NLIU JOURNAL FOR LABOUR AND EMPLOYMENT LAW

ARTICLE:
PRINCIPAL EMPLOYER’S LIABILITY FOR THE DEFAULT OF
CONTRACTOR IN RESPECT OF EMPLOYEES’ STATE INSURANCE AND
PROVIDENT FUND

ABSTRACT

The Article has made an extensive effort to bring out the real picture of uncertainty of the
Liability of Principal Employer for the default of Contractor in respect of Employees’ State
Insurance and Provident Fund. ESI and EPF are main social security measures to provide
financial security to the employees and protection against sickness, disability, maternity, and
death on work place and to provide medical care. In these Schemes, contribution is made by
the Employer and Employee. To Determine the liability of Principal Employer in case where
the employees are engaged through third party Contractor, the test is of Ultimate control and
supervision. The liability of the Principal employer would depend on the facts of each case
and are required to be tested as to whether principal employer had supervision upon the
employee or not and whether Contractor has independent ESI Code or independent
registration under PF Act. In every case, it is a question of fact as to whether a contractual
employee is under supervision of “principal employer” or “immediate employer”. The
research also includes judicial interpretation of various courts and guidelines of the State
Corporations on the issue. Further, the concrete measures are provided to avoid the
uncertainty of principal Employer’s Liability.
 INTRODUCTION

In India, the laws relating to Labor and Employment is of recent origin and has developed
largely after the independence due to India’s welfare state policy and awakening of the
workers of their rights. These labor laws are constantly evolving to adapt to needs of modern
labor markets and to address the issues of employees and to protect their interest. The social
security regulation in labor laws derives their spirit from the Directive Principles of the State
Policy mentioned in the Constitution of India. Employees’ Provident Funds and
Miscellaneous Provisions Act, 1952 is the main social security regulation in India which
seeks to provide financial security, retirement benefits and various other kinds of benefits to
employees. The act provides for the establishment of national provident fund in which both
the employee and the employer make a contribution. The employee is also authorised to take
loans from the fund for the purpose of house building, marriage of children, and schooling
etc. Apart from EPF, another social security measure is the Employees’ State Insurance Act,
1948 which provides protection the employees against sickness, disability, maternity, and
death due to injury on work place and to provide medical care to insured employees and their
families.

Many times, employees are engaged through a third-party Contractor in which case owner or
occupier of the factory or establishment is called “Principal Employer” and Contractor is
called “Immediate Employer” and the question frequently arises that who is liable for paying
the contribution to the ESI and EPF. In this research, Principal Employer’s liability for
default of Contractor in respect of Employees’ State Insurance and Provident Fund is studied.
The Principal Employer’s Liability remains a debatable issue primarily and it has been
interpreted by Courts differently over a period of time.

EMPLOYEE STATE INSURANCE ACT, 1948

Chapter IV of the Act provides for mandatory insurance of all the employees in the manner
provided for therein. Section 39 provides for payment of contribution. 

As per Section 40 of ESI Act, 1948, the Principal Employer is liable to pay contribution in
respect of all his employees including contract labour engaged through a contractor. Further,
Principal Employers are also responsible to deduct the ESI dues from the bills of the
Contractor, if short/non-deduction/contribution is noticed. Section 41 of ESI Act, 1948,

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further state that a Principal Employer, who has paid contribution in respect of an employee
employed by or through an immediate employer, shall be entitled to recover the amount of
the contribution so paid (that is to say the employer’s contribution as well as the employee’s
contribution, if any,) from the immediate employer, either by deduction from any amount
payable to him by the Principal Employer under any contract, or as a debt payable by the
immediate employer

Section 41 empowers the principal employer to recover the amount of the contribution so
paid from the immediate employer either by deduction from any amount payable to him by
the principal employer under any contract or as a debt payable by the immediate employer.
Sub-section (1A) of Section 41 mandates that the immediate employer shall maintain a
register of employees employed by or through him as provided for in the regulations and
submit the same to the principal employer before the settlement of any amount payable under
sub- section (1).

EMPLOYEE, PRINCIPAL EMPLOYER AND IMMEDIATE EMPLOYER:

Sec. 2(9) of ESI Act defines the term “Employee”, which is of wide connotation and covers:

(a) Directly employed by Principal Employer.

(b) Indirectly employed through contractor, on the premises of the factory and outside,
but under the supervision of principal employer.

(c) Part-time employee on contract of service.

(d) Employee whose services are temporarily lent or let on hire to principal employer
or his agent by the direct employer of the person.

