The new Labour Codes—specifically the Code on Wages, 2019 (Wage Code), the Occupational Safety, Health and Working Conditions Code, 2020 (OSHWC Code), and the Code on Social Security, 2020 (SS Code)—establish a framework where the Principal Employer (PE) carries ultimate, non-delegable responsibility for the welfare, safety, and statutory contributions of contract labour.
This advisory details the mandatory compliance areas, strategic implications, and necessary contractual safeguards for the PE.
I. Statutory Obligations and Liability Shift
The PE is the ultimate authority, and the new codes leverage this authority to mandate worker protection, shifting the liability from contingent to primary oversight.
Table 1: Section-Wise Responsibilities and Advisory
| Code | Section | Area of Responsibility | Advisory for PE Compliance |
| OSHWC Code | Section 53 | Welfare Facilities | Direct Liability: PE must provision and maintain all prescribed welfare amenities (canteens, restrooms, first-aid) for all workers on-site. This duty cannot be delegated solely to the contractor. |
| OSHWC Code | Section 55 | Wage and Dues Payment | Ultimate Liability: PE must incorporate strong contractual clauses enabling direct payment to workers and subsequent deduction from contractor invoices upon verified default. |
| OSHWC Code | Section 57 | Restriction on Core Activity | Strategic Risk: PE must audit outsourced work to ensure it falls strictly under the legal exceptions; otherwise, workers risk being deemed direct employees. (Refer to Section III). |
| SS Code | Section 29 | Social Security Contributions | Secondary Liability: PE must implement a mandatory monthly audit system to verify the contractor’s remittance of contributions (PF, ESI, Gratuity) against payment challans. |
| Wage Code | Section 2(y) | Uniform Wage Definition | Financial Risk: PE must ensure the contractor’s wage structure complies with the 50% Rule to ensure correct calculation of all social security contributions, mitigating PE’s default liability. |
| All Codes | Unified Compliance | Documentation & Returns | PE must establish a system for unified record maintenance and filing of the Single Annual Return via the digital portal, simplifying administration but requiring accurate data collection. |
II. Comparative Strategic Impact
The codes streamline administration for the PE but drastically increase financial oversight requirements.
Table 2: Comparison of Old vs. New Compliance Framework
| Feature | Old Laws (e.g., CLRA Act, 1970) | New Labour Codes (OSHWC, SS, Wage Codes) | Strategic Impact on Principal Employer |
| Applicability Threshold | 20 or more contract workers. | 50 or more contract workers (for registration/prohibition). | Benefit: Reduced compliance burden for smaller establishments (20-49 workers). |
| Statutory Liability | Secondary/Contingent liability, often requiring litigation. | Ultimate Liability Reinforced: PE is explicitly responsible for wages and dues upon contractor default. | Action: Mandatory financial oversight and contractual indemnities required. |
| Welfare Facilities | Ambiguous, could often be shifted to contractor. | Direct, Primary Responsibility explicitly placed on the PE. | Action: Must budget for and maintain unified facilities for the entire workforce. |
| Compliance System | Multiple registrations and returns under fragmented laws. | Single Registration, Single Licence, Single Annual Return. | Benefit: Significant administrative efficiency through digitization. |
| Core Activity | Prohibited, but interpretation led to high judicial risk. | Defined and Restricted: Prohibition maintained with clear, limited exceptions. | Action: Requires fundamental review of outsourcing strategy for core functions. |
III. Core Activity Prohibition and Exceptions
The prohibition on using contract labour in a “core activity” is a critical constraint. Section 57 of the OSHWC Code outlines the specific, limited exceptions where engagement is permissible.
Table 3: Core Activity Restrictions and Legal Exceptions
| Status | Activity Type | Condition for Engagement | Advisory Note |
| PROHIBITED | The main productive process where the establishment “is engaged in for the purpose of its business.” | Perennial work, integral to the establishment’s main output, or requiring non-intermittent employment. | HIGH RISK: PE must avoid, as failure can result in deemed employment and retrospective liability. |
| ALLOWED | 1. Sudden Increase in Work | To cope with a temporary and sudden increase in volume. | The need must be genuinely temporary and verifiable by business records. |
| ALLOWED | 2. Intermittent Work | Work done intermittently for not more than 45 days in a period of twelve months. | PE must rigorously track the duration of the contract to avoid breaching the time limit. |
| ALLOWED | 3. Specialized Services | Work that does not ordinarily need to be performed by the regular workmen (e.g., specialized high-end installation or complex maintenance). | Must be genuinely specialized expertise not normally available in-house. |
| ALLOWED | 4. Non-Core Activities (by nature) | Activities like security, catering, sanitation, housekeeping, and construction (unless the PE’s business is that specific activity). | Generally safe to outsource via contract labour. |
IV. Financial Impact and The 50% Wage Rule
The Code on Wages, 2019, introduces a uniform definition of ‘Wages’ that increases the statutory contribution base, directly increasing the PE’s financial exposure in case of contractor default.
