Article (May-2019)

Articles

What is sham contract while engaging contract labour?

Deepanjan Dey

Designation : -   General Manager-HRM

Organization : -  Tata Steel BSL Ltd., Angul, Odisha

01-May-2019

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The Blacks' Law Dictionary, (7th Edn) defines 'sham' as (i) Something that is not what it seems; a counterfeit; (ii) A person who pretends to be something that he or she is not; a faker. The Law Lexicon Dictionary (second Edition, 2001) defines 'sham' as good in appearance but false in facts.

Now the question that arises in the context of the Contract Labour (regulation and abolition) Act 1970 (hereinafter referred to as CLRA Act) as to what is a sham Contract and what is the implications of such sham contract? In this context it may be appropriate to refer the case of Gujarat Electricity Board, Ukai, Gujarat V. Hind Mazdoor sabha (1995 (2) LLJ 790 (SC) whereby the apex Court inter alia has observed "that the authority to abolish the contract labour under Section 10 of the Act comes into play only where there exists a genuine contract. In other words, if there is no genuine contract and the so called contract is sham or a camouflage to hide the reality, the said provisions are inapplicable. When, in such circumstances, the concerned workmen raise an industrial dispute for relief that they should be deemed to be the employees of the principal employer, the Court or the industrial adjudicator will have jurisdiction to entertain the dispute and grant the necessary relief." Here the contract which the apex court was referring is the contract between the contractor and the principal employer. The constitutional bench of the apex court endorsed this view in Steel Authority of India vs National Union Water Front Workers Union (2001(91) FLR 182 (SC)= 2001 LLR 691 (SC)). In this judgment while addressing the issue of automatic absorption the court also ruled that if the contract is found to be not genuine but mere camouflage, the so called contract labour will have to be treated as employee of the principal employer who shall be directed by the industrial adjudicator to regularize the services of the contract labour in the concerned establishment subject to the conditions as may be specified. The two major ratio decidendi of the SAIL judgment can be enumerated as follows :

(1) Automatic absorption is no more the sine qua non on notification prohibiting the engagement of contract labour being issued by the appropriate government under section 10 (1) of the CLRA Act.

(2) If it is proved before the industrial adjudicator that the contractor is interposed and its engagement is camouflage to deprive the various beneficial statutory rights to the workers, in such event the contract between the contractor and principal employer will be deemed to be a sham contract. In the event of contract being deemed to be sham, the industrial adjudicator will pass order directing the principal employer to regularize the service of the contractor workers.

It is needless to say that for any notification for prohibition has be made only by the appropriate government under section 10 (1) of the CLRA Act. To prove the existence or non existence of a sham contract it is the domain of the industrial adjudicator and therefore, industrial dispute has to be raised under the provisions of Industrial dispute Act 1947.

Factors determining Sham Contract :

In the case between M/s. Bharat Coking Coal Limited Vs Their workmen represented by the Secretary, Bihar Colliery Kamgar Union, (2014 LLR 64) the learned Tribunal had held that in absence of the registration and the license, the arrangement made by the management to execute the work through a contractor is a sham and camouflage. Disagreeing with such findings of the Tribunal the Jharkhand High Court was of the opinion that failure to comply the provisions of Sections 7 (registration of establishment) and 12 (Licensing of contractors) of the CLRA Act does not lead to inescapable conclusion that the workmen concerned are to be regularized under the services of the management for violation of the said provisions. There are other penal consequences which arise for such violation. The provisions pertaining to aforesaid sections of the CLRA Act are no more a res-integra. Hence, in this context the Jharkhand High Court relied upon Deena Nath v National Fertilizers Ltd (1992 (64) FLR 39= 1992 (II) LLJ 46 SC), R.K. Panda V Steel Authority of India (1994 (69) FLR 256 (SC) = 1994 (2) LLN 378 (SC)) and Steel Authority of India vs National Union Water Front Workers Union (supra) wherein the Supreme Court has time and again reiterated that non compliance to section 7 and 12 of the CLRA Act will not lead to absorption or the arrangement between the contractor or principal employer will be treated as sham. Non compliance for such provision will lead to other penal consequences as enshrined in the CLRA Act.

For a sham Contract to be proved before the industrial adjudicator the relationship of employer and employee has to be established. In this connection it may be appropriate to refer to the Supreme Court judgment Ram Singh and others V Union Territory, Chandigarh and others 2004 (1) CLR 81 (SC)= 2004 Lab.IC 50 (SC) which has succinctly dealt with two factors namely the 'Control test' and 'integration test' for determining the relationship of employer and employee. The relevant portion of the judgment is set out herein in verbatim for better appreciation and inter- alia reads as follows :

"In determining the relationship of employer and employee, no doubt 'control' is one of the important tests but is not to be taken as the sole test. In determining the relationship of employer and employee all other relevant facts and circumstances are required to be considered including the terms and conditions of the contract. It is necessary to take a multiple pragmatic approach weighing up all the factors for and against an employment instead of going by the sole 'test of control'. An integrated approach is needed. 'Integration' test is one of the relevant tests. It is applied by examining whether the person was fully integrated into the employer's concern or remained apart from and independent of it. The other factors which may be relevant are - who has the power to select and dismiss, to pay remuneration, deduct insurance contributions, organise the work, supply tools and materials and what are the 'mutual obligations' between them (see Industrial Law _x0016_Third edition by I.T. Smith and JC Wood _x0016_ at pages 8 to 10).

