Contract Labour Rules: Payroll and Principal Employer Duties

Housekeeping, security, loading, canteen and facility staff in many Indian businesses are employed through contractors. The workers are on the contractor's payroll, but the law treats the business where they work, the principal employer, as the backstop for their wages, welfare and social security. This guide explains the contract labour rules that apply now under the Labour Codes, what changed from the old CLRA regime, the principal employer's duties, and the monthly payroll checks that protect the business. It is part of our payroll compliance guide.

What is contract labour?

Contract labour means workers hired in or in connection with the work of an establishment by or through a contractor, with or without the knowledge of the principal employer. The principal employer is the owner or occupier of the establishment (or the person it nominates), and the contractor is the person or firm that supplies workers or undertakes work through hired workers, including manpower suppliers. Common examples are security, housekeeping, gardening, canteen, transport, loading and unloading, and construction work.

Contract labour law: CLRA Act to OSH Code

The Contract Labour (Regulation and Abolition) Act, 1970 and its Central Rules of 1971 were repealed when the Occupational Safety, Health and Working Conditions Code, 2020 came into force on 21 November 2025. Contract labour is now covered by Part I of Chapter XI of the OSH Code. The Central Government notified the OSH (Central) Rules, 2026 on 8 May 2026 for establishments in the central sphere; States make their own rules for others.

Sources: the OSH Code and the OSH (Central) Rules, 2026 (Ministry of Labour and Employment). Our OSH Code guide covers the Code as a whole.

Central and State rules

Which rules apply depends on the "appropriate Government". For establishments in the central sphere, such as Central Government undertakings, mines, major ports and certain other sectors, the OSH (Central) Rules, 2026 apply. Most private factories, shops and offices fall under their State Government, whose rules under the OSH Code set the forms, fees, registers and some timelines. Check your State's notified rules, and our Labour Code State rules tracker, before relying on a central form or deadline.

Who the contract labour rules apply to

• Establishments in which 50 or more contract workers are employed, or were employed on any day of the preceding 12 months.
• Contractors who employ, or employed on any day of the preceding 12 months, 50 or more contract workers.
• Exclusion: establishments where the work is only of an intermittent or casual nature are excluded.

Below the threshold, the licensing and contract labour Part does not apply, but other obligations do: minimum wages, payment of wages, PF and ESI where the establishment or contractor is covered, and safety duties. The threshold decides paperwork, not whether workers must be paid correctly.

Core activities: where contract labour is not allowed

Section 57 of the OSH Code prohibits contract labour in the core activities of an establishment, meaning the activities for which it is set up. Contract labour may still be used in a core activity if the normal functioning of the establishment is such that the activity is ordinarily done through contractors, if the activity does not require full-time workers for most of the working day or for long periods, or if there is a sudden increase in work that must be done in a specified time. The Code also lists activities treated as non-core, such as sanitation, watch and ward (security), canteen and catering, loading and unloading, courier, civil and maintenance works, gardening, housekeeping and laundry, transport (including ambulance) and intermittent activities, where the establishment is not set up for that activity. Classify every contract as core or non-core and keep the reasoning on file.

Principal employer duties

• Registration: include contract labour details in the establishment's registration under the Code.
• Use licensed contractors: where the contractor needs a licence, engage only licensed contractors; using an unlicensed contractor has serious consequences under the Code.
• Wages: make sure wages are paid on time and in full; pay any shortfall if the contractor defaults (section 55).
• Welfare facilities: ensure the specified facilities, such as drinking water, toilets, first aid, canteens and crèches where applicable, are provided for contract workers.
• Social security: make sure contract workers are enrolled in PF and ESI where applicable and that contributions are paid.
• Records and returns: keep contractor-wise records and file the annual return (Form XVII in the central sphere, by the end of February for the previous calendar year).

Contractor duties

• Obtain a licence where it employs 50 or more contract workers (in the central sphere, applied for electronically in Form XXI on the Shram Suvidha portal), and report each work order to the authority within the prescribed time.
• Pay wages not below the minimum wage, by bank transfer or electronic mode, within the wage-payment time limit, and issue wage slips.
• Give contract workers doing the same or similar work as the principal employer's own workers the same wages and conditions where the rules require.
• Enrol workers in PF and ESI and deposit contributions on time.
• Maintain registers and records, and issue an experience certificate to workers on request (section 56).

How to engage a contractor: step by step

1. Classify the work: confirm it is not a core activity, or that one of the exceptions applies, and record why.
2. Check the contractor: licence (if it will deploy 50 or more), PF and ESI registrations, PAN and GST details, and past compliance.
3. Write compliance into the contract: minimum wages, payment by the due date through bank transfer, PF and ESI enrolment, monthly proof, the principal employer's right to withhold and recover, and indemnity.
4. Update registration and records: add the contractor and the number of workers to the establishment's records.
5. Onboard workers properly: identity, UAN and ESI numbers, safety induction and access to welfare facilities.
6. Verify every month before releasing the bill, using the checklist below, and review the contractor at least once a year.

Contract labour wages and payroll

The contractor runs the payroll for its workers, but the principal employer should treat it as an extension of its own compliance. Under the OSH (Central) Rules, the contractor must pay wages within seven days of the end of the wage period; if it does not, the principal employer must pay the full or unpaid wages within 15 days and can recover the amount from the contractor. State rules may set different timelines, so check the rules that apply to your establishment.

Contract workers are entitled to at least the applicable minimum wage for their State and skill category; see our State minimum wages tracker. Wages, overtime, deductions and payslips follow the Code on Wages, as for any worker; our salary payment rules explain them.

