Contract labour compliance: a principal employer's checklist

Contract labour compliance means ensuring every contractor's worker is engaged lawfully, paid in full and covered by PF and ESI. The Occupational Safety, Health and Working Conditions Code, 2020 (the OSH Code) replaced the Contract Labour (Regulation and Abolition) Act, 1970. Its contract labour provisions apply where 50 or more contract workers are engaged. The principal employer must use licensed contractors, provide welfare facilities and pay wages on contractor default.

This checklist is for the principal employer: the company whose premises and work the contract workers serve. For your own employees' monthly obligations, see our payroll compliance checklist.

What changed under the OSH Code

The OSH Code has been in force since 21 November 2025, along with the other three Labour Codes. Its Part on contract labour carries forward the old Act's structure but changes several details.

Area	Contract Labour Act, 1970	OSH Code, 2020
Threshold	20 or more contract workers	50 or more contract workers on any day of the preceding 12 months, in the establishment or employed by the contractor
Contractor licence	Licence per establishment, renewed periodically	Electronic licence valid for five years; one Central licence possible for multi-state contractors; a work-specific licence where prescribed criteria are not met
Work orders	Not required in this form	The contractor must intimate each work order to the licensing authority
Core activities	Prohibition through government notification	Contract labour in core activities is prohibited, with defined exceptions
Wage payment	Contractor pays, principal employer pays on default	Same, and the contractor must pay through bank transfer or electronic mode and tell the principal employer electronically what was paid

The contract labour Part does not apply to establishments where work is only intermittent or casual. Work is not treated as intermittent if it was done for more than 120 days in the preceding 12 months, or for more than 60 days in a year if it is seasonal.

State rules prescribe the forms, the wage payment period, registers, licence fees and the portal. Several states were still finalising or bringing their rules into effect at the time of writing, so check what your state has notified before relying on any specific form or timeline. The Ministry of Labour and Employment publishes the Code and central rules.

Core activities: where contract labour is prohibited

The OSH Code prohibits contract labour in the core activities of an establishment. A core activity is the activity the establishment is set up for, plus anything essential or necessary to it.

The Code lists support services that are not treated as core unless the establishment is set up for them. These include sanitation and cleaning, security, canteen and catering, loading and unloading, courier services, civil and maintenance works, gardening, housekeeping and laundry, and transport including ambulances.

Even in core activities, a principal employer may use contract labour if:

• the normal functioning of the establishment is such that the activity is ordinarily done through contractors;
• the activity does not need full-time workers for most of the working day or for longer periods; or
• there is a sudden increase in the volume of core work that must be finished in a specified time.

Map every contract against this test and record your reasoning.

Principal employer vs contractor obligations

Obligation	Contractor	Principal employer
Licence before supplying or engaging contract labour	Must hold a valid licence (where the Code applies)	Must engage only licensed contractors; engaging through an unlicensed contractor is deemed a contravention of the Code
Wage payment	Pays wages within the prescribed period, by bank transfer or electronic mode	Pays wages in full or the unpaid balance if the contractor defaults or pays short, then recovers from the contractor
Minimum wages	Pays at least the notified minimum wage	Verifies, because it carries the default liability
PF and ESI	Registers, deducts and deposits for its workers	Verifies deposits; social security law can hold it liable for dues on workers engaged through a contractor
Welfare facilities	Follows the facilities agreed in the contract	Provides the welfare facilities the Code requires, such as washing, first aid and, where 100 or more workers including contract workers are ordinarily employed, a canteen
Fees from workers	Must not charge any fee or commission	Should prohibit it in the contract
Registers and records	Maintains wage, attendance and other prescribed records	Maintains its own records and keeps copies of contractor evidence

The wage and social security rows are where principal employers lose money. If a contractor disappears with wages and PF unpaid, the principal employer can be made to pay and then has to chase the contractor. A monthly check stops that from building up.

Onboarding a contractor

Do the checks before the first worker walks in:

• Licence: the contractor's licence number, validity, the establishment and work it covers, and the maximum number of workers allowed.
• Registrations: PF establishment code, ESI employer code, PAN, GSTIN and any state registration the contractor needs.
• Work order intimation: proof that the contractor has intimated your work order to the licensing authority, where your state's rules require it.
• Core activity check: a short written note on why the work is not core, or which exception applies.
• Contract clauses: compliance with all labour laws, minimum wages, wage payment by bank transfer, no fees from workers, monthly submission of evidence, your right to audit, your right to withhold or set off amounts against the contractor's bills for unpaid wages and dues, and indemnity.
• Wage structure: the wage rates by skill category, so you can check them against the notified minimum wage for the job and zone. Our guide to minimum wages explains how these are fixed.

Gate pass, identity and attendance

Every contract worker on site should have a photo gate pass linked to your own master list: name, contractor, UAN, ESI number, skill category and dates.

Capture attendance at your own gate or biometric device, not only in the contractor's register. Your gate records are the independent evidence of who worked and for how many days. Each month, compare three numbers: workers and man-days in your gate records, in the contractor's attendance register and in the contractor's wage register. Differences need an explanation before the contractor's bill is cleared.

