest areas.

• Drinking Water, First Aid, and Washrooms: Essential health and safety facilities.

These requirements prevent exploitation and promote a safe and humane working environment.

Wages and Social Security

Wage Responsibility

The primary duty to pay wages rests with the contractor, since they are the direct employer of contract labour. Contractors must pay workers on time, at rates not lower than those fixed under the Minimum Wages Act, 1948 or as agreed in the contract.

However, to ensure workers are not left unpaid in case of contractor default, the Principal Employer (PE) acts as a safeguard. If a contractor fails to pay wages, the PE is legally required to pay the workers directly and later recover the amount from the contractor. This system guarantees that workers always receive their wages, regardless of the contractor’s financial condition.

Social Security Contributions

Contract workers are also entitled to social security benefits under labour laws:

• Employees’ Provident Fund (EPF) Act, 1952: Applicable when the establishment employs 20 or more workers. Both contractors and PEs must ensure contributions are deducted and deposited.

• Employees’ State Insurance (ESI) Act, 1948: Provides medical, sickness, and insurance benefits to workers earning within the notified wage ceiling (currently ₹21,000 per month in most cases).

While contractors are responsible for making these contributions, PEs must actively monitor compliance. This is usually done by insisting on monthly challans, returns, and proof of deposit from contractors. Failure to ensure compliance can result in liability shifting to the PE.

Record-Keeping and Returns

Registers and Records

For Contractors

Contractors are required to maintain detailed registers to ensure transparency and accountability in employment and wage practices. Key registers include:

• Muster Roll (Form XVI): Daily attendance of each contract worker.

• Register of Wages (Form XVII): Records of wages paid, including overtime, allowances, and deductions.

• Register of Deductions (Form XX): Details of deductions such as fines, advances, or PF contributions.

These registers serve as official evidence during inspections and help prevent disputes about attendance or wage payments.

For Principal Employers (PEs)

Principal Employers must maintain a Register of Contractors (Form XII). This register contains information about all contractors engaged by the establishment, the nature of work assigned, number of workers employed, and period of engagement. It ensures the PE has full control and visibility over the contract labour system within the organisation.

Returns

• Annual Returns: Both Principal Employers and Contractors are required to file annual returns to the licensing/registration authority, confirming details of contract labour employed, wages paid, and welfare measures provided.

• Online Filing in Central Sphere: For establishments under the Central Government’s jurisdiction, filings have been digitised through the Unified Shram Suvidha Portal (USSP). This enables online submission of returns, reducing paperwork and ensuring better compliance tracking.

Penalties for Non-Compliance

Offences

The Contract Labour (Regulation and Abolition) Act, 1970 sets out clear obligations for both Principal Employers (PEs) and Contractors. Failure to comply with these obligations is treated as an offence. Major non-compliances include:

• Engaging contract labour without registration/licence: A PE cannot hire contract workers without first obtaining a Certificate of Registration, and contractors cannot supply workers without a valid licence. Doing so makes the engagement illegal.

• Violation of licence conditions: If a contractor exceeds the permitted number of workers, underpays wages, or fails to provide facilities specified in the licence, it is considered a violation.

• Non-payment of wages or failure to provide welfare facilities: Contractors (and ultimately PEs) must ensure that workers are paid their lawful wages and provided with welfare measures like restrooms, canteens, drinking water, and first aid. Failure to do so is punishable.

Punishments

To enforce compliance, the Act prescribes penalties:

• General Penalty: Imprisonment up to 3 months, or a fine up to ₹1,000, or both.

• Continuing Offences: If violations continue after conviction, additional fines can be imposed for each day the offence persists.

• Repeated Contraventions: For habitual or repeated offenders, stricter penalties may be applied, including higher fines and longer imprisonment terms.

These penalties ensure that employers and contractors take their responsibilities seriously, as failure not only leads to monetary loss but also damages credibility and invites stricter scrutiny from labour authorities.

Judicial Approach and Worker Protection

Key Judicial Principles

1. Principal Employer’s Liability

Indian courts have consistently emphasised that the Principal Employer (PE) carries ultimate responsibility when contractors default. Even though contractors are the direct employers, courts often direct PEs to settle statutory dues such as unpaid wages, PF, or ESI contributions, ensuring that workers are not left without remedies. The PE can later recover the amount from the contractor, but workers’ rights remain protected.

2. Gratuity and Social Security Benefits

Courts have ruled that workers cannot be deprived of benefits like gratuity, provident fund, or insurance merely because they are engaged through an intermediary contractor. If workers fulfil the eligibility conditions, these benefits must be extended to them, and the PE cannot use the contractual arrangement as an excuse to deny such rights.

3. Absorption of Contract Workers in Perennial Work

In cases where contract labour was engaged for perennial, essential, or core activities in violation of Section 10 of the CLRA Act courts have gone a step further. They have sometimes directed the absorption of such workers into the rolls of the PE, treating them as regular employees. This principle reinforces the prohibition on using contract labour for permanent or core functions and protects workers from disguised or unfair outsourcing practices.

