Can contract labour be regularized as permanent employees in India?

There is no automatic regularization right in the CLRA Act. However, if the Central/State government abolishes contract labour in a specific process under Section 10, workmen may be absorbed by the principal employer. Courts have also ordered regularization where contract labour was used to avoid regular employment maliciously.

What is Form V under the Contract Labour Act?

Form V is the certificate issued by the principal employer to the contractor certifying them as a contractor for the purpose of obtaining a contractor license. Without Form V from the principal employer, a contractor cannot get their license under the CLRA Act.

Labour Law & Compliance

Contract Labour Act Compliance India: Employer Obligations & Penalties

Q: When does the Contract Labour (R&A) Act apply?

The CLRA Act 1970 applies to: (1) establishments employing 20 or more contract labourers on any day in the preceding 12 months, and (2) contractors employing 20 or more workmen on any day in the preceding 12 months. States like Maharashtra have reduced this threshold to 10 workmen.

Q: What is the principal employer's liability under CLRA?

If the contractor fails to provide wages, welfare facilities, or statutory benefits to contract labourers, the principal employer (the company that hired the contractor) becomes directly liable. This is one of the most important compliance risks — companies are liable for their contractors' labour law defaults.

February 26, 2026•9 min read

Contract Labour Act Compliance India: Employer Obligations & Penalties

If your company uses outsourced workers, security guards, housekeeping staff, or third-party contractors, you are subject to the Contract Labour (Regulation & Abolition) Act 1970. As the "principal employer," you are legally liable for your contractors' labour law defaults — including unpaid wages and welfare failures. Non-compliance risks criminal prosecution.

Who Does the CLRA Act Apply To?

The Contract Labour (R&A) Act 1970 applies to:

Establishments: Any factory, mine, plantation, or establishment that employs 20 or more contract labourers on any day in the preceding 12 months
Contractors: Any person who employs 20 or more workmen on any day in the preceding 12 months
State variations: Maharashtra, Tamil Nadu, and several other states have reduced the threshold to 10 workmen
Excluded workers: Workers doing work of perennial nature essential to the principal employer may be entitled to absorption as regular employees

Key Compliance Requirements

Requirement	Who	Form/Registration
Registration of establishment	Principal employer	Form I (Registration Certificate)
Contractor license	Contractor	Form IV (License) + Form V from principal
Display of notices	Principal employer	Wage rates, hours, holidays at site
Canteen (if 100+ workers)	Contractor / Principal	Physical facility required
First aid	Contractor	First aid box at every worksite
Wage payment (on time)	Contractor	Within 7 days of wage period end
EPF + ESI enrollment	Contractor (with PE oversight)	PF Trust or EPFO coverage

Principal Employer's Liability: The Critical Risk

⚠️ You Are Liable for Your Contractor's Defaults

Under Section 21 of the CLRA Act, if the contractor fails to pay wages within the prescribed period or fails to provide statutory welfare, the principal employer becomes directly liable and must make good the default — and can recover the amount from the contractor. This surprises many companies: you cannot hide behind the contractor-employee relationship for wage defaults.

Contractor Agreement Clauses: What to Include

Your contractor service agreement must address CLRA compliance explicitly:

1. CLRA Compliance Warranty

Contractor warrants that they hold a valid CLRA license, will maintain it throughout the contract, and will comply with all requirements under the Act including wage payment, EPF, ESI, and welfare facilities.

2. Wage Payment Proof

Contractor provides monthly wage payment proofs (bank transfer records, Aadhaar-linked payment slips) to the principal employer within 7 days of payment. Without this, the principal employer cannot defend against worker wage claims.

3. EPF/ESI Compliance Certificate

Monthly ECR (Electronic Challan cum Return) copies for PF and ESI challans to be submitted