(e) Employed for wage for any work connected with the administration of
factory/establishment, department or branch dealing with purchase of raw material
or for distribution or sale of products.

(f) Persons who are on "contract of service" will only come in category of "employer".

(g) An apprentice not being engaged under Apprentices Act.

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In the case of Saraswath Films Vs. Regional Director, Employees’ State Insurance
Corporation, Trichur1, Supreme Court has expounded on the amplitude of the definition of
"employee", as contained in sub-section (9) of Section 2 of the ESI Act in the following: -

“6. From the provision in Section 2(9) it is clear that the definition is wide and of
comprehensive nature. It includes any person employed for wages in or in connection
with work of the establishment to which the Act applies and also includes any person
employed by or through immediate employer on the premises of the establishment or
under the principal employer or his agent of work which is ordinarily a part of the work
of establishment or which is preliminary to work carried on in or incidental to the
purpose of the establishment. In clause (iii) the position is further clarified; a person
whose services are temporarily lent or let on hire to the principal employer by the
person with whom the person whose services are so lent or let on hire has entered into a
contract of service is also brought within the purview of the statute. On a plain reading
of the definitions of the expressions "principal employer" and "immediate employer" the
position is manifest that the appellant is the principal employer of the security guards in
the case. It may be that their immediate employer is the security agency with whom there
has been a contract either by the lessor or the lessee of the cinema hall for purpose of
the service. On a fair reading of relevant statutory provisions and keeping in view the
object and purpose for which the legislation was enacted it is clear to us that in this case
the security guards come within the purview of the expression "employee" as defined in
Section 2(9) of the Act………….”

“Immediate Employer” has been defined in Section 2(13) to mean:

“Immediate employer, in relation to employees employed by or through him, means a

person who has undertaken the execution, on the premises of a factory or an
establishment to which this Act applies or under the supervision of the principal
employer or his agent, of the whole or any part of any work which is ordinarily part of
the work of the factory or establishment of the principal employer or is preliminary to the
work carried on in, or incidental to the purpose of, any such factory or establishment,
and includes a person by whom the services of an employee who has entered into a
contract of service with him are temporarily lent or let on hire to the principal employer
and includes a contractor.”

1
2010(11) SCC 553.

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Section 2(17) defines Principal Employer in the following terms:

“Principal Employer” means

(i) in a factory, the owner or occupier of the factory and includes the managing agent of
such owner or occupier, and where a person has been named as the manager of the
factory under the Factories Act, 1948 (63 of 1948), the person so named;
(ii) in any establishment under the control of any department of any Government in India,
the authority appointed by such Government in this behalf or where no authority is so
appointed, the head of the Department;
(iii) in any other establishment, any person responsible for the supervision and control of
the establishment;

LIABILITY OF PRINCIPAL EMPLOYER:

The Indian Courts deal with the debatable issues of determining the liability of Principal
Employer in various judgements. The main issue before the hon’ble Courts was whether
Principal Employer is liable for default of Contractor as far as ESI and Provident Fund is
concerned.

In Indian Oil Corporation Ltd. vs Employees State Insurance2, Hon’ble High Court of Delhi
has held as under;

“………6. Even to a lay man it would be apparent that the issue had to be decided with
reference to the work contract awarded by the appellant to the contractors and the focus of
the inquiry had to be in relation to Section 2(9), Section 2(13) and Section 2(17) of the ESI
Act 1948 which define "employee", "immediate employee" and "principal employer"
respectively. The nature of the works being executed had to be considered and the nature of
supervisory control, if any, exercised by the appellant had to be considered……...” 

Also, the Hon’ble Madras High Court in the case of Dy. Director, Insurance ESI
Corporation, Chennai v. India Pistons Repco Limited3 held that in absence of any control or
supervision over the employees of the independent contractor who was given various job
work to be carried out, the principal employer cannot be held liable for the ESI contribution,
hence the ESI authority has wrongly determined the money which is rightly set aside by the
Employees' Insurance Court. The Hon’ble Court stated that:

2
(2008) 104 DRJ 361.
3
2014 LLR 536.

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 “8. It is not in dispute that the independent contractor with whom the job works were
entrusted, do the job work at their factory premises. It is not the case of the appellant
Corporation that the employees of the independent contractors were placed under the
control or supervision of the respondent or a representative or an officer of the
respondent who would be in a position to give on the spot instructions as to how the
work was to be accomplished. It is also not the case of the appellant Corporation that
the respondent herein or its officer were given power to take any action against the
erring employees of the independent contractor in respect of their employment in
accomplishment of the job work entrusted to the contractor. On the other hand, based on
the admitted position that the respondent who has given job work to the independent
contractor, does have the authority to prescribe specification and quality and also the
power to reject the quality, the learned counsel for the appellant would contend that the
said power will not doubt exhibit the power of supervision and control over the
employees of the independent contractors. If it is a case of lending of the employees of
the independent contractors to do work in the factory premises of the respondent, then
there cannot be any scope for the respondent to escape the liability since Section 2(9)(ii)
of E.S.I. Act contemplates such liability.”