The Mandatory 50% Rule
The rule states that the sum of all excluded allowances (HRA, Conveyance, Overtime, etc.) cannot exceed 50% of the employee’s total monthly remuneration (CTC/Gross).
- Financial Impact: If excluded allowances exceed 50%, the excess amount is automatically treated as ‘Wages’ for calculating all statutory dues (PF, Gratuity, ESI).
- PE Advisory: This necessitates the contractor to pre-emptively increase Basic Pay/DA to at least 50% of CTC. The PE must mandate and audit this wage restructuring to ensure contributions are calculated on the correct, higher base.
Table 4: Penalties and Liability Exposure
| Violation Type | Relevant Code | Penalty for First Offence | Advisory on Severity |
| Accident Causing Death/Serious Injury | OSHWC Code | Imprisonment up to 2 years or fine up to ₹10 lakh (death). | Critical Risk. Court can mandate 50% of the fine be paid as compensation to the victim. |
| Failure to Pay/Ensure Social Security Dues | SS Code | Fine up to ₹1 lakh. Subsequent offence: up to 3 years imprisonment and/or fine up to ₹3 lakh. | High Financial Risk. PE must ensure strict financial audit of the contractor. |
| Non-provision of Safety/Welfare Facilities | OSHWC Code | Fine up to ₹2 lakh. | Minor violations are generally compoundable (settled by paying a fine). |
V. Strategic Action Points and Contractual Safeguards
The PE must take immediate action to align outsourcing agreements with the new legal framework.
Action Points for PE Compliance:
- Contract Review: Immediately amend all contractor agreements to include strong clauses covering the right to audit, inspect records, and intervene/deduct payment upon default.
- Wage Mandate: Issue a mandatory directive to all contractors requiring the restructuring of their wage components to comply with the 50% Rule under the Wage Code.
- Core Activity Audit: Conduct a zero-tolerance audit of all outsourced activities against the Section 57 exceptions. Convert non-compliant contract labour arrangements to direct employment or strictly non-core services.
- Digital Compliance: Leverage the digital portal for Unified Filing and mandatory record maintenance, ensuring data provided by the contractor is accurate.
Table 5: Mandatory Contractual Clauses (SLA Checklist)
| Area | Clause Title | PE’s Legal Purpose |
| Statutory | Core Activity Restriction | Contractor confirms work is not core or strictly falls under OSHWC Section 57 exception. |
| Financial | Indemnity for Default | Contractor fully indemnifies PE against all costs/penalties arising from non-payment of wages or statutory dues. |
| Financial | PE Right to Intervene & Deduct | PE reserves the right to directly pay workers/authorities and deduct the amount plus penalty from the contractor’s invoice. |
| Wages | Wage & Contribution Warranty | Contractor warrants payment as per Wage Code (50% Rule) and submission of monthly proof of contribution remittance (challans) by a specified date. |
| OSH | Safety & Accident Reporting | Contractor agrees to strict adherence to PE’s safety protocols and immediate reporting of any accident to PE and authorities. |
Sample Indemnity Clause can be added to SLA: Principal Employer and Contractor Agreement
A Contractor Indemnity Clause is crucial for the Principal Employer (PE) under the new Labour Codes. It ensures that the PE is compensated by the Contractor for any financial losses (fines, penalties, legal fees, or back payments) incurred due to the Contractor’s failure to comply with statutory obligations, especially regarding wages and social security contributions.
This sample clause is drafted to cover the enhanced liabilities under the Code on Social Security, 2020 (SS Code) and the Occupational Safety, Health and Working Conditions Code, 2020 (OSHWC Code).
