PRINCIPAL EMPLOYER vs CONTRACTOR vs CONTRACT LABOUR
15 Key Differences under the New Labour Codes
Effective from 21 Nov 2025 | Key provisions from OSH Code 2020, Code on Wages 2019 & Social Security Code 2020
| Aspect / Section | Principal Employer | Contractor | Contract Labour |
| 1 Legal identity | OSH ss.2(1)(m),(n),(u) | Establishment-side person with ultimate control; gets work done through contractor. | Undertakes work or supplies manpower through contract labour; includes subcontractor. | Worker hired by or through contractor for work connected with the establishment. |
| 2 Who is contract labour? | OSH s.2(1)(m) | Direct employees of PE are not contract labour. | Not every employee of contractor is contract labour. | Permanent regular employees of contractor’s own establishment are excluded, except part-time employee. |
| 3 Threshold | OSH s.45 | Part I applies if 50+ contract labour were employed on any day in preceding 12 months. | Manpower-supply contractor also covered at 50+ contract labour threshold. | Coverage depends on worker count; intermittent test: over 120 days, or seasonal over 60 days. |
| 4 Registration / Licence | OSH ss.3,47,48,119 | Registers establishment electronically, where applicable. | Must obtain contractor/common licence; usually valid for 5 years, subject to conditions. | No personal registration or licence required. |
| 5 Lawful engagement | OSH ss.50,54 | Must ensure contractor holds valid licence; engagement through unlicensed contractor is a contravention. | Must report work order / engagement to authority; failure may affect licence. | Not responsible for licence or reporting failures. |
| 6 Recruitment & documents | OSH ss.6(1)(f),49,56 | Should ensure worker has appointment documentation and no prohibited recruitment charges are collected. | Cannot charge fee/commission; issues appointment letter; gives experience certificate on demand. | Entitled to appointment letter, no recruitment commission, and experience certificate. |
| 7 Core activity deployment | OSH ss.2(1)(p),57 | Generally cannot engage contract labour in core activity except statutory exceptions. | Cannot supply workers for prohibited core activities. | Can work in core activity only where section 57 exception applies. |
| 8 Welfare & safety | OSH ss.6,23,24,53 | Has express non-transferable duty to provide welfare facilities and safe workplace. | Must cooperate with safety systems and licence conditions; provide training/PPE where applicable. | Beneficiary of welfare, health and safety facilities at workplace. |
| 9 Wages default | OSH s.55 | If contractor defaults or short-pays, PE must pay full wage/unpaid balance and may recover from contractor. | Primary wage-paying employer; normally pays electronically and informs PE. | Entitled to full wages despite contractor default. |
| 10 Minimum wages & OT | COW ss.5,14,16,17,43 | Must monitor compliance; establishment-side liability can arise where statutory dues remain unpaid. | Must pay minimum wages, fix wage period up to 1 month, pay OT at double rate, and follow timelines. | Has right to minimum wages, timely wages, OT, and final wages within 2 working days in specified cases. |
| 11 Records & wage slips | OSH s.33 / SSC s.31(7) | Maintains establishment-level records, returns, contractor details, wages and defaults. | Maintains attendance, wages, deductions, OT and social-security contribution records. | Must be shown in muster/wage/social-security records and receive wage slip. |
| 12 Provident Fund | SSC s.17 | If PE pays PF/EPS/insurance dues for contractor workers, amount can be recovered from contractor. | Bears employer-side contribution and charges; can deduct only employee’s lawful contribution. | Gets PF/EPS/insurance coverage subject to scheme conditions. |
| 13 ESI | SSC ss.28,31,32 | Must initially pay contributions for employees engaged directly or through contractor; may recover contractor-related amount. | Reimburses/reconciles; keeps worker register; cannot recover employer share from worker. | Eligible insured person gets sickness, maternity, disablement, dependant and medical benefits. |
| 14 Gratuity | SSC ss.53,56 | Usually not the gratuity-paying employer in a genuine contract labour arrangement, but should monitor compliance. | Contractor is the employer liable to pay gratuity to contract labour, subject to legal conditions. | Claims gratuity from contractor, not automatically from principal employer. |
| 15 Employment injury compensation | SSC s.85 | Can be liable as if worker were directly employed where work is ordinarily part of PE’s trade/business; may seek indemnity. | May have to indemnify PE and remains answerable to worker. | May recover compensation from PE or contractor, subject to section 85 limits. |
| QUICK NOTES. Core activity generally excludes support functions like sanitation, security, canteen, housekeeping, transport and similar ancillary work. Inter-State migrant contract labour: extra compliance applies where 10 or more such workers are employed (OSH ss.59–61). Outsourcing does not eliminate statutory liability of the principal employer. |
Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked as a reporter, a podcaster and an editor for publications across India.