Does your business use contract workers? If your establishment engages 20 or more contract workers on any day of the year, you must register under the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act). Operating without registration attracts imprisonment up to 3 months, a fine, or both. Under the OSH Code 2020 (effective 21 November 2025), penalties rise to Rs 2 lakh for a first offence. Beyond registration, the law makes the principal employer directly liable for contractor defaults on wages and welfare.
Indian businesses across manufacturing, IT services, construction, logistics, and facility management rely on contract workers for housekeeping, security, data entry, packaging, and dozens of other operations. Most business owners know about PF and ESI compliance, minimum wages, and bonus payments. But many discover their obligations under the CLRA Act only when a labour inspector visits, a contractor defaults on wages, or a client asks for the CLRA registration certificate during vendor due diligence.
This guide covers every principal employer obligation: who must register, the registration and licensing process, wage liability, welfare requirements, record-keeping, penalties, and how the OSH Code 2020 changes the framework.
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What Is the CLRA Act?
The Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act) regulates the employment of contract labour in establishments and provides for its abolition in certain circumstances. The Act came into force on 10 February 1971.
The CLRA Act creates a dual compliance framework:
- Principal employer (the establishment that engages contract workers): must register the establishment
- Contractor (the person who supplies contract workers): must obtain a licence
Both the principal employer and contractor carry independent statutory obligations. The principal employer cannot escape liability by delegating responsibilities to the contractor.
Who Must Comply?
The 20-Worker Threshold (CLRA Act)
The CLRA Act applies to every establishment in which 20 or more workers are employed or were employed as contract labour on any day of the preceding 12 months.
The count includes all contract workers across all contractors. If you engage 12 workers from Contractor A and 10 from Contractor B, your total is 22 and the Act applies.
The 50-Worker Threshold (OSH Code 2020)
The Occupational Safety, Health and Working Conditions Code, 2020 (effective 21 November 2025) raises the threshold to 50 or more contract workers. However, each state must separately notify the OSH Code provisions. Until your state issues the notification, the CLRA Act's 20-worker threshold continues to apply.
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Summary
CLRA Act 1970 threshold
OSH Code 2020 threshold
Who Is a Principal Employer?
Under Section 2(1)(g), a principal employer is:
- Factory: the owner or occupier of the factory, or the manager named under the Factories Act
- Mine: the owner or agent of the mine
- Government establishment: the head of the department or the authority designated by the government
- Other establishments: any person responsible for the supervision and control of the establishment
Who Is a Contractor?
Under Section 2(1)(c), a contractor is any person who:
- Undertakes to produce a given result for the establishment through contract labour
- Supplies contract labour for any work of the establishment
This covers staffing agencies, manpower suppliers, security service providers, housekeeping companies, and any person who provides workers on a contractual basis.
What Is Not Covered?
The Act does not apply to establishments where the work is of an intermittent or casual nature. Work is considered intermittent if it is performed for fewer than 120 days in the preceding 12 months, and casual if it is not of a regular nature and is supplemental to the main activities.
Registration: Principal Employer (Section 7)
The Process
- Apply in Form I to the Registering Officer of the area (usually the Assistant Labour Commissioner or the officer designated by the state government)
- Attach documents: details of the establishment, nature of work, maximum number of contract workers to be employed, details of contractors
- Pay the registration fee (prescribed by state rules, varies by state and number of workers)
- Receive Form II (Certificate of Registration) if the application is in order
The Registering Officer may refuse registration only after giving the applicant an opportunity of being heard and for reasons to be recorded in writing.
Key Points
- Registration must be obtained before employing contract labour
- The registration certificate specifies the maximum number of contract workers that can be employed
- If you want to increase the number beyond the registered limit, you must apply for amendment
- Registration can be revoked if obtained through misrepresentation or suppression of facts
Licensing: Contractor (Section 12)
Every contractor who employs or intends to employ contract labour in an establishment must obtain a licence from the licensing officer.
The Process
- Obtain Form V (Certificate) from the principal employer
- Apply in Form IV to the licensing officer
- Provide details: number of workers, nature of work, duration of contract, wages and conditions of service
- Pay the licence fee (varies by state and number of workers)
- Receive the licence specifying the maximum number of workers, conditions, and validity period
Principal Employer's Role
The principal employer must:
- Issue Form V to each contractor (a prerequisite for the contractor's licence application)
- Verify that the contractor holds a valid licence before engaging them
- Not engage any contractor whose licence has been suspended or revoked
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Section 10: Abolition of Contract Labour
The appropriate government (central or state) can prohibit the employment of contract labour in any process, operation, or work in any establishment by notification in the Official Gazette.
Before issuing such notification, the government considers:
- Whether the work is incidental to or necessary for the main activity of the establishment
- Whether the work is of a perennial nature (performed throughout the year or for a major part of the year)
- Whether the work is ordinarily done through regular workers in similar establishments
- Whether the number of contract workers is sufficient to employ whole-time regular workers
SAIL Judgment (2001): No Automatic Absorption
In Steel Authority of India Ltd. v. National Union Waterfront Workers (2001), a five-judge Constitution Bench of the Supreme Court held that abolition of contract labour under Section 10 does not automatically result in absorption of those workers by the principal employer.