Contract Clause Title: Indemnity for Statutory and Compliance Failures
1. General Indemnification: The Contractor hereby agrees to indemnify, defend, and hold harmless the Principal Employer (including its directors, officers, agents, and employees) from and against any and all claims, demands, liabilities, losses, damages, costs, charges, penalties, fines, interest, and expenses (including reasonable legal fees and disbursements) that may be incurred by, imposed on, or asserted against the Principal Employer arising out of, or resulting from, directly or indirectly:
a) Any breach or non-performance by the Contractor of any term, covenant, representation, or warranty contained within this Agreement, including non-adherence to the requirements of the new Labour Codes.
2. Indemnification Specific to Contract Labour Laws: Without prejudice to the generality of Clause 1, the Contractor shall specifically indemnify the Principal Employer against any losses arising from:
a) Failure to Pay Wages and Dues: The Contractor’s failure to ensure the timely and full payment of wages (as defined under the Code on Wages, 2019) or any other statutory monetary dues to the Contract Labour, including gratuity, bonus, leave encashment, or retrenchment compensation.
b) Social Security Default: The Contractor’s failure to register or obtain licenses, or to make timely and correct deposit of all mandatory statutory contributions, premiums, or levies related to the Contract Labour, including but not limited to contributions under the Code on Social Security, 2020 (e.g., Provident Fund, Employees’ State Insurance), resulting in a claim against the Principal Employer under Section 29 of the SS Code or similar provisions.
c) Safety and Welfare Failure: Any breach of safety, health, and welfare provisions under the OSHWC Code, 2020 (including Section 53 requirements), leading to penalties, accidents, injuries, or fatalities involving Contract Labour for which the Principal Employer is held liable.
d) Illegal Engagement: Any claim by the Contract Labour or a government authority asserting that the engagement of Contract Labour by the Contractor violates Section 57 of the OSHWC Code, 2020 (i.e., employment in a prohibited “core activity”), resulting in the workers being deemed direct employees of the Principal Employer, or incurring any associated financial liability (including back wages or retrospective social security payments).
3. PE’s Right to Intervene and Deduct (Back-to-Back Clause): In the event that the Principal Employer receives notice of any claim, demand, penalty, or liability covered by this indemnity, the Principal Employer shall have the unconditional right, without waiving any other remedy, to:
a) Intervene: Directly remit the outstanding statutory dues or wages to the Contract Labour or the concerned statutory authority.
b) Deduct: Recover the full amount of the liability paid (including the dues, penalties, interest, and related legal costs) by deducting it from any amount due and payable to the Contractor under this or any other agreement. If the amount due is insufficient, the Contractor shall pay the balance upon demand.
Advisory Objective and Scope
The objective of this advisory was to provide a consolidated, section-wise analysis of the PE’s enhanced liabilities and to furnish actionable steps for mitigating financial and legal risks arising from the new labour regime.
Key Outcomes Covered:
- Ultimate Liability: Confirmation that the PE holds ultimate and non-delegable responsibility for the payment of wages, statutory dues (PF, ESI), and the provision of welfare facilities for contract workers.
- Core Activity Restriction: Detailed analysis of the prohibition on contract labour in the “core activity” and the limited exceptions permitted under OSHWC Code, Section 57.
- Financial Compliance: Explanation of the Uniform Wage Definition and the 50% Rule (Wage Code) and its mandate to restructure contractor payrolls to ensure correct contribution calculation.
- Risk Mitigation: Provision of mandatory contractual safeguards (SLA Checklist) to transfer operational and financial indemnity back to the contractor.
Conclusion and Risk Acknowledgment
The transition to the new Codes represents a fundamental shift from fragmented, secondary liability to unified, primary accountability for the PE. Compliance is no longer merely an administrative task but a core business continuity risk.
By adopting the mandatory contractual clauses and enforcing strict monthly audits (especially for the 50% Wage Rule compliance), the PE can establish a defensible legal position and significantly mitigate exposure to fines, penalties, and the catastrophic risk of contract workers being deemed direct employees with retrospective benefits.
Next Steps & Documentation
The advisory documentation, including the Comparative Tables, Section-wise analysis, Penalty Structure, and the SLA Checklist, is now complete.
- Final Action: The recommendations contained within this advisory, specifically the Contract Review and the Wage Mandate, must be implemented immediately across all existing and new vendor/contractor agreements.
Document Status: The Advisory is marked as Closed/Finalized and is ready for distribution to Legal, HR, Finance, and Procurement departments for implementation.