Supreme Court Ruling on Contract Labour: Workers Hired Through Contractors Cannot Claim Equal Status as Regular Employees

Introduction

The Supreme Court of India has recently reaffirmed a crucial principle governing employer-employee relatioships in the context of contract labour. The court’s decision makes it clear that workers hired through contractors cannot claim the same status and benefits as regular employees unless there exists documented proof establishing a direct employment relationship with the principal employer. The Supreme Court judgment has far-reaching implications for industries across India that rely heavily on contract labour arrangements, clarifying the boundaries between principal employers, contractors, and contract workers.

The judicial pronouncement comes at a time when the Indian economy witnesses extensive use of contract labour across various sectors. From manufacturing units to educational institutions, from government establishments to private enterprises, the engagement of workers through third-party contractors has become a standard business practice. However, this arrangement often leads to disputes when contract workers seek benefits equivalent to those enjoyed by permanent employees of the principal establishment.

The Recent Supreme Court Judgments

CBSE vs. Raj Kumar Mishra (2025)

In a landmark ruling delivered on March 17, 2025, a bench comprising Justice Ahsanuddin Amanullah and Justice Prashant Kumar Mishra settled a long-standing dispute concerning the employment status of workers engaged through contractors [1]. The case involved Raj Kumar Mishra, who worked as a Junior Assistant at the Central Board of Secondary Education through a third-party contractor, M/s Man Power Services & Security. When his services were discontinued in 1999, Mishra contended that CBSE was his actual employer because the Board exercised direct supervisory control over his daily work activities, including assigning duties and transferring him between locations.

The Labour Court initially accepted Mishra’s argument, heavily relying on the traditional control test to conclude that an employer-employee relationship existed between him and CBSE. The Allahabad High Court later remanded the matter for further inquiry. However, the Supreme Court set aside both these decisions, establishing that a direct master-servant relationship must be proven through clear documentary evidence such as appointment letters, salary slips, or direct payment records.

The Court observed that while CBSE allocated duties and exercised oversight, this did not establish an employment relationship. When a contractor supplies manpower, the principal employer naturally gives instructions and ensures accountability, but this does not override the contractual intermediary arrangement. The judgment reinforced that supervisory or administrative control by the principal employer does not, by itself, create an employer-employee relationship [1].

Municipal Council Case (2025)

Building upon the precedent established in the CBSE case, another bench of Justices Ahsanuddin Amanullah and Vipul M. Pancholi recently decided a similar dispute involving a Municipal Council and contract workers [2]. The municipality had engaged workers through an intermediary contractor, and these workers subsequently claimed equal pay and benefits as regular municipal employees.

The Municipal Council appealed citing the CBSE judgment, arguing that no direct employer-employee relationship existed between the workers and the Council. The respondent workers, on their part, cited the principle of equal pay for equal work as established in State of Punjab vs. Jagjit Singh and others [3]. They argued that contractual employees performing the same duties as regular employees should receive the same benefits.

The Supreme Court accepted the municipality’s argument, holding that since no direct employment relationship existed between the workers and the Municipal Council, the Council was not liable to extend the same employment benefits to them. The Court emphasized that workers engaged through an intermediary contractor face a fundamentally altered employment relationship. The judgment stated that the principle of equal pay for equal work applies differently when workers are engaged through contractors rather than directly employed [2].

The Legal Framework Governing Contract Labour

The Contract Labour (Regulation and Abolition) Act, 1970

The primary legislation governing contract labour in India is the Contract Labour (Regulation and Abolition) Act, 1970, which came into force on February 10, 1971 [4]. This Act was enacted to prevent the exploitation of contract labour and introduce better working conditions. The legislation applies to establishments employing twenty or more contract workers and contractors who employ twenty or more workmen.

The Act establishes a detailed framework for regulating contract labour relationships. It mandates registration of establishments employing contract labour and licensing of contractors. Principal employers must register their establishments with the appropriate authority, and contractors must obtain licenses before supplying labour. These requirements ensure that both principal employers and contractors maintain proper documentation and comply with statutory obligations.

Under the Act, a workman is deemed to be employed as contract labour when hired in connection with the work of an establishment by or through a contractor. The contractor assumes responsibility for hiring, supervising, and remunerating these workers. The principal employer then remunerates the contractor for providing these services. This triangular relationship distinguishes contract labour from direct employment, where workers are borne on the payroll and paid directly by the establishment.

The Act empowers the appropriate government to prohibit employment of contract labour in any process, operation, or work in any establishment after consultation with the Central Board or State Board. This provision recognizes that while contract labour serves legitimate business needs, certain core operations may require direct employment to ensure adequate worker protection. Section 10 of the Act specifically addresses the abolition of contract labour in certain circumstances, considering factors such as whether the work is perennial in nature, whether it is ordinarily done through regular workmen, and whether it is sufficient to employ considerable number of whole-time workmen [4].