The court overruled the earlier Air India position that had established automatic absorption rights. After SAIL, the appropriate government or the Industrial Tribunal must separately consider whether absorption is warranted in each case.
This means that if the government abolishes contract labour for a specific operation in your establishment, the contract workers do not automatically become your regular employees.
Section 21: Principal Employer's Wage Liability
This is the most important provision for principal employers. Under Section 21:
- The contractor must pay wages to contract workers within the prescribed period
- The contractor must disburse wages in the presence of an authorised representative of the principal employer
- If the contractor fails to pay or makes short payment, the principal employer must pay the wages directly to the workers
- The principal employer can recover the amount from the contractor by:
- Deducting from any pending payments to the contractor
- Treating it as a debt payable by the contractor
What This Means in Practice
- Nominate a representative: appoint a person in writing to witness every wage disbursement by the contractor
- Track payment records: get monthly confirmation from the contractor with proof of wage payment, PF remittance, and ESI remittance
- Budget for defaults: if the contractor disappears mid-contract, you pay the workers directly
The principal employer's wage liability exists regardless of any indemnity clause in the commercial contract with the contractor. You cannot contractually transfer this statutory obligation away.
Welfare Facilities (Sections 16-19)
The contractor must provide the following welfare facilities. If the contractor fails, the principal employer must provide them and can recover the cost.
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Summary
Canteen
Rest rooms
Drinking water
Latrines and urinals
First-aid boxes
Section 16: Canteen
Where 100 or more contract workers are employed, the contractor must provide a canteen. State rules prescribe construction standards, accommodation, furniture, and foodstuff standards.
Section 17: Rest Rooms
Where contract workers are required to halt at night, the contractor must provide rest rooms or suitable alternative accommodation. These must be sufficiently lighted, ventilated, and maintained in a clean condition.
Section 18: Drinking Water, Latrines, and Urinals
Every contractor must provide wholesome drinking water at convenient locations and a sufficient number of latrines and urinals that are conveniently accessible.
Section 19: First-Aid
The contractor must maintain first-aid boxes equipped with prescribed contents at every workplace, readily accessible during all working hours.
Record-Keeping Requirements
Registers the Principal Employer Must Maintain
| Register | Form | Purpose |
|---|---|---|
| Register of Contractors | Form XII | Details of all contractors engaged |
| Muster Roll | Form XVI | Attendance of contract workers |
| Register of Wages | Form XVII | Wages paid to each worker |
| Register of Deductions | Form XXIII | Deductions made from wages |
| Register of Overtime | Form XXIII-A | Overtime hours and payment |
| Register of Fines | As prescribed | Fines imposed, if any |
Registers the Contractor Must Maintain
| Register | Form | Purpose |
|---|---|---|
| Register of Workmen | Form XIII | Details of all contract workers |
| Employment Card | Form XIV | Individual worker details |
| Service Certificate | Form XV | On termination of employment |
| Muster Roll | Form XVI | Daily attendance |
| Register of Wages | Form XVII | Wages paid |
| Wage Slip | Form XIX | Individual wage slips |
Return Filing
- Contractor: half-yearly return in Form XXIV to the Licensing Officer within 30 days of the half-year ending
- Principal Employer: annual return in Form XXV to the Registering Officer by 15 February each year
All registers must be preserved for 3 years after the last entry.
Penalties Under the CLRA Act
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Summary
Section 23: General contravention
Continuing violation
Section 24: Operating without registration
Section 25: Repeat offence
Under the CLRA Act 1970
- Section 23: contravention of any provision attracts imprisonment up to 3 months, fine up to Rs 1,000, or both. Continuing violation: additional Rs 100 per day
- Section 24: employing contract labour without registration (principal employer) or without a licence (contractor) attracts imprisonment up to 3 months, fine up to Rs 1,000, or both
- Section 25: repeat offence (second or subsequent conviction) attracts imprisonment up to 6 months, fine up to Rs 2,000, or both
Under the OSH Code 2020
The OSH Code significantly increases penalties:
- First offence: fine up to Rs 2,00,000
- Repeat offence: fine up to Rs 5,00,000 with possible imprisonment
- Non-maintenance of registers and records (Section 96): fine up to Rs 1,00,000
- Falsification of records: imprisonment up to 3 months or fine up to Rs 1,00,000
The OSH Code also introduces a compounding mechanism for first offences, allowing monetary settlement without criminal prosecution.
Tax Interactions
TDS on Contractor Payments (Section 194C / 393)
Payments to contractors for labour supply attract TDS under Section 194C (now Section 393 under the Income Tax Act 2025):
- 1% TDS for payments to individuals and HUFs
- 2% TDS for payments to any other person (company, firm, etc.)
- TDS applies if aggregate payments exceed Rs 30,000 in a single payment or Rs 1,00,000 in the financial year
GST on Manpower Supply
Manpower supply services attract 18% GST under SAC 9985. The principal employer can claim full Input Tax Credit (ITC) if the services are used for business purposes and a valid GST invoice is received.
