Engaging contract labour in India carries specific statutory risks that often catch Principal Employers off guard. With the transition from the Contract Labour (Regulation and Abolition) Act, 1970 to the Occupational Safety, Health and Working Conditions Code (OSH Code), the legal framework governing manpower supply has shifted.

A poorly drafted agreement—specifically one relying on legacy “commission” or “cost-plus” models—can trigger “Sham Contract” litigation, forcing the absorption of contract workers as permanent employees.

This analysis breaks down the necessary clauses for a valid “Contract for Service,” outlines the financial safeguards required under the Code on Wages, and provides executable templates to secure your compliance posture against Section 21 liabilities and BOCW Act mandates.

Agreement Between Principal Employers and Labour Contractors | Evaakil.com

The New Rules of Labour Supply.

How the 2025 Labour Codes reshape the agreement between Owners and Contractors.

28 Min Read Legal Compliance Drafting Guide

The engagement of contract labour in India is no longer a simple commercial handshake. It is a regulated tripartite arrangement that imposes significant liabilities on the Principal Employer. As of 2025-2026, the transition from the legacy Contract Labour (Regulation and Abolition) Act, 1970 to the consolidated framework of the four Labour Codes has fundamentally altered compliance obligations.

This guide provides a legal analysis of the “Agreement for Supply of Labour” and dissects the distinction between “Contract for Service” and “Contract of Service.” It also examines the impact of the Occupational Safety, Health and Working Conditions Code (OSH Code) and the Code on Wages.

The “Sham” Doctrine

Indian courts have consistently pierced the corporate veil to ascertain the true nature of the relationship between the Principal Employer and the contract worker. The essence of a valid labour supply agreement is that it establishes a genuine contract between the Principal Employer and the Contractor.

If the contract is found to be a camouflage to avoid statutory benefits due to regular employees, the court will disregard the agreement. The contract workers will be treated as direct employees of the Principal Employer. This is the “Sham Contract” doctrine, reiterated in SAIL vs. National Union Waterfront Workers.

Visualizing the Tripartite Relationship

Figure 1: The correct legal flow of Control and Payment.

Service vs. Employment

The distinction is legally decisive. A “Contract of Service” creates an employer-employee relationship. A “Contract for Service” creates a principal-independent contractor relationship.

Comparison Matrix

Feature	Contract OF Service (Employment)	Contract FOR Service (Independent)
Control	Employer controls manner of work.	Contractor decides manner.
Tools & Equipment	Provided by Employer.	Provided by Contractor.
Economic Risk	Borne by Employer.	Borne by Contractor (Profit/Loss).
Disciplinary Power	Employer can hire/fire.	Only Contractor can discipline.

The “Cost-Plus” Trap: Analyzing Legacy Agreements

Many traditional agreements, like the standard templates often circulated (referencing Clause 3 of your provided document), utilize a “Commission on Disbursement” model. This structure is fraught with legal peril in the post-2025 landscape.

Legacy Model (High Risk)

“The Contractor is entitled to 10% commission on total wages disbursed.”

Interpretation: Courts view this as the Principal Employer paying the wages directly, with the Contractor acting merely as a “paymaster” or agent.
Consequence: It supports the argument for a “Direct Employer-Employee” relationship, leading to absorption claims.
Fiscal: GST authorities may demand tax on the entire wage bill, not just the service charge.

Unit-Rate Model (Recommended)

“The Contractor shall be paid ₹500 per sq. ft. of wall constructed / ₹25,000 per man-month output.”

Interpretation: This is a genuine “Contract for Service.” The Contractor bears the risk of efficiency.
Consequence: Breaks the nexus between the Principal Employer’s money and the worker’s wage.
Fiscal: Clearer demarcation for Input Tax Credit (ITC).

The “Prevailing Market Rate” Fallacy

Clause 2 of your document states: “The labour shall be paid at the prevailing market rate.” In modern legal drafting, this phrasing is ambiguous and dangerous.