Monthly verification checklist

Check	Evidence to collect	What to look for
Headcount	Your gate records and the contractor's worker list	Every worker on site appears in the contractor's records
Wages paid	Wage register and bank transfer statement	Paid within the prescribed period, by bank transfer, for the days worked
Minimum wages	Wage register and current notification	Rates at or above the notified minimum for each category
PF	The contractor's ECR, challan and payment receipt (TRRN) for the wage month	Every eligible worker's UAN is in the ECR and wages match the wage register
ESI	ESI contribution file, challan and payment proof	Every eligible worker is included, on the right gross wages
Licence	Licence copy	Still valid, and headcount within the licensed number

Our guide to the PF ECR explains what the ECR contains, which helps when you read a contractor's file. Contribution rates and wage limits are published by EPFO and ESIC.

Worked example: verifying PF and ESI for 120 contract workers

A housekeeping and facilities contractor supplies 120 workers to a plant. For the wage month:

• 100 workers earn a gross of ₹16,000: wages (Basic + DA) of ₹13,000 and an allowance of ₹3,000. The allowance is below 50% of total pay, so PF wages are ₹13,000.
• 20 supervisors earn a gross of ₹24,000: wages of ₹14,000 and allowances of ₹10,000 (also below 50%). PF wages are ₹14,000. Their gross is above ₹21,000, so ESI does not apply (assuming they were not already within an ESI contribution period).

Expected PF:

• Workers: 12% of ₹13,000 = ₹1,560 employee share each; 100 × ₹1,560 = ₹1,56,000.
• Supervisors: 12% of ₹14,000 = ₹1,680 each; 20 × ₹1,680 = ₹33,600.
• Employee share in total: ₹1,56,000 + ₹33,600 = ₹1,89,600. The employer share is the same ₹1,89,600, split between EPS and EPF, plus EDLI and administrative charges.

Expected ESI (100 workers only):

• Employee share: 0.75% of ₹16,000 = ₹120; 100 × ₹120 = ₹12,000.
• Employer share: 3.25% of ₹16,000 = ₹520; 100 × ₹520 = ₹52,000.
• Total ESI: ₹64,000.

What the contractor submitted: an ECR with 116 members and an ESI file with 98 employees. Your gate records show all 120 people on site through the month. Four workers are missing from the ECR and two of those four are also missing from the ESI file.

The exposure for the month:

• PF: 4 × (₹1,560 + ₹1,560) = ₹12,480, before EDLI, administrative charges, interest and damages.
• ESI: 2 × (₹120 + ₹520) = ₹1,280.
• Total: ₹12,480 + ₹1,280 = ₹13,760.

The amount is small, but it compounds and can land on the principal employer. Ask for a supplementary ECR and a corrected ESI filing, and hold ₹13,760 from the contractor's bill under the set-off clause until the receipts arrive.

The same review found that the contractor's wage register showed 2,860 man-days against 2,980 in your gate records. That gap of 120 man-days is either unpaid work or a recording error, and it needs an answer before the bill is passed.

Sham contracting and the risk of deemed employment

A contract that is a paper arrangement, with the principal employer in practice controlling the workers, creates a serious risk: workers may claim they are the principal employer's own employees, with back wages and benefits. Warning signs include:

• your managers assign, supervise and discipline contract workers directly;
• contract workers do the same core work alongside your employees, indefinitely;
• the contractor has no supervisors or organisation of its own;
• you decide wages or terminations for individual contract workers.

Authorities and courts look at the substance of the arrangement, not the label on the contract. Keep supervision with the contractor's supervisors, define the work as a deliverable or a service, and take legal advice before converting a long-running arrangement.

A separate Part of the OSH Code covers inter-State migrant workers where an establishment has 10 or more of them, including PF and ESI coverage and a yearly journey allowance as state rules prescribe. Ask contractors to flag migrant workers in their worker list.

Common mistakes

• Checking the licence once and never again, while headcount grows past the licensed number.
• Relying on the contractor's attendance register with no independent gate or biometric record.
• Accepting a challan without the ECR, so you cannot see which workers were covered.
• Using contract labour in core activities without a documented exception.
• No set-off or audit clause in the contract.
• Assuming the OSH Code does not apply because one site has fewer than 50 contract workers today; the test looks at any day in the preceding 12 months.

FAQs

Who is a principal employer under the OSH Code? In a factory, the owner or occupier, or the person named as manager. In most other establishments, the person responsible for the supervision and control of the establishment. Government offices and mines have their own categories.

Does the OSH Code apply if we have fewer than 50 contract workers? The contract labour Part applies where 50 or more were engaged on any day of the preceding 12 months. Wage, PF, ESI and other laws still apply to contract workers below that number.

Is the principal employer liable for contract workers' PF? The contractor deposits it, but social security law can hold the principal employer liable for dues on workers engaged through a contractor. Verify deposits monthly.

Can we hire contract labour for housekeeping and security? Yes. These are support services the Code does not treat as core, unless your establishment is set up to provide them.

How NeevHR helps

NeevHR is built for your directly employed workforce. It captures attendance from biometric devices, runs payroll with PF, ESI, PT, LWF and TDS, and tracks your own filings in the statutory compliance calendar. It does not run a contractor's payroll or verify contractor challans, so the checks in this article stay with your compliance team. Clean records for your own employees make that comparison easier.

This article provides general information for educational purposes. Statutory rules, thresholds, rates and filing requirements may change; verify with the relevant authority or a qualified professional. Last reviewed: 06 Oct 2026.