The Industrial Disputes Act, 1947

The Industrial Disputes Act, 1947, provides another crucial layer of worker protection, particularly regarding retrenchment and termination of services. Section 25F of this Act lays down conditions that must be fulfilled before retrenching any workman who has been in continuous service for not less than one year [5]. These conditions include providing one month’s notice in writing indicating reasons for retrenchment, paying retrenchment compensation equivalent to fifteen days’ average pay for every completed year of continuous service, and serving notice on the appropriate government.

However, the applicability of these protections depends on establishing an employer-employee relationship. The recent Supreme Court judgments clarify that workers engaged through contractors do not automatically enjoy these statutory protections from the principal employer unless documentary evidence establishes direct employment. The contractor, as the immediate employer, bears the primary responsibility for compliance with retrenchment provisions and other labour law requirements [5].

The Doctrine of Equal Pay for Equal Work

State of Punjab vs. Jagjit Singh (2017)

The principle of equal pay for equal work finds its foundation in Article 39(d) of the Indian Constitution, which directs the State to ensure equal pay for equal work for both men and women. This constitutional directive has been interpreted and applied through various judicial pronouncements, most notably in State of Punjab vs. Jagjit Singh and others, decided on October 26, 2016, and reported in (2017) 1 SCC 148 [3].

In this watershed judgment, the Supreme Court held that temporary workers who execute tasks and duties similar to those of regular permanent workers are entitled to receive remuneration at par with the pay that similarly situated permanent workers receive. The Court emphasized that it is fallacious to determine artificial parameters to deny workers the fruits of their labour. An employee engaged for the same work cannot be paid less than another who performs the same duties simply because of the designation given by the management [3].

The Court observed that the goals set out in Part IV of the Constitution, particularly Article 38 which enjoins the State to promote welfare of people by securing a social order informed by social, economic, and political justice, must guide State action. Article 39(d) imposes a duty to ensure equal pay for equal work, and this directive should be understood as fundamental to achieving social justice.

Application to Contract Workers

However, the recent Supreme Court judgments clarify that the Jagjit Singh principle applies differently in situations involving contract labour. The critical distinction lies in the employment relationship. In Jagjit Singh, the workers were directly employed by the State of Punjab, albeit on a temporary basis. They had a direct employer-employee relationship with the government, which created an obligation to pay them at par with regular employees performing similar work [3].

In contrast, when workers are engaged through contractors, the employment relationship exists between the worker and the contractor, not between the worker and the principal employer. The Municipal Council case explicitly distinguished the Jagjit Singh precedent on this ground. The Court noted that in Jagjit Singh, the contractual employment was directly by the principal, and in that background, contractual workers were entitled to regularization and equal pay. However, when workers are hired through intermediary contractors, this fundamental distinction alters the applicability of the equal pay doctrine [2].

Documentary Evidence: The Decisive Factor

The recent Supreme Court judgments place paramount importance on documentary evidence in determining employment relationships. The Court held that for a person to claim employment under any organization, a direct master-servant relationship must be established on paper. This represents a significant shift from earlier approaches that relied more heavily on the control test and the nature of work performed.

Documentary evidence that could establish direct employment includes appointment letters issued by the principal employer, salary slips showing direct payment by the principal employer, employment contracts executed between the worker and the principal employer, and official communications recognizing the worker as an employee of the establishment. Without such documentation, mere supervisory control or work allocation by the principal employer does not create an employment relationship [1].

The Court rejected the argument that supervisory and jurisdictional control over workers establishes them as employees. In modern business arrangements, principal employers naturally exercise oversight over contract workers to ensure work quality and coordinate operations. They assign specific tasks, monitor performance, and may even transfer contract workers between different locations or responsibilities. However, these activities reflect the principal employer’s legitimate interest in ensuring that contracted work meets required standards, not an employment relationship.

The CBSE judgment specifically addressed this issue, noting that the Labour Court had erred by adopting a simplistic approach that relied heavily on the perception of work and supervision rather than assessing legal documentation. The Supreme Court emphasized that the identity of an employer is determined not by perception but by proof. In an era of widespread outsourcing and non-traditional work arrangements, this clarity proves crucial for both employers and workers [1].

Regulatory Compliance and Employer Obligations

While the recent judgments provide relief to principal employers by clarifying that contract workers cannot claim equal status without documentary proof of direct employment, they do not absolve either principal employers or contractors from their regulatory obligations. Both parties must ensure strict compliance with the Contract Labour Act and other applicable labour legislation.

Principal employers must register their establishments if they employ twenty or more contract workers. They must verify that contractors engaged by them hold valid licenses and comply with all statutory requirements regarding wages, working conditions, and welfare measures. The Contract Labour Act imposes joint and several liability on principal employers and contractors for ensuring payment of wages to contract workers. If a contractor fails to pay wages, the principal employer becomes liable to make such payment [4].

Contractors must obtain licenses before undertaking work involving contract labour. They must maintain proper registers and records, pay wages in accordance with statutory requirements, and provide welfare amenities such as drinking water, latrines, rest rooms, and first-aid facilities. Contractors must also ensure compliance with other labour laws including the Minimum Wages Act, Employees’ Provident Funds Act, and Employees’ State Insurance Act. Failure to comply with these requirements can result in penalties including imprisonment and fines [4].