Normally, the relationship of employer and employee does not exist between an employer and contractor and servant of an independent contractor. Where, however, an employer retains or assumes control over the means and method by which the work of a contractor is to be done it may be said that the relationship between employer and the employee exists between him and the servants of such a contractor. In such a situation the mere fact of formal employment by an independent contractor will not relieve the master of liability where the servant is, in fact, in his employment. In that event, it may be held that an independent contractor is created or is operating as a subterfuge and the employee will be regarded as the servant of the principal employer. Where a particular relationship between employer and employee is genuine or a camouflage through the mode of contractor is essentially a question of fact to be determined on the basis of features of relationship, the written terms of employment, if any, and the actual nature of the employment. The actual nature of relationship concerning a particular employment being essentially a question of fact, it has to be raised and proved before an industrial adjudicator. Conclusion Nos. 5 & 6 of the Constitution Bench decision of this Court in Steel Authority of India (supra) are decisive for purposes of this case."

The issue of `control and supervision' was also addressed in General Manager (OSD), Bengal Nagpur Cotton Mills, Rajnandgaon vs. Bharat Lal & Anr. ( 2011 I CLR 1 (S.C.)) wherein Supreme court was of the view that in determining relationship between principal employer and contract labour, two determining factors are to be seen who pays the salary to the contractor labour and who has the control and supervision on the work of such employee. It is for the contract labour to prove that he was directly employed by the principal employer and not the contractor. Further, the court was of the opinion that to get relief of reinstatement against principal employer, contract worker has to prove that he was directly paid by principal employer and not contractor. In the context of supervision and control the Court referred to the its judgment in International Airport Authority of India v. International Air Cargo Workers Union (2009 (13) SCC 374= 2009 LLR 923 (SC)). In this instant case the Supreme Court has held that merely because the contract labour work is under the supervision of the officers of the principal employer, it cannot be taken as evidence of direct employment under the principal employer. The relevant observation of the Court in International Airport Authority of India case is set out here under for better appreciation which reads as follows :

"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 the salary is paid by contractor, if the right to regulate employment is with the contractor, and 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/allotted/sent 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."

From the above discussion we find that apart from 'control test' or 'organization test' several other factors such as who is the appointing authority; (b) who is the pay master; (c) who can dismiss; (d) how long alternative service lasts; (e) the extent of control and supervision; (f) the nature of the job, e.g. whether, it is professional or skilled work; (g) nature of establishment; (h) the right to reject; determine the relationship of an employer and employee in the dispute of sham contract. (refer Workmen of Nilgiri co-operative Marketing Society Ltd. Vs. State of Tamil Nadu and others (2004 (2) LLJ 253 (SC) = 2004(101) FLR 138 (SC)= 2004 (2) LLN 68 (SC)= 2004 LLR 351(SC)).

Hence, we find that a combination of factors based on facts and merit of the case will determine whether there is an existence of employer and employee relationship between the contractor employees and principal employer. If such relationship is established the contract between the principal employer and contractor will be deemed as sham by the industrial adjudicator and the principal employer will be directed to regularize the service of the Contractor workers.

From our above discussion the following can be summarized :

1. Non compliance with section 7 and 12 of the CLRA act will not lead to sham contract. Violation of these provisions will only lead to penal consequences.

2. 'Control' is one of the important tests but is not to be taken as the sole test in determining the relationship of employer and employee.

3. 'Integration' test is one of the relevant tests. It helps in determining whether the person was fully integrated into the employer's concern or is independent of it.

4. The other factors which may be relevant are who has the power to select and dismiss, to pay remuneration, deduct insurance contributions, organise the work, supply tools and materials and what are the 'mutual obligations' between them.

5. Mere supervision of the contract labour work by the officers of the principal employer cannot be the sole determinative factor to prove a contract to be sham.

Importance of agreement :

It is needless to say that in any dispute of sham contract the contract between the contractor and principal employer will have a huge evidentiary value. The industrial adjudicator will obviously scrutinize and rely upon this document and hence it need to be properly crafted. Generalities should be avoided and the agreement between the principal employer and contractor should be very specific be it in terms of the job to be performed and/or any obligations of the party. Therefore essentials of this kind of agreement in brief can be enumerated as follows :

I. Define the scope of the agreement, that is, to whom it applies.

II. Define the time frame/duration of the agreement.

III. Write down clearly what has been agreed.

IV. Specify the conditions, if any, for making the agreement operational and the consequences of non-compliance to obligations of both the parties as a result of the agreement.

V. The agreement must disclose the place of work, time of working, rate of compensation (towards consideration) and consequences arising out of breach of contract and procedure termination by either of parties to the agreement.

VI. The agreement must disclose the scope of work, deployment of manpower in number, period of validity, compensation, security deposit and terms of payment of bills.

VII. The agreement must carry out the objectives of statutory provisions and judicial pronouncements.

VIII. Lay down the procedure for dealing with problems of interpretation and implementation.

IX. The agreement should be between the contractor and the principal employer and should be witnessed by two witnesses.

Additional precautions by principal employer :

I. The agreement should be drafted and executed on non-judicial stamp paper.

II. The Contractor should submit the printed bills and signs under the rubber stamp.

III That the Contractor's main records should be maintained through his staff and not by be the staff of principal employer.

IV. That the Contractor's Labour does only the specific work agreed by the Contractor.

V. That the contractor issues the photo identity card to his worker under his name, trading style and signature.

VI.That the contractor is not a cloak for suppressing the facts and the contractor is not treated as commission agent.

(Note: Essentials of agreement & Additional precautions by principal employer reference taken from the article 'Avoid making Sham Contract' LLR March 2018, P 66-67.)