Principal Employers Must Prefer Displaced Contract Workers When Hiring Regular Workmen; Supreme Court
Kiran Raj
The Supreme Court of India Division Bench of Justice Pankaj Mithal and Justice S.V.N. Bhatti set aside interim directions that required a principal employer to provide work and pay wages to contract labourers while a dispute over their status was pending. The Court held that the interim order proceeded on an unproven employer–employee relationship and therefore could not stand, but left the workmen at liberty to seek interim measures consistent with Steel Authority of India Ltd. It clarified that if the principal employer chooses to engage regular workmen for the same work, it must first consider the displaced contract workers, cannot bypass them by recruiting from the open market, and may relax age and nontechnical qualification norms to make that preference effective.
The dispute arose from a complaint filed by contract workers before the Industrial Court alleging unfair labour practices after they were denied work during the pendency of an industrial dispute. The workers claimed that despite an ongoing reference before the Industrial Tribunal, the management altered their service conditions by discontinuing their engagement without following statutory requirements. They sought interim relief directing the management to provide work and pay wages during the pendency of the proceedings.
The management opposed the complaint and the interim application, contending that the workers were engaged through registered contractors and that no direct employer–employee relationship existed between the management and the workers. It was argued that interim directions granting work and wages would amount to granting final relief without adjudicating the foundational issue of status.
The Industrial Court allowed the interim application, holding that a prima facie case, balance of convenience, and irreparable loss were made out in favour of the workers. The High Court dismissed the writ petition filed by the management challenging the interim order. Aggrieved, the management approached the Supreme Court challenging the correctness of the interim directions granted by the Industrial Court and affirmed by the High Court.
The Court stated: "Though the definition of “workman” under Section 2(1)(i) of the CLRA is textually derived from Section 2(s) of the ID Act, 1947, the two differ fundamentally in their juridical scope and the structural basis of the employment between employer and employee. The definition under ID Act is broad, which includes persons dismissed, discharged, or retrenched in connection with an industrial dispute to ensure they retain locus standi for adjudication. The CLRA, being regulatory in nature, contains no such “extended meaning” for terminated employees."
It recorded: "Furthermore, the CLRA introduces a specific statutory exclusion for “out-workers” whereas the ID Act does not have this specific statutory exclusion. Under the ID Act, the status of such workers is determined by the “Control and Supervision Test”. Under CLRA, they are statutorily barred from the definition. Finally, the ID Act presupposes a direct privity of contract (master-servant relationship) between the management and the worker, whereas the CLRA definition strictly operates through the medium of a contractor, covering workers hired “by or through” a third party for the establishment’s work."
On interim relief, the Court recorded: "The question on relationship between the Management and the Workman is for decision in Complaint (IT) No. 1 of 2021. At this stage, the interim prayer amounts to a virtual pre-judgment of the main dispute between the parties. In this litigation, the Management attempts to nip the dispute in the bud by raising preliminary objections and the Union is praying for relief which the union should agitate after the preliminary issues are decided in favour of the workmen. Both the parties are not conforming to the requirements of law in resolving a dispute of fact or dispute in law."
Referring to the effect of abolition of contract labour, the Court stated: "The issuance of a Section 10 notification does not lead to the automatic absorption of contract workers as regular employees of the principal employer. The immediate legal effect of such abolition is that the contract labour working in that specific process must cease to function in that capacity. The principal employer is prohibited from employing contract labour for that job thereafter. The workers do not become unemployed immediately; they remain employees of the contractor. The contractor can utilize their services in any other establishment where contract labour is not prohibited."
On sham contracts and adjudication, the Court recorded: "If it is proved that the contract was a mere ruse or camouflage to hide the real employer-employee relationship and that the principal employer retained full control and supervision over the workers the contract is disregarded as a legal fiction. In such cases, workmen “will have to be treated as employees of the principal employer who shall be directed to regularise the services of the contract labour”. Unlike the Section 10 scenario, here the workers become direct employees of the company. They are entitled to back wages and benefits as if they were regular employees from the start (or a date determined by the Tribunal). Determining whether a contract is “sham” or “genuine” involves disputed questions of fact (e.g., Who supervised the work? Who paid the wages? Who supplied the tools?). Therefore, only the Industrial Tribunal/Court can adjudicate the dispute. Writ Courts generally do not decide these disputed questions under Article 226 of the Constitution of India."
On re-engagement and the outcome, the Court stated: "If the principal employer intends to employ regular workmen for the work previously done by contract labour, they must give preference to the erstwhile contract labourers. The principal employer cannot simply hire fresh candidates from the open market while ignoring the displaced contract workers. They are legally bound to consider the contract workers who were working in that establishment. To ensure this “preference” is meaningful, the principal employer may relax maximum age limit and academic qualifications; specifically, non-technical posts to accommodate experienced workers.
The Court directed: In fine, we conclude in the facts and circumstances of the case, the relief granted by the High Court and the Industrial Court through the orders dated 21.03.2023 and 17.01.2023 are unsustainable. The impugned orders are set aside. Liberty to the workmen is granted to pray for an interim measure in terms of the dictum in SAIL (supra) before the Industrial Court."
Case Title: M/s Premium Transmission Private Limited v. Kishan Subhash Rathod and Others
Case No.: Civil Appeal arising out of SLP (Civil) No. 12192 of 2023
Bench: Justice Pankaj Mithal, Justice S.V.N. Bhatti
