Supreme Court ruling contractors employees are not automatic employees of a principal employer

Case Summary – Kirloskar Brothers Limited v. Ramcharan & Ors.

In a recent landmark judgment, Justice M.R Shah and Justice Hima Kohli of the Hon’ble Supreme Court of India were pleased to set aside the judgment of the Hon’ble Madhya Pradesh High Court, wherein a judgment of the Industrial Tribunal ordering reinstatement of laid-off employees was confirmed. The Hon’ble Supreme Court was of the opinion that in the absence of any notification under Section 10 of the Contract Labour (Regulation and Abolition) Act, 1970 (‘CLRA Act’) and in the absence of any allegations and/or findings that the contract was sham and camouflage, both the Industrial Tribunal as well as the High Court has committed a serious error in reinstating the laid off employees and directing Kirloskar Brothers Limited (Appellant herein) to absorb them as their employees. employee act and direction to absorb clarified

The Hon’ble Supreme Court further clarified that the parties shall be governed by the CLRA Act and relief, if any, could have been granted under the provisions of the CLRA Act and not under the Madhya Pradesh Industrial Relations Act, 1960 (‘MPIR Act’).

FACTS OF THE CASE:

1. Respondent Nos. 1 to 6 (laid off employees / Respondents) were contractual labourers of Respondent No. 7 (Contractor), engaged by Kirloskar Brothers Limited (Appellant) in terms of Contract dated 01.08.1995, which came to an end on 07.10.1996.
2. As per the Appellant all statutory pay-outs, including salary were paid by the Contractor since under CLRA Act, and the Appellant informed the Contractor of deducting INR 7,224/- from the bill payable, for non-deposit of PF contribution for May 1995.
3. The Respondents approached the Labour Court praying that they were employees of the Appellant, who have been orally terminated by Respondent No. 7, and ought to be re-instated.
4. Ld. Labour Court and Industrial Tribunal: The Ld. Labour Court vide Judgment and Order dated 14.03.2002 returned a finding that the Contractor had obtained a license under the CLRA Act and the contesting Respondents were employees of the Contractor and not the Appellant. Upon appeal, the Ld. Industrial Tribunal passed an order date 05.02.2004, ordering reinstatement and holding that a contract labourer automatically becomes an employee of the principal employer.
5. Appeals before the High Court: The Single Judge of the Hon’ble Madhya Pradesh High Court (in W.P.(S) No. 1083 of 2004) confirmed the order of the Ld. Industrial Tribunal. Aggrieved by the same, a Writ Appeal (W.A. No. 813 of 2018) was preferred before the Division Bench, however, the same was dismissed.
6. Hence, the Appellant approached the Hon’ble Supreme Court of India to vide a Civil Appeal, challenging the orders passed by the Single Judge and Division Bench of the Hon’ble High Court of Madhya Pradesh.

ISSUES TO BE CONSIDERED:

• Whether the labourers can be considered employees of the Appellant?
• Whether the workers/employees employed by a Contractor automatically become employees of a principal employer?

CONTENTIOS OF THE APPELLANT:

• The contesting Respondents herein were the employees employed by Respondent No. 7 – contractor. Therefore, in the absence of a notification under Section 10 of the CLRA Act and there are no allegations or findings with regard to the contract being a sham, the contesting Respondents could not have been held to be employees of the Appellant.
• Neither Section 10 of the CLRA Act nor any other provision in the Act, whether expressly or by necessary implication, provides for the absorption of contract labour in the absence of a notification by an appropriate Government.
• In the present case, there were no such allegations or pleadings or findings arrived at by any Court that the contract between the parties was a sham and not genuine.
• Invoking the provisions of the MPIR Act as against the provisions of the CLRA Act is inconsistent in view of the provisions of Article 254 of the Constitution of India

KEY OBSERVATIONS OF THE COURT:

• Merely on the basis that sometimes the payment of salary was made and/or PF contribution was paid by the Appellant, which occurred due to non-payment of the same by the Contractor, the contesting Respondents shall not automatically become employees of the principal employer, i.e., the Appellant herein.
• In the absence of a notification under Section 10 of the CLRA Act unless there are allegations or findings with regard to a contract being a sham, private Respondents herein, who are as such the workmen/employee of the Contractor, cannot be held to be employees of the Appellant.
• Neither Section 10 of the CLRA Act nor any other provision in the Act, expressly or by necessary implication, provides for automatic absorption of contract labour on issuing a notification by the appropriate Government, and the principal employer cannot be required to order absorption of the contract labour working in the establishment concerned.
• It is further observed that the industrial adjudicator can grant the relief sought if it finds that the contract between the principal employer and the Contractor is a sham, nominal, and merely a camouflage to deny employment benefits to the employee, and that there is in fact direct employment, by applying tests like who pays the salary; who has the power to remove/dismiss from service or initiate disciplinary action; who can tell the employee the way in which the work should be done, in short, who has direct control over the employee.

DECISION OF THE COURT:

In view of the facts, circumstances, and evidence, the appeal was allowed, and the impugned orders passed by the Hon’ble High Court of Madhya Pradesh in W.P.(S) No. 1083 of 2004 and W.A. No. 813 of 2018, as well as the judgment and order passed by the Industrial Tribunal, were quashed and set aside.

Last updated: 01/03/2023

Article contributed by:

Senior Associate - Legal

MBG Corporate Services