Transition to the OSH Code, 2020

Proposed Changes

The Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code) was introduced by the Government of India to simplify and modernise labour compliance. It consolidates 13 existing labour laws, including the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act), into a single framework.

Key proposed reforms include:

• Single Electronic Registration and Licensing System: Instead of multiple registrations under different laws, establishments and contractors will require only one digital registration/licence, making compliance simpler and transparent.

• Standardised Definitions: Terms such as contractor, worker, and principal employer (PE) will have uniform definitions across industries and states, reducing ambiguity and litigation.

• Unified Compliance Framework: Welfare provisions, working conditions, and safety measures will be harmonised for contract as well as regular workers.

Current Status

Although the OSH Code has been enacted, it is not yet in force nationwide. Several states have issued draft or final rules, but pan-India implementation requires coordination between the Central and State governments.

Until the OSH Code is fully notified and brought into effect:

• The CLRA Act, 1970 and its rules remain applicable.

• Employers and contractors must continue to comply with the current system of registration, licensing, and record-keeping under the CLRA Act.

Best Practices for Compliance

For Principal Employers (PEs)

Since Principal Employers carry ultimate accountability, adopting proactive measures is essential.

• Conduct Due Diligence on Contractors: Before engagement, verify the contractor’s past compliance record, PF/ESI registration, financial stability, and licensing status. This prevents future liability.

• Incorporate Compliance Clauses in Contracts: Every agreement with contractors should include clauses requiring proof of wage payments, statutory contributions, and indemnification in case of defaults.

• Monitor Monthly PF/ESI Payments: PEs should insist on challans, returns, and compliance certificates every month to ensure social security contributions are deposited.

• Keep Records Ready for Inspection: Registers, returns, and digital records should be maintained neatly so that inspections by labour authorities do not lead to penalties or disputes.

For Contractors

Contractors handle the day-to-day management of contract workers, making strict compliance equally important.

• Renew Licences Before Expiry: Operating without a valid licence makes the engagement illegal and punishable. Timely renewals avoid disruption of work.

• Maintain Updated Registers and Returns: All statutory registers (attendance, wages, deductions) and returns must be accurate and regularly updated for inspection.

• Provide All Statutory Welfare Amenities: Canteens (for 100+ workers), safe drinking water, restrooms, and first aid must be available at worksites to protect worker welfare.

• Ensure Timely Wage Disbursement Through Bank Transfer: Paying workers on time through bank accounts promotes transparency, reduces disputes, and ensures compliance with wage laws.

Conclusion

Contract labour forms an essential part of India’s workforce, particularly in large industries, construction, and infrastructure projects, where flexibility in manpower is necessary. While this system benefits employers by providing a scalable workforce, it also raises concerns of exploitation and non-compliance if not properly regulated. To address these risks, the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act) imposes strict obligations. Principal Employers must obtain registration, oversee contractors, and step in to provide welfare facilities when required. Contractors, on their part, must ensure timely wage payments, maintain statutory registers, and provide basic amenities such as drinking water, restrooms, and first aid.

Looking ahead, the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code) is expected to replace the CLRA Act, bringing uniformity and digitisation in compliance. Businesses should proactively prepare by adopting digital record-keeping, regular compliance monitoring, and robust contract clauses, ensuring smooth transition and minimising litigation risks while safeguarding worker welfare.

Frequently Asked Questions (FAQs)

Q1. What is Contract Labour Registration?

Ans. Contract Labour Registration is the mandatory process under the Contract Labour (Regulation and Abolition) Act, 1970, where the principal employer registers the establishment and the contractor obtains a licence before engaging 20 or more contract workers.

Q2. Who needs to register under the CLRA Act?

Ans. Every principal employer engaging 20 or more contract workers in an establishment must obtain a Certificate of Registration. Similarly, contractors with 20 or more workers must obtain a licence.

Q3. What is the procedure for Contract Labour Registration?

Ans. The employer must apply online (through the Shram Suvidha Portal or state portals), submit establishment and contractor details, pay fees, and obtain a Certificate of Registration. Contractors must apply separately for a licence with Form V from the employer.

Q4. What are the compliance duties of a principal employer?

Ans. Principal employers must maintain a register of contractors, ensure contractors pay wages and provide statutory benefits, arrange welfare facilities where contractors fail, and file annual returns.

Q5. What are the compliance duties of contractors?

Ans. Contractors must pay wages on time, maintain statutory registers (wage, muster roll, deductions), issue wage slips and employment cards, provide welfare amenities, and comply with PF/ESI obligations.

Q6. What happens if the contractor fails to pay wages?

Ans. If the contractor defaults, the principal employer is legally bound to pay the workers and later recover the amount from the contractor.