Determination of Contract Workers as Direct Employees: Two Prong Test Laid Down by the Supreme Court

In India, contract labourers are protected by the Contract Labour (Regulation and Abolition Act), 1970. A contract labourer is defined as one who is hired in connection with the work of an establishment by a principal employer through a contractor. While a contractor is the supplier of contract labour for the organization, a principal employer is the person responsible for the control of the establishment.

Are Contract Labourers Direct Employees: The Two Prong Test

The question of whether contract labourers qualify as direct employees has been raised multiple times. In a recent ruling, Bharat Heavy Electricals Limited vs. Mahendra Prasad Jakhmola & Ors (Civil Appeal No. 1799-1800 of 2019), the Supreme Court of India reiterated the basic tests to be applied in determining whether contract labourers can be classified as direct employees.

Bharat Heavy Electronics Limited (“BHEL“) had entered into an agreement with a contractor to engage contract labourers in its factory at Haridwar in North India. The employment of certain contract labourers was terminated by BHEL, following which the contract labourers approached the Labour Court at Haridwar, seeking reinstatement. The Labour Court ruled in favour of the contract labourers, basing its analysis on the fact that BHEL exercised supervision, superintendence and administrative control over them.In BHEL’s appeal, the Uttarakhand High Court upheld the Labour Court’s ruling, holding that as the contract labourers were performing duties identical with BHEL’s regular employees, they were under the command, control and management of BHEL, and the contract with the contractor was a sham.Thereafter, BHEL appealed to the Supreme Court.

The Apex Court,in order to decide the dispute relied on the test laid down by it in General Manager, (OSD), Bengal Nagpur Cotton Mills, Rajnandgaon v. Bharat Lala and Another ((2011) 1 SCC 635), which is as follows:Two of the well-recognized tests to find out whether the contract labourers are the direct employees of the principal employer are: (i) whether the principal employer pays the salary instead of the contractor; and (ii) whether the principal employer controls and supervises the work of the employee.”

Control and Supervision

The Supreme Court in International Airport Authority of India v. International Air Cargo Workers’ Union ((2009) 13 SCC 374) explained the expression, ‘Exercise of control and supervision’. The Court held that “If the contract is for supply of labour, necessarily, the labour supplied by the contractor will work under the directions, supervision and control of the principal employer but that would not make the worker a direct employee of the principal employer, if: (i) the salary is paid by a contractor;(ii) the right to regulate the employment is with the contractor; and (iii) the ultimate supervision and control lies with the contractor.The principal employer only controls and directs the work to be done by a contract labour, when such labour is assigned 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.”

In the present case, the contract labourers were being paid salaries by the contractor, and not by BHEL.  Further, the second test was not met as BHEL was merely exercising secondary control over the contract labourers. Therefore, the SC set aside the judgment of the Uttarakhand High Court and the Labour Court’s award.


Permanency claims against the principal employers are not a recent finding. Many such cases have been witnessed in industrial, manufacturing and IT majors in India. It is very important for principal employers to be conscious of the two-part test while employing contract labourers. In order to avoid such claims, a detailed contract for the supply of contract labour should be in place between the principal employer and the contractor. Further, the contract should explicitly lay down the rights and obligations of the principal employer and the contractor, for instance who shall pay the employed contract labourers. All steps should be taken to ensure that the ultimate supervision and control over the contract labourers rests with the contractor.