The recent supreme court judgments reinforce that while contract Labour may not claim equal status with regular employees, they remain entitled to all statutory protections provided under various labour laws. Their engagement through contractors does not diminish their rights to minimum wages, safe working conditions, social security benefits, and other legally mandated protections. The contractual arrangement affects the identity of the employer responsible for providing these benefits, but not the existence of these entitlements.

Implications for Employers and Workers

For Employers

The Supreme Court’s clarification provides much-needed certainty for employers regarding their obligations toward contract workers. Organizations can continue to engage workers through contractors for legitimate business purposes without fear that such arrangements will automatically create direct employment relationships. This flexibility allows businesses to manage workforce requirements efficiently, particularly for temporary projects, seasonal work, or specialized activities.

However, employers must ensure that their contract labour arrangements are structured properly and comply with all legal requirements. The contractor must be a genuine independent entity with real control over the workers supplied. Documentation must clearly establish the contractor as the employer. Payment of wages must flow through the contractor, with the principal employer paying the contractor for services rendered rather than paying workers directly. Any deviation from this structure could be interpreted as evidence of direct employment.

Employers should also implement robust due diligence procedures to verify that contractors comply with all labour law requirements. Principal employers can face liability for violations committed by contractors, particularly regarding wage payment and statutory benefits. Regular audits of contractor compliance, verification of license validity, and monitoring of wage payments help mitigate these risks.

For Workers

For workers engaged through contractors, the judgment underscores the importance of understanding their employment status and ensuring that their rights are protected within the existing framework. While they cannot claim equal status with regular employees of the principal establishment, they remain entitled to all statutory protections applicable to their employment with the contractor.

Workers should insist on proper documentation of their employment relationship with the contractor, including appointment letters, identity cards, and wage slips. They should ensure that their wages meet minimum wage requirements and that statutory deductions for provident fund and insurance are made correctly. If the contractor fails to comply with legal obligations, workers can seek remedies through labour enforcement authorities or courts.

The judgment also highlights that workers seeking regularization or equal benefits must establish direct employment through documentary evidence. Merely performing similar work or being subject to the principal employer’s supervision does not suffice. Workers who believe they have been misclassified as contract labour when they are actually direct employees must gather and preserve evidence of their direct employment relationship from the outset.

Conclusion

The recent Supreme Court judgments represent a significant development in Indian labour law, clarifying the boundaries between contract labour and direct employment. By emphasizing the importance of documentary evidence and rejecting the notion that mere supervisory control establishes employment relationships, the Court has provided much-needed clarity to a complex area of law.

The decisions balance the interests of employers, who require flexibility in workforce management, with those of workers, who need protection from exploitation. While contract workers cannot claim equal status with regular employees absent proof of direct employment, they retain all statutory protections applicable to their employment relationship with contractors. This framework recognizes the legitimate role of contract labour in modern business while ensuring that such arrangements do not undermine fundamental worker protections.

Going forward, both employers and workers must adapt to this clarified legal landscape. Employers must ensure that their contract labour arrangements are properly structured and documented while maintaining compliance with all applicable labour laws. Workers must understand their rights within the existing framework and seek appropriate remedies when those rights are violated. Legal practitioners must counsel clients carefully on structuring employment arrangements and resolving disputes in accordance with these principles.

The Supreme Court judgments reflect a documentation-driven approach to employment law in the context of contract labour, signalling a possible future direction of labour jurisprudence in India. As the economy continues to evolve and new forms of work arrangements emerge, the emphasis on clear documentation and formal employment relationships is likely to grow in importance. These Supreme Court decisions therefore provide not merely a resolution to specific disputes concerning contract labour, but also a broader framework for understanding employer–employee relationships in India’s changing economic landscape.

References

[1] LiveLaw. “Workers Hired Through Contractors Can’t Claim Equal Status As Regular Employees: Supreme Court.” January 2025. https://www.livelaw.in/supreme-court/workers-hired-through-contractors-cant-claim-equal-status-as-regular-employees-supreme-court-518527 

[2] Verdictum. “Supreme Court: Giving Contractual Employees Same Status As Regular Employees Amounts To Giving Premium To Arbitrarily Selected Process.” January 2025. https://www.verdictum.in/court-updates/supreme-court/giving-contractual-employees-same-status-regular-employees-amounts-giving-premium-arbitrarily-selected-process-1604080 

[3] Indian Kanoon. “State of Punjab and Ors vs Jagjit Singh and Ors.” (2017) 1 SCC 148. https://indiankanoon.org/doc/106416990/ 

[4] Chief Labour Commissioner, Government of India. “Contract Labour (Regulation & Abolition) Act, 1970.” https://clc.gov.in/clc/acts-rules/contract-labour-regulation-abolition-act-1970 

[5] Indian Kanoon. “Section 25F in The Industrial Disputes Act, 1947.” https://indiankanoon.org/doc/1056316/ 

Authorized and Published by Dhruvil Kanabar