PF and ESI for contract workers

Contract workers are covered by PF and ESI on the same basis as direct employees where the contractor or the establishment is covered. Under the Code on Social Security, the principal employer is liable for PF and ESI contributions of contract workers that the contractor does not pay, and can recover them from the contractor or set them off against its bills. In practice, principal employers should insist that each contractor has its own PF and ESI registrations and should check its challans each month. Use our PF calculator and ESI calculator to check the amounts on the contractor's bill.

Same or similar work

Where contract workers do the same or similar kind of work as the principal employer's own workers, the rules require that they get the same wage rates, holidays, hours of work and other conditions of service, subject to the rules that apply. Disputes over whether the work is similar are decided by the authority named in the rules. This is a frequent source of claims, so compare the contractor's wage rates with your own for similar roles.

Example: monthly check of a security contractor

A factory engages 60 security guards through an agency, so the contract labour provisions apply. Before releasing the October 2026 bill, HR checks:

Because two guards are missing from the ECR, the factory holds back an amount at least equal to their PF contributions until the contractor files a revised return and shares the proof.

Contract labour vs employees and service contracts

• Direct employees are on the principal employer's own payroll; it runs their salary, PF, ESI and TDS.
• Contract labour is on the contractor's payroll, but the principal employer carries backstop liability for wages, welfare and social security.
• Service contracts (a vendor delivers a defined service with its own management, tools and supervision) may fall outside the contract labour regime depending on the facts; arrangements that are really manpower supply are treated as contract labour.
• Gig and platform workers are covered by separate social security provisions in the Code on Social Security.

Records to keep

Keep, for each contractor: the contract and work order, licence copy, monthly attendance and wage registers or extracts, proof of wage payment, PF ECRs and challans, ESI challans, PT and LWF proofs, and correspondence about any shortfall. The principal employer also keeps its own register of contractors and the data needed for the annual return. Our statutory registers guide covers registers under the Labour Codes.

Monthly checklist for principal employers

• ☐ Contractor's licence (where required) is valid and covers the number of workers deployed.
• ☐ Headcount on site matches the contractor's attendance and wage register.
• ☐ Wage register shows at least the applicable minimum wage for each worker's skill category.
• ☐ Wages paid by bank transfer within the time limit; payment proof received.
• ☐ Wage slips issued to contract workers.
• ☐ PF ECR and challan for the month include every deployed worker, with UANs.
• ☐ ESI contributions paid for covered workers, with ESI numbers.
• ☐ Professional tax and LWF deducted and paid where applicable.
• ☐ Overtime approved and paid at no less than twice the ordinary rate.
• ☐ Welfare facilities available on site.
• ☐ Contractor's bill released only after the above are verified.

Holding back part of the contractor's bill until compliance proof is received is common practice and gives the principal employer a source from which to recover any amount it has to pay.

Accounting and tax points

• Contractor's bill: debited to the relevant expense (security, housekeeping, manpower); the principal employer does not run the workers through its own payroll.
• TDS: deduct TDS on payments to contractors at the applicable rate under the Income-tax Act; this is separate from salary TDS.
• Amounts paid on the contractor's behalf: wages or contributions paid directly by the principal employer are recorded as recoverable from the contractor and set off against its bills.
• Annual return: contractor-wise wage, PF, ESI and bonus details feed the annual return; keep them reconciled with the contractor's records.

Common contract labour compliance gaps

• Contract workers deployed in core activities without a valid exception.
• Contractor below minimum wage after an April or October revision.
• Workers on site who do not appear in the contractor's PF and ESI filings.
• Contractor licence expired or covering fewer workers than deployed.
• No proof of wage payment, only the contractor's invoice.
• Contract workers doing the same work as employees on very different terms.

The Codes provide penalties for contraventions, including using contractors without a required licence and failing to pay wages or contributions, and the principal employer remains liable for unpaid wages and dues. These are among the findings in our payroll audit guide; see also payroll penalties.

Frequently asked questions

Is contract labour legal in India?

Yes. Employing workers through a contractor is legal, but it is regulated by the Occupational Safety, Health and Working Conditions Code, 2020, which replaced the Contract Labour (Regulation and Abolition) Act, 1970 from 21 November 2025. Contract labour is prohibited in an establishment's core activities except in limited cases, and contractors employing 50 or more contract workers need a licence.

What is the minimum number of contract labour for the law to apply?

The contract labour provisions of the OSH Code apply to an establishment where 50 or more contract workers are employed, or were employed on any day in the preceding 12 months, and to contractors who employ 50 or more. Under the old Act the threshold was 20. PF, ESI and minimum wage obligations apply regardless of this threshold.

Is there a maximum age limit for contract labour?

The OSH Code does not set a maximum age for contract workers. The usual rules on minimum age apply: children cannot be employed, and adolescents are restricted from hazardous work. Retirement ages are set by the contractor's own terms of employment.

What were Form V, Form VII and rule 76 under the contract labour law?

These belonged to the Contract Labour (Regulation and Abolition) Central Rules, 1971, which applied under the repealed 1970 Act. Form V was the principal employer's certificate supporting a contractor's licence application, and the 1971 rules prescribed registers, employment cards and other forms. Rule 76 required the contractor to issue an employment card to each worker within three days of employment. Since the OSH Code came into force, registration, licensing, registers and returns follow the OSH Code and the Central or State rules made under it.

Who pays contract workers if the contractor does not?

The principal employer. Under section 55 of the OSH Code, if the contractor fails to pay wages within the prescribed time or pays short, the principal employer must pay the wages in full or the unpaid balance, and can recover the amount from the contractor.

Position as of 15 November 2026. Based on the OSH Code, 2020 and the OSH (Central) Rules, 2026 for the central sphere; State rules may differ on forms, fees and timelines. General information, not legal advice.