9. On the other hand, the independent contractors have to do the job work with their own
employees in their premises and supply only the finished goods to the respondent herein.
As pointed out supra, the power to prescribe specifications and quality and the further
power to reject goods in case they do not conform to such specifications of quality will
not amount to supervision or control over the employees of the independent contractors.

Moreover, in the case of E.S.I. Corporation v. Bethall Engineering Company4 it was held by
the Madras High Court in categorical terms that the right to reject or accept work on
completion, on scrutinizing compliance with job requirements as accomplished by a
contractor, the immediate employer through his employees, is by itself cannot be construed as
effective and meaningful 'supervision' as envisaged under section 2(9) of the Employees State
Insurance Act, 1948.

Further, Pursuant to judgment of the Hon'ble Supreme Court, ESIC V/s. JMD Fashions 5,
which related to job work done outside premises and guidelines was issued by the ESI
Corporation in respect of payment of contribution as follows: -

4
(2007) 4 MLJ 1273.
5
2007 (114) FLR 621.

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A. The Job work done inside the Factory/Establishment premises through
Contractors/Immediate Employers having independent Code Nos.:
In the case where the workers or employees are working in the premises of Principal
Employer but they are on the rolls of the vendor/contractor, the Principal employer in such
case will not be liable to pay ESI contribution of these workers. The supervision is implied in
this case. However, the Principal Employer has to keep the records of such payment of
contribution being made to the workers and should present it before the insurance inspector at
the time of inspection as per the provisions of Section 41 (1 A) ESI Act.
B. Job work done inside the Factory premises through Contractors/Immediate
Employers not having independent Code Nos.:
The employees of such Job Contractors/ Immediate Employers who are not having
independent Code Nos. but working in the Factory/Establishment of the Principal Employer
are coverable and the compliance is to be made by the Principal Employer. The Supervision
is implied in this case. Thus, the principal employer is responsible for payment of ESI
contribution of such employees.

As far as Supervision is concerned, the same is interpreted to mean as under;

(a) In case where the employee is put to work under the eye and gaze of the principal
employer, or his agent, where he can be watched secretly, accidentally or occasionally, while
the work is in progress, so as to scrutinize the quality thereof and to detect faults therein, as
also put to timely remedial measures by direction given, finally leading to the satisfactory
completion and acceptance of work amounts to supervision, for the purposes of Section 2 (9)
of the Act.6

(b) The right to control the manner of work is not the exclusive test for determining the
relationship of employer and employees. It is also to be considered as to who provides the
equipment. The fact that the sewing machines on which the workers do the work, generally
belong to the employer, is an important consideration for deciding that the relationship is that
of Master and Servant.7

Hence, the liability of the Principal employer would depend on the facts of each case and are
required to be tested as to whether Contractor has independent ESI Code and whether
principal employer had supervision upon the employee or not. In every case, it is a question

6
CESE Ltd. v. S.C. Bose AIR 1992 SC 573.
7
Ibid.

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of fact as to whether a contractual employee is under supervision of “principal employer” or
“immediate employer”.

EMPLOYEES PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT,

1952

Section 6 of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (EPF
Act) requires the employer to make contributions to the provident fund accounts of each of its
employees.

Para 30 of the Employees’ Provident Funds Scheme, 1952 scheme provide for payment of
contribution, which reads as under-

“(1)  The employer shall, in the first instance, pay both the contribution payable by
himself (in this Scheme referred to as the employer's contribution) and also, on. behalf of the
member employed by him directly or by or through a contractor, the contribution payable by
such member (in this Scheme referred to as the member's contribution).

(2) In respect of employees employed by or through a contractor, the contractor shall

recover the contribution payable by such employee (in this Scheme referred to as the
member's contribution) and shall pay to the principal employer the amount member's
contribution so deducted together with an equal amount of contribution (in this Scheme
referred to as the employer's contribution) and also administrative charges,

(3) It shall be the responsibility of the principal employer to pay both the contribution
payable by himself in respect of the employees directly employed by him and also in respect
of the employees employed by or through a contractor and also administrative charges.”