Why “Market Rate” fails:

Below Minimum Wage: If the market rate is lower than the statutory minimum wage notification, the contract is void ab initio and the Principal Employer is liable for the differential amount + penalty.
Variable Standard: “Prevailing rate” fluctuates. It gives the Contractor a loophole to demand hikes mid-contract.
The Correct Standard: “Wages shall be paid in accordance with the Minimum Wages Act (or Code on Wages) notifications issued by the State Government, plus applicable statutory contributions (PF/ESIC).”

Transition to Labour Codes (2025)

The OSH Code subsumes and repeals the CLRA. It introduces significant structural changes.

Single License Regime

Contractors operating in multiple states can now obtain a single All-India license valid for five years. This replaces the requirement of obtaining separate licenses for each work order.

Core Activity Ban

Section 57 prohibits contract labour in “core activities” unless specific exceptions apply. The “Scope of Work” clause must be drafted to align with these exceptions.

The 50% Wage Rule

Under the Code on Wages, allowances (HRA, Overtime) cannot exceed 50% of the total remuneration. Any excess is deemed “Wages” for social security calculation. Agreements must be modeled on this new definition to avoid short-payment liabilities.

Wage Structure Composition

Figure 2: Permissible allowance splits under Code on Wages, 2019.

The Compliance Shield

To insulate the Principal Employer from Section 14 (CLRA/OSH) liabilities, a rigorous document collection process is required monthly.

Day 1-7: Wage Disbursement

Contractor must pay wages directly to worker bank accounts. Cash payments are high-risk.

Day 15: Statutory Deposits

Contractor deposits EPF (PF Challan) and ESIC contributions.

Day 20: Invoice Submission

Contractor submits invoice to Principal Employer with “Proof of Compliance”.

Monthly Document Checklist

Copy of Wage Register (Form XVII)

Bank Transfer Statement (Bank Seal)

ECR for EPF (Electronic Challan Return)

ESIC Contribution History

GST Return Filing Proof (GSTR-1/3B)

Labour Welfare Fund (LWF) Receipt

Risk Transfer & Financial Safeguards

Clause 4 of standard agreements often places liability on the Contractor, but statutory law places the ultimate burden on the Principal Employer. Two mechanisms are vital to manage this risk: Statutory Recovery and Insurance coverage.

The “Right to Recover” (Sec 21 CLRA)

The Principal Employer’s most powerful tool is Section 21(4) of the CLRA (mirrored in the OSH Code). If a Contractor fails to pay wages, the Principal Employer must pay the workers directly. However, the law explicitly allows the Principal Employer to recover this amount from the Contractor’s bills or Security Deposit.

Drafting Tip: The Indemnity Clause must explicitly reference this statutory right to deduct dues from the “current or future bills.”

Insurance Decision Logic

Figure 3: Determining the correct policy coverage.

Workmen’s Compensation (WC) Policy

If your site is outside an ESIC notified area, or if workers earn above ₹21,000/month, a WC Policy is mandatory under the Employee’s Compensation Act, 1923. The Principal Employer is liable for accidents on site if this policy is absent.

Construction Specifics: The BOCW Act

Since the reference document mentions “masons” and “construction”, the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 applies. This imposes distinct liabilities separate from general labour laws.

The 1% Cess Liability

The Principal Employer (Owner) is primarily liable to pay 1% Cess on the total cost of construction to the Welfare Board.

Risk: If you pay the Contractor the full amount inclusive of Cess, and they fail to deposit it, the Government will recover it from you (the Owner) with interest.

Action: Deduct 1% from every running bill and deposit it directly to the BOCW Board.

Safety Officer Requirement

If engaging 500 or more building workers, a Safety Officer is mandatory. For smaller numbers, specific safety committees are required. The contract must mandate that the Contractor provides PPE (helmets, harnesses) conforming to BIS standards.

Data Privacy (DPDP Act 2023)

Collecting Aadhaar cards and bank details of contract workers makes the Principal Employer a “Data Fiduciary” (or joint fiduciary) under the new Digital Personal Data Protection Act, 2023.

