It is possible to outsource most services to an external vendor or contractor.
Employees hired through a 'contractor' are known as 'contract employees'. The organisation that owns the establishment is known as the 'Principal Employer'.
It is possible to maintain an arms length from vendor employees in terms of claims for employment.
However it is not possible to avoid liabiilty for correct payment of minimum wages and statutory contributions to vendor employees. If the vendor does not comply, the financial liability is assessed to the principal employer, not the vendor.
An establishment that has more than 20 contract employeess, needs to register under the Contract Labour Act.
Any vendor with more than 20 employees at an establishment need to obtain a licence under under the Contract Labour Act.
The principal employer is reponsible for the payment of wages to the contract employees. Any shortfall on this account is the liability of the principal employer.
The principal employer is also responsible for ESI/PF deposits on behalf of vendor employees. These inspections occur once every 3-4 years, and at the time of the inspection, it is the responsibility of the principal employer to prove that the vendor has made these deposits, failing which, the liability will be recovered from the principal employer.
We have seen many cases of inspections where there is no documentation regarding vendor employees, with vendors having lefr/not maintained these documents leading to massive liabilities to the principal employer.
IT IS CRITICAL to audit your vendors given the above. This is a much ignored aspect of compliance although it bears the largest legal and financial risk.