Section 8A of Act provides as under;

“(1) The amount of contribution (that is to say the employer's contributions well as the
employee's contribution) and any charges on the basis of such contribution for meeting the
cost of administering the Fund paid or payable by an employer in respect of an employee
employed by or through a contractor may be recovered by such employer from the
contractor, either by deduction from any amount payable to the contractor under any
contract or as a debt payable by the contractor.”

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Section 2(f) of the Act defines “Employee”, which reads as under:

"Employee" means any person who is employed for wages in any kind of work manual or
otherwise, in or in connection with the work of an establishment, and who gets his wages
directly or indirectly from the employer,  and includes any person employed by or through a
contractor in or in connection with the work of the establishment”

From above, it is apparent that definition is comprehensive enough to cover the workers
employed directly or indirectly and they have specifically introduced a phrase in this
definition about a person employed by or through a contractor.8

LIABILITY OF PRINCIPAL EMPLOYER:

The Employees Provident Fund Organization (“EPFO”) had also issued notification dated
02.02.2017 elucidating the obligations of Principal Employer for ensuring compliance under
the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) in
respect of employees engaged by or through contractors, which provides that;

(i) With a view to providing social security benefits to contract employees and in pursuance
of the statutory liability of a Principal Employer under the EPF Act, the EPFO has
advised the Principal Employers to comply with the following:

(ii) The Principal Employer must ensure that the contractor is registered with EPFO before
awarding any contract. After award of the contract, the contractor details should be
entered in the EPFO portal.

(iii) Payments due to the contractor should be made only after verifying that the statutory PF
payments have been made to EPFO. This can be verified either directly from the EPFO
portal or insisting on a payment receipt obtained by the contractor from the EPFO portal
while making payment.

(iv) If the contractors have separate PF code number, the overall responsibility of ensuring
the compliance under the EPF Act, for the employees working through the Contractors
rests with the Principal Employer.

8
Malwa Vanaspati and Chemical Co. Ltd. v. Regional Provident Fund Commissioner (1976) ILLJ 307 MP;
G.V.V. Swamy vs. Regional Provident Fund Commissioner and another 1987 (I) LLN 94).

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(v) The Principal Employer is empowered to deduct EPF dues from the contractor’s bill and
deposit the same against the contractor’s code number or their own code number.

(vi) Also, a provision on the official website of the EPFO, has been added under the
“establishment search option” to verify whether the contractors are regularly depositing
Provident Fund Contributions in respect of their employees.

(vii) Further, the EPF Act defines employee (as per Section 2(f) of the EPF Act) as any
person who is employed for wages in any kind of work, manual or otherwise, in
connection with the work of an establishment and who gets his wages directly or
indirectly from the employer, and includes any person employed by or through a
contractor in connection with the work of the establishment. Therefore, the EPFO
clarifies that the EPF Act does not differentiate between casual, contractual and regular
employee.

While relying upon the definition of employee under section 2(f) of the Act read with para 30
of the Employees Provident Fund Scheme, the provident fund authorities invariably insist
upon the principal employers to ensure that the Contractors as engaged must pay the
provident fund contributions and in case of non-payment, the principal employers are held
liable.

Having said that it is important to point out that over period of time, Court have taken
progressive view and held that on allotment of independent code number, a contractor
acquires the status of establishment (may it be a Company, firm, society or sole
proprietorship) and becomes responsible for deposit of Employees Provident Fund
contributions.

In Group 4 Securitas Guarding Ltd. [GSGL] vs. Employees Provident Fund Appellate
Tribunal9, Delhi High Court has held that where the Contractor, being employer providing
services of manpower, is having control over the personnel being supplied by him to the
establishments by way of issuance of appointment letters, making payment of wages and
other allowances, taking disciplinary actions, affecting their placement, transfer, and
termination of services, the relationship between such a contractor and the establishment
where the manpower is supplied by him would be of principal to principal and not that of
employer-contractor. The Delhi High Court relied on the definition of employer under section
9
2012 LLR 22.

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2(e) of the PF Act wherein employer is defined as a person having 'ultimate control over the
affairs of the establishment'. In this instance, the courts observed that since GSGL:

(i) operates as an independent entity and is engaged in the activity of providing security
services to various clients,
(ii) issues employment contracts to the security guards,
(iii) pays wages and other allowances to the guards after obtaining their signatures
on the register maintained by the contractor,
(iv)deputes the guards to the client's establishment on rotation and transfer basis,
(v) is responsible to take disciplinary actions against delinquent guards,
(vi)has control rooms in the client's establishment to supervise and regulate the work of
the deputed guards; and
(vii) has an independent registration under the PF Act

GSGL will be regarded as the employer as per section 2(e) having ultimate control over its
personnel and its own establishment. The Delhi High Court also relied on the case of Tata
Engineering and Locomotive Company Ltd v Union of India and Ors.10 where it was held that
"contractor contemplated under section 8A is one who is a mere front or headman of the
principal employer" which is not true for an establishment like GSGL that operates as an
independent entity providing services to various establishments across India.