Mandatory Clauses for the Agreement

Consent Collection: The Contractor must warrant that they have obtained “verifiable consent” from workers to share their personal data with the Principal Employer for compliance purposes.
Purpose Limitation: Data collected (e.g., for Gate Passes or PF verification) must not be used for any other analytics or shared with third parties.
Data Erasure: Upon termination of the contract, the Principal Employer must delete worker data unless retention is required by law (e.g., maintaining wage registers for 3 years).

Drafting the Agreement

The agreement serves as the first line of defense. It must contain specific representations that the Contractor is an independent legal entity.

Clause: Scope of Services

Focus on output and service levels rather than manpower numbers to pass the control test.

The Contractor shall provide [Service Name, e.g., Material Handling/Data Entry] to process [Target Volume] with [Accuracy %]. 
The Principal Employer may request the replacement of any personnel found unsuitable. The Contractor shall provide a suitable replacement within 24 hours. 
The disciplinary action against the removed personnel rests solely with the Contractor.
This Agreement does not create a partnership, joint venture, or agency relationship.

Complete Agreement Templates

Below are two versions of the agreement. The first is the reference format (as per your upload), and the second is a modern, compliance-oriented structure.

Standard Reference (Legacy)

Caution: This format uses “Commission” and “Market Rate” clauses which may create liability under the 2025 Labour Codes. Use for reference only.

AGREEMENT BETWEEN OWNERS AND LABOUR CONTRACTOR FOR SUPPLY OF LABOUR

THIS AGREEMENT made between A, son of B, resident’s of …………… hereinafter referred to as the owner of the ONE PART and C, son of D, resident of ………. hereinafter referred to as the contractors of the OTHER PART.

WHEREAS the owner is getting the construction of building on the land bearing Plot No………. Survey No. ……… House No. …… situate, lying and being in village……… Tehsil …….. District………. hereinafter referred to as the ‘said work’ and is desirous of availing of labour for the said work.

AND WHEREAS The contractors are the contractor for the supply of all types of labour required for the construction work and offered their services to the owner, which the owner has agreed on the terms and conditions hereafter set forth.

NOW IT IS MUTUALLY AGREED BETWEEN THE PARTIES AS UNDER:

1. The contractors will supply all labour viz. masons, labourers, water carriers and other necessary workers required for the said work to the owner at site provided that the requisition thereof is made ………. hours in advance.

2. The labour shall be paid at the prevailing market rate. The present prevailing market rate of labour of all type has been given in the Schedule hereunder written. The said rates may be changed by the mutual consent of the parties.

3. The contractors will be entitled to a commission of ………. on the total disbursement made to the labour so supplied by them. The said commission shall be payable to the contractors every week.

4. The contractors will be liable for and make good any loss or damage, caused by any act or default on the part of the labour supplied by them.

5. If the contractors fail to supply necessary labour on a requisition made by the owner in time, they will be liable to pay a sum of Rs. …………. as liquidated damages per labourer, mason, water carrier or any other worker not supplied by them in accordance with the requisition by the owner.

IN WITNESS WHEREOF the parties hereto have set their respective hands to these presents on the date, month and year hereinabove written.

Signed and delivered by 
the within named owner A 

Signed and delivered by 
the within named contractors C

WITNESSES;
1.
2.

Modern Compliance Format

Recommended: Aligns with OSH Code, Wage Code, and BOCW Act. Focuses on “Contract for Service” and Output.

SERVICE AGREEMENT FOR LABOUR SUPPLY (OSH CODE COMPLIANT)

THIS AGREEMENT is made at [City] on [Date] BETWEEN [Owner Name], hereinafter “Principal Employer” AND [Contractor Name], hereinafter “Contractor” (holding License No. [License No]).

WHEREAS the Principal Employer is engaged in construction at [Site Address] and requires specialized services for [Scope, e.g., Masonry/Excavation].

NOW IT IS AGREED:

1. SCOPE OF WORK: The Contractor shall undertake [Specific Task] on a unit-rate basis. This is a Contract for Service. The Contractor retains full control over the deployment, supervision, and discipline of its personnel.

