A definitive reference for corporate HR and legal teams on each party’s statutory duties, mandatory records, and the full scope of the Principal Employer’s vicarious liability under India’s new Labour Codes.
Applicable Codes: OSH Code 2020 | Code on Wages 2019 | Code on Social Security 2020 | Industrial Relations Code 2020 | Draft Central Rules 2025
| 4 | LABOUR CODES APPLICABLE |
| 2 | PARTIES WITH DISTINCT DUTIES |
| 5 | PE VICARIOUS LIABILITY HEADS |
The new Labour Codes impose parallel, non-delegable obligations on both the Contractor and the Principal Employer. While the Contractor is the primary employer of record, the PE carries independent statutory duties — and critically, vicarious liability when the Contractor defaults. These liabilities arise by statute and cannot be contractually extinguished.
01 — Duties: Contractor vs. Principal Employer
The Contractor bears primary employer obligations — from wage payment to social security enrolment. The Principal Employer’s duties are oversight-focused but independently enforceable. Neither party can excuse a default by pointing to the other.
| Contractor PRIMARY EMPLOYER OBLIGATIONS |
Principal Employer OVERSIGHT, BACKUP & VICARIOUS OBLIGATIONS |
|---|---|
| › Pay wages within 7 days of wage period — via bank/electronic mode only | › Verify contractor holds a valid license before deployment |
| › Issue appointment & employment letters to every worker | › Display establishment registration certificate at worksite |
| › Maintain muster rolls, wage, overtime & deductions registers | › Provide welfare: canteen, first-aid, crèche, drinking water |
| › Issue wage slips before each disbursement | › Pay wages if contractor defaults — recover thereafter (Sec. 55) |
| › File half-yearly returns with the authority | › Pay ESI if contractor defaults — recover thereafter (Sec. 31) |
| › Intimate work order commencement within 15 days | › Pay PF if contractor defaults — recover thereafter (Sec.17) |
| › Enroll workers in PF & ESIC; remit contributions on time | › Pay minimum bonus if contractor defaults (Draft Rule 57) |
| › Pay minimum wages under Code on Wages 2019 | › Maintain contractor-wise compliance & social security file |
| › Issue experience certificates on separation | › File annual return with contractor-wise wage payment details |
| › Electronically inform PE of wages paid each period | › Audit contractor records; ensure independent maintenance |
02 — Mandatory Registers & Documents
Documentation is the strongest practical defence against a sham contract allegation. Courts consistently draw adverse inferences where registers are absent, inconsistent, or critically found to be maintained by the Principal Employer rather than the Contractor.
WHAT EACH PARTY MUST MAINTAIN
| CONTRACTOR — STATUTORY REGISTERS | PRINCIPAL EMPLOYER — DOCUMENTS |
|---|---|
| ·Register of Employees (master deployment record) | ·Establishment registration certificate (displayed at worksite) |
| ·Attendance-cum-Muster Roll — maintained independently by contractor | ·Certified copy of contractor’s valid license under OSH Code |
| ·Register of Wages, Overtime & Deductions | ·Contractor-wise PF/ESI registration & remittance tracker |
| ·Wage Slips — issued before every disbursement | ·Wage oversight records & default-backup payment records |
| ·Bonus computation & payment records | ·Welfare facility compliance records (canteen, first-aid etc.) |
| ·Leave records, separation records, service certificates | ·Annual return with contractor-wise wage details |
| ·EPF/ESIC remittance challans & registration documents | ·Safety officer & safety committee records (where applicable) |
| ·Half-yearly return acknowledgements | ·Work orders, audit reports, contractor compliance file |
03 — Vicarious Liabilities of the Principal Employer (‘PE’)
The following five liability heads are imposed on the PE by statute. They cannot be contractually extinguished — only the right of recovery against the Contractor can be preserved through well-drafted indemnity clauses.
| LIABILITY | LEGAL PROVISION | PE EXPOSURE & POSITION | RISK |
|---|---|---|---|
| Wages | OSH Code Sec.55 | If contractor fails to pay wages within the prescribed time or makes short payment, PE is directly and absolutely liable to pay the shortfall. No defence of contractor fault. PE recovers from contractor thereafter by deduction or as a debt. | HIGH |
| Minimum Bonus | Wages Code Draft Rule 57 | On written notice of contractor default from affected workers or their registered union, PE must pay minimum statutory bonus and recover from contractor. | MEDIUM |
| Provident Fund | SS Code Sec. 17 | EPF Act | PE may pay both employer’s & employee’s PF contributions and recover from contractor. Important: mere PF deposit by PE does not establish direct employment — confirmed in Ramjas Public School v. Dharmender. |
MEDIUM |
| ESI | SS Code Sec. 31 | ESI Act | PE is jointly and directly liable for ESI — both the employer’s and employee’s share — regardless of whether workers are directly or contractor-deployed. PE must pay and recover. | HIGH |
| Gratuity (Old — CLRA) | Payment of Gratuity Act | Under the old CLRA framework, ‘wages’ included gratuity (confirmed in Mettur Thermal Power Station v. Appellant Authority). PE bore vicarious liability for contractor gratuity defaults under the old regime. | OLD LAW |
| Gratuity (New Codes) | Labour Codes 2020 | SIGNIFICANT RELIEF DUE TO CHANGE: ‘Wages’ under the Labour Codes expressly excludes Gratuity. The PE’s automatic vicarious liability for contractor gratuity defaults no longer applies under the new framework. PE exposure on gratuity must now be assessed separately and independently. | CHANGED |
04 — Three Principles Every HR & Legal Team Must Know
| Substance Over Form | Records Are Your Shield | Vicarious = Non-Waivable |
| Courts look past labels. If the PE recruits, controls, and disciplines workers — the PE is the real employer, regardless of what the contract says. The designation ‘Contractor’ does not conclude the legal analysis. | Contractor-maintained registers are the first line of defence. Where the PE maintains attendance in its own systems, courts treat this as a primary indicator of sham. Absence of records invites adverse inference. | PE’s backup statutory liabilities cannot be contracted away. Only the right of recovery is preserved. Budget for default scenarios and build strong indemnity clauses into every work order. |
Key Change Under the Labour Codes — Gratuity
Under the old CLRA framework, gratuity was included in ‘wages’, making the PE vicariously liable for contractor gratuity defaults (confirmed in Mettur Thermal Power Station). Under the new Labour Codes, Gratuity is expressly excluded from the definition of ‘Wages’ — this automatic vicarious liability no longer exists. Legal teams must review all existing indemnity clauses and gratuity provisions in work orders in light of this significant change.
05 —HR & Legal Action Checklist
| 01 | Verify contractor license, PF & ESI registration before every new engagement and at each renewal cycle. |
| 02 | Maintain a contractor compliance register — tracking licenses, remittances, returns filed, and audit dates. |
| 03 | Ensure contractor independently maintains muster rolls and wage registers — never in PE’s own systems. |
| 04 | Audit contractor wage payment records monthly — confirm bank/electronic mode and timely disbursement. |
| 05 | Review all work orders annually — ensure indemnity clauses cover all five vicarious liability heads. |
| 06 | Reassess gratuity provisions in all work orders — the automatic vicarious liability no longer applies under the Labour Codes. |
Disclaimer: This article has been prepared for informational and general awareness purposes only. It does not constitute legal advice and should not be relied upon as such. The law stated herein reflects the position as of April 2026 under the new Labour Codes framework and is subject to change upon notification of the final rules. Organisations should seek independent legal counsel before taking any action based on this content. | © 2026 · Labour & Employment Law Practice
