This article has been written by Rajat Gupta, 3rd year student at MNLU, Mumbai
Contract labour in the country has faced a lot of issues at different points of time.[i] In the era of the Coronavirus pandemic, labourers throughout the country have had to rush back to their hometowns from their places of employment, due to lack of resources. Their problems seem bound to increase, with the economy slowing down, businesses shutting and spending capacity reducing.
But are the labourers the only ones affected? What could be a possible impact on Direct Employees of an organisation? These employees may be facing exploitation in the form of their actual work hours being more than what has been stipulated, at same pay, with such practice becoming regularised and strategic restructuring or reduced salaries on account of companies invoking pay-cut clauses that may be present in employment agreements due to less profits. Companies being entities for profit, may engage in illegal methods as well to protect their interests as a separate legal entity, which is the premise for further arguments. In light of the same, it is important to bring to light the judgement of the Supreme Court in the case of BHEL v. Mahendra Prasad Jakhmola.[ii]. The case provides an important protection to regular employees by preventing them from being classified as contract workers brought in by an independent contractor. The Judgement of the Court becomes especially relevant for consideration, as due to a decrease in the fortunes of companies, and in order to cut costs while being unable to terminate employment, companies may change the treatment of regular employees to that afforded to contractual workforce.
Facts of the Case
In the particular case mentioned above, the appeal by Special Leave with the Supreme Court challenged the award as granted by the Labour Court to workmen. The question posed to the Labour Court was with regards to the validity of the termination of employment of persons, the nature of whose employment was initiated as contract labour. This led to the question as to whether they were direct employees of BHEL or not, considering that they were labour brought in by the contractor. [O1] The labour court held that the supervision, superintendence and the administrative control of the contract labour was with BHEL, and they could not be removed from work if the contractor was removed, and thus called for their reinstatement.
In an appeal to the High Court and a subsequent review petition, the award of the Labour Court was held to be valid in law, in light of command, control and management of the labour being with BHEL, and not the contractor. The Court also stated that there was no proof of payment made to the contractor and neither was there any proof defining the time period of employment of contract labour. The Court also held that it could not be ascertained who brought in the labour and thus, whether the labour was employed directly or through the contractor. On the basis of such findings, the Court stated the arrangement between BHEL and the contractor to be a “Sham Contract”
Understanding Sham Contracts in Practice
The arrangement of Sham Contracting is one, by the means of which a principal employer is able to disguise their employment relationship[iii] with a person(s) as one where the same is seen to be independent of the principal employer. The same may be done by the means of the company making a representation that the employee is an independent contractor, or the existence of an independent contractor who has brought in stated employees as contract workers, for the operations of the employer to be carried on. The workforce, in the form of labour, is shown to be employed for specific purposes, as is the industry norm, at a certain amount of wage.
However, in practice, such a workforce performs all general and specific activities of the business, that too at bare minimum wages, without being aware of such an arrangement.
The existence of such an arrangement enables the principal employer to be able to cut costs, thus obtaining unfair gains, in terms of the treatment that the principal employer would have had to give if the workforce in consideration was to be treated as direct employees of the principal employer.
Duties of Employer for Regular Employee vis-a-vis Contract Labour
A direct, regular employee of an entity is guaranteed a certain level of treatment and benefits. The specialised skill that they offer enables them to procure a significant sum of money. Apart from this, the employing entity has certain obligations mandated by law as to these employees. These benefits may vary in nature, and are said to accrue with the continuous employment of persons. Some of these may be stated to be social security benefits such as medical leaves, earned leaves, paid leaves, gratuity, severance, Dearness Allowance and much more. The employer may also provide certain additional fringe benefits not in the nature of social security, such as travel allowance, utilities reimbursement, accommodation for the direct employee, etc.
In comparison to the benefits that a regular, direct employee of an entity is entitled to, the same as per law, for contract labour is extremely limited.[iv] The principal employer does not owe the same or even similar duty of care to contract labour, in terms of providing any fringe benefit such as health insurance, complimentary leaves, etc. or any payroll tax on their behalf.