2. CONSIDERATION: The Principal Employer shall pay the Contractor based on the output (e.g., per sq. ft. / per cubic meter) as per Schedule A. The rates are inclusive of Minimum Wages, EPF, ESIC, Bonus, and 1% BOCW Cess.

3. STATUTORY COMPLIANCE: The Contractor shall strictly comply with the Code on Wages, 2019 and OSH Code, 2020. The Contractor shall submit proof of wage payment (bank transfer) and PF/ESIC challans with every invoice.

4. INDEMNITY: The Contractor indemnifies the Principal Employer against any claims, damages, or liabilities arising from the Contractor’s failure to pay statutory dues or from accidents occurring during work. The Principal Employer reserves the Right to Recover such dues from the Contractor’s bills (Sec 21 CLRA).

5. SAFETY: The Contractor shall provide BIS-standard PPE to all workers.

6. TERMINATION: Either party may terminate with 30 days notice. The Contractor is solely responsible for retrenchment compensation to its workers upon exit.

IN WITNESS WHEREOF…
[Signatures]

Performance Management: From Damages to SLAs

Legacy contracts (referencing Clause 5 of your document) often use “Liquidated Damages” (e.g., fixed ₹500 fine per missing worker). This is outdated. Modern agreements utilize Service Level Agreements (SLAs) that link payment to output quality, not just headcount.

Metric	Legacy “Fine” Approach	Modern SLA Approach
Absenteeism	Fixed ₹500 deduction per day.	Cost of replacement + 15% Admin Fee + SLA Score reduction.
Misconduct	Request to replace worker.	Immediate removal + Penalty of 5% of monthly bill for safety violations.
Statutory Default	Indemnity clause only.	Stop Payment: 100% hold on invoice until proof of PF/ESIC deposit is shown.

Termination & Exit Strategy

Ending a labour supply contract is often more dangerous than starting one. If the Contractor’s workers have been at your site for years (e.g., security guards or canteen staff), they may claim “automatic absorption” upon contract termination.

The Golden Rules of Exit

Rotation: Do not keep the same Contractor (and consequently the same set of workers) for indefinite periods. Rotate contractors every 2-3 years.
Full & Final Settlement: Ensure the Contractor provides proof of Full & Final (F&F) settlement with their workers, including Gratuity payments, before releasing their final Security Deposit.
No Direct Negotiation: Never negotiate severance directly with the contract workers. Always channel communication through the Contractor.

Beyond the Contract: The POSH Mandate

Under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, a “Contract Worker” is explicitly covered under the definition of an “Employee”.

Principal Employer’s Duty

If a contract worker faces harassment on your premises, your Internal Committee (IC) must accept the complaint if the Contractor does not have their own IC. You must ensure the Contractor’s staff are sensitized.

Drafting Requirement

Include a clause: “The Contractor warrants that it has constituted an Internal Committee (IC) under the POSH Act and shall strictly comply with all provisions regarding the safety of women employees.”

Fiscal Dimensions

Stamp Duty

If the agreement is purely for manpower supply, it falls under Article 5(c) (Agreement). If it involves transfer of property in goods, it becomes a “Works Contract” attracting higher ad-valorem duty.

Tip: Explicitly state “This Agreement is for the provision of services only” to minimize duty.

GST & ITC

Manpower Supply (SAC 9985) is taxable at 18%. The Principal Employer can claim Input Tax Credit (ITC).

Tip: Include a clause allowing withholding of GST components if the Contractor fails to upload invoices to the GST portal (GSTR-1).

Frequently Asked Questions

Can I employ contract labour for core activities?

Generally, no. Section 57 of the OSH Code prohibits it. However, exceptions exist if the activity is ordinarily done through a contractor, does not require full-time workers, or meets a sudden surge in volume.

Who is responsible for safety amenities?

Under the OSH Code, the Principal Employer is primarily responsible for providing welfare facilities like canteens and restrooms, while the Contractor remains responsible for wages.

What is the risk of a “Sham” contract?

If the court finds the contract is a sham, the contract workers are treated as direct employees of the Principal Employer, entitling them to regularization, back wages, and all standard employee benefits.

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