Security personnel supply attracts Reverse Charge Mechanism (RCM) under Notification 13/2017-CT (Rate).
PF and ESI for Contract Workers
The contractor is the immediate employer responsible for PF and ESI remittance. However, the principal employer carries joint liability. If the EPFO or ESIC finds that the contractor has not remitted contributions, it can recover the amount from the principal employer.
To protect yourself:
- Collect monthly PF/ESI challans and ECR reports from the contractor
- Verify remittance through the EPFO Unified Portal using the contractor's establishment code
- Include PF/ESI compliance as a condition in the commercial contract
OSH Code 2020: What Changes?
The Occupational Safety, Health and Working Conditions Code, 2020 subsumes the CLRA Act 1970 along with 12 other labour laws. Effective 21 November 2025, the OSH Code introduces several changes for contract labour:
| Feature | CLRA Act 1970 | OSH Code 2020 |
|---|---|---|
| Applicability threshold | 20 workers | 50 workers |
| Licence type | Per-establishment | Single licence, 5-year validity |
| Work-specific licence | Not available | Available (for specific work orders) |
| Penalty (first offence) | Rs 1,000 | Rs 2,00,000 |
| Penalty (repeat) | Rs 2,000 + 6 months | Rs 5,00,000 + imprisonment |
| Compounding | Not available | Available for first offence |
| Web-based registration | State-dependent | Mandatory (Shram Suvidha Portal) |
State-by-state notification determines when the OSH Code provisions actually apply in your state. Until the state notification, the CLRA Act remains the operative law.
Common Compliance Mistakes
1. Not Registering Because "Workers Are on the Contractor's Rolls"
Contract workers are on the contractor's payroll, but the establishment must register if 20 or more contract workers work there. The registration obligation is on the principal employer, regardless of whose payroll the workers are on.
2. Not Verifying Contractor's Licence
Engaging a contractor without a valid licence is an offence under Section 24. Before signing a contract, verify the contractor holds a valid licence from the licensing officer and that the licence covers the number of workers being deployed.
3. Ignoring Wage Disbursement Supervision
Section 21 requires the principal employer's representative to be present during wage disbursement. Many employers skip this. When the contractor defaults, the principal employer discovers they have direct wage liability with no deduction buffer because the contractor has already been paid.
4. Missing the Annual Return Deadline
Form XXV must be filed by 15 February each year. Missing this deadline is a contravention that attracts penalties under Section 23.
5. No Welfare Facility Audit
If the contractor does not provide canteen, rest rooms, or first-aid facilities, the obligation falls on you. Conduct quarterly welfare facility inspections and document the findings.
6. Treating Contract Workers as Regular Employees
If contract workers report directly to your supervisors, follow your attendance rules, and do not receive instructions from the contractor, the arrangement may be treated as a sham contract. In that case, the workers may be deemed your direct employees with full statutory benefits (PF, ESI, gratuity, bonus). Structure the arrangement so that the contractor retains operational control.
12-Point Compliance Checklist
- Register the establishment under Section 7 (Form I) before engaging contract workers
- Issue Form V to each contractor before they apply for a licence
- Verify each contractor holds a valid licence under Section 12
- Nominate an authorised representative to witness every wage disbursement
- Collect monthly proof of wage payment, PF challan, and ESI challan from each contractor
- Maintain Form XII (Register of Contractors) with details of all engaged contractors
- Ensure contractors maintain Form XIII (Register of Workmen), Form XVI (Muster Roll), and Form XVII (Register of Wages)
- Conduct quarterly welfare facility inspections (canteen, rest rooms, drinking water, first-aid)
- File annual return in Form XXV by 15 February each year
- Deduct and remit TDS on contractor payments under Section 194C / 393
- Verify contractor's GST registration and collect valid GST invoices for ITC claims
- Review commercial contracts to ensure the contractor retains operational control (prevent sham contract risk)
Interaction with the Four Labour Codes
The Four Labour Codes subsume 29 old laws into 4 codes. For contract labour, the key code is the OSH Code 2020. The other three codes also affect contract workers:
- Code on Wages 2019: Minimum wage obligations apply to contract workers. The wage definition (basic must be at least 50% of CTC) affects PF and ESI calculations.
- Code on Social Security 2020: PF, ESI, and gratuity provisions extend to contract workers. Gig and platform workers also get social security coverage.
- Industrial Relations Code 2020: Retrenchment, closure, and layoff provisions apply to establishments with contract workers. Standing orders requirements depend on total worker count (including contract workers in some states).
Sources: Contract Labour (Regulation and Abolition) Act, 1970 (indiacode.nic.in); CLRA Central Rules, 1971; Occupational Safety, Health and Working Conditions Code, 2020 (effective 21 November 2025); Steel Authority of India Ltd. v. National Union Waterfront Workers, (2001) 7 SCC 1; Central Labour Commissioner website (clc.gov.in); PIB Labour Codes implementation notification (PRID 2193095).