Issues & Matter Discussed in The Case
The appeal to the Supreme Court made by BHEL through special leave was with regard to the determination of the nature of employment of the labour as being direct employees or not.
The Court delved into the matter extremely meticulously, and stated that the fact, that contract workers being provided with gate passes was not a determinant towards direct control, supervision or management. It was a matter of premise security, as without a gate pass system, anyone would be able to enter. The Court also stated that no evidence was given to show that direct employees and contract workers were performing identical duties at the set-up in consideration.
To determine the nature of employment, the Court formulated two questions, those being –
1. Whether Principal Employer or Contractor made payment of wage/salary to the worker?
2. Whether Principal Employer had control and supervision of the worker/employee?
The Court in the particular case stated that there was indeed evidence of payments being made to the contractor for the purpose of payment to the workers. The wage payment was done via the contractor.
With regards to the issue of control and supervision, the Court stated that in a contract for supply of labour itself, which was in existence in the given case, the principal employer is bound to direct the workers as to what they are required to do. But the same does not mean that the principal employer gains primary control over workers, and their exercise over them remains secondary.[v] This is so because, if the contractor was to leave, the workers would follow, as a matter of general practice.
In light of the above-mentioned arguments, the Court held that there was no direct employer-employee relationship in existence between BHEL and contract workforce. Thus, there was no sham in the given case.
In these unprecedented times, COVID-19 has created financial hardships for all. It has been witnessed that corporations are invoking clauses like force majeure in their employment agreements with direct employees, due to decreases in profits and cash flow. This enables them to reduce or deny any payment like salary or other benefits and other charges; or deny any obligation incurred due to an agreement entered into. Thus, measures for cost reduction in the pandemic are increasingly being put to force as slashing jobs may be construed to be an illegality,[vi] and thus, open the company to litigation for wrongful termination. Employers are even withholding pay to their employees, or illegally deducting charges from salaries, since termination of employment is unlikely when there are no clauses for the same in respective employment agreements, citing COVID-19 as a reason.
In light of the trend as established in the previous paragraph, measures enforced by corporates in the pursuit of cost cutting cannot and should not be allowed take an unethical turn, considering that there is a high possibility for it, as has been shown in the arguments above. Corporate Houses, barred from firing employees as an outright measure, would thus look for loopholes for significant and lasting reductions in employment costs, arriving at the sham contract arrangement. The COVID pandemic has thus, given employers the scope to renegotiate their relations with their workforce to their advantage.
Welfare is an important constitutional principle [O1] in existence in the country, thus becoming a possible legal mandate to be enforced, and it is most important to ensure the welfare of all in this pandemic, to ensure availability of resources. The two principles as derived in the judgement become an important protection available in the prevailing situation and should become known to all as an entitlement held with the position of employee, against their employer.
An appointment letter or any other document signifying the nature of existence of a relationship between parties should be safely kept within possession of all concerned. There should be clarity in the mind of both parties, in terms of consensus ad idem, as to the position of work involved.
[i] 3 Paramita Ray, Contract Labour System in India: Issues & Perspectives, 3 IJLLJS.
[ii] (2019) 13 SCC 82
[iii] Matt Champ, “Sham contracts: a solicitor’s headache?”, School of Advanced Study, University of London.
[iv] Courtney Von Hippel, Stephen L. Mangum, David B. Greenberger, Robert L. Heneman, and Jeffrey D. Skoglind. “Temporary Employment: Can Organizations and Employees Both Win?” The Academy of Management Executive (1993-2005) 11, no. 1 (1997): 93-104. Accessed December 31, 2020. http://www.jstor.org/stable/4165375.
[v] International Airport Authority of India v. International Air Cargo Workers’ Union, (2009) 13 SCC 374.
[vi] Nagreeka Exports Ltd. Vs. Union of India, Ludhiana Hand Tools Association Vs. Union of India, Ficus Pax Pvt. Ltd. Vs. Union of India and Twin City Industrial Employers Association Vs. Union of India, & more.