Similar view is taken by Hon’ble High Court Punjab and Haryana in Pardeep Kumar vs.
Presiding Officer11. In said case it was held that employer-employee relationship, in respect
of principal employer, would not exist if the contractor, engaged in supply of man-power, is
having a valid licence under the Contract Labour (Regulation and Abolition) Act, 1970,
records of payment of wages and attendance show payments made by the contractor, EPF
Employee Code number allotted to the workman is through the firm of the Contractor. In the
Madurai District Central Co-operative Bank Ltd. vs. Employees Provident Fund
Organisation12, Madras High Court has held that when a separate code number was allotted,
the employees of the contractor, by no stretch of imagination can be treated to be employees
of the principal employer. In Brakes India Ltd. vs. Employees Provident Fund
Organisation13, the Madras High Court also hold that the Employees Provident Fund

10
1996 II LLN 1194.
11
2015 LLR 726.
12
2012 LLR 702.
13
2015 LLR 635.

11
Authority is not entitled to recover either Provident Fund contribution or damages from the
principal employer in respect of employees engaged through contractors, registered with the
PF Department, having independent code number.

Moreover, in Calcutta Constructions Company vs. Regional Provident Fund Commissioner14,

Punjab & Haryana High Court held that so long so the code number is not allotted to the
contractor, it is the liability of the establishment to pay the provident fund on account of the
employees employed by the contractor and thus, in essence, it is the liability of the
establishment to pay and not that of the contractor to pay contribution.

Therefore, if the employees are not under “'ultimate control” or “supervision” of Principal
Employer, which remains with Contractor and also independent registration under the PF Act
is obtained by the Contractor, then, in view of “Group 4 Securitas”15 judgment, liability of
PF obligation of contractual employee is that of Contractor. The Contractor is liable to
discharge the liability relating to PF Contribution.

CONCLUSION

Since courts have taken the view that if Contractor has obtained independent registration/
code under PF Act and exercises 'ultimate control over the affairs of the establishment', the
responsibility lies with Contractor and the Principal Employer is not liable for deposit of the
default. The phrase 'ultimate control over the affairs of the establishment' or “supervision” is
very subjective and would vary in facts of every case.

Supervision is the primary test. Where an employer entrusts the work to a third party-
contractor and latter engages independent workers to carry on the work as entrusted, the
employees of such contractor will not be treated as employees of the employer entrusting the
work since the principal employer could not exercise any supervision as envisaged in sub-
clause (9) of section (2) of the Act. Thus, the Principal Employer is not liable to pay
Contribution to the schemes.

To avoid the uncertainty of liability of Principal employer in respect of employees engaged

through different contractors, the Principal Employer should ensure that: -

14
2015 LLR 1023.
15
Group 4 Securitas (n 9).

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(i) Ensure that contractor is having independent PF/ ESI registration number
and has submitted proof of the same before commencement of work; and

(ii) Ensure that there is no direct “supervision” or 'ultimate control upon the
employees of Contractor by Principal Employer; and

(iii) Ensure that ESI and EPF dues paid by the contractors in the accounts of the
respective employees. Payments due to the contractor should be made only
after verifying that the statutory PF payments have been made to EPFO.
This can be verified either directly from the EPFO portal or insisting on a
payment receipt obtained by the contractor from the EPFO portal while
making payment. To ensure that contribution of ESI and PF is deposited by
the contractor, stipulation in agreement be made for clearance of next
invoice, only upon presentation of proof of compliances under ESI and PF
and no invoice of contractor is cleared unless such proof is provided; and

(iv) Maintain records of employees including complete required personal bio-

data of employees so engaged, attendance and payment of wages records;

(v) Maintain and preserve the records of ESI/EPF, including registration under
Contract Labour (Regulation and Abolition) Act, 1970, contract with
contractor regarding supply of manpower, documents including
correspondence showing control and supervision of the contractor,
preserving the same for a long time. It is important to keep in mind that
there is no limitation for the EPF Authority to inspect the records for
applicability of the Act, levy QL damages and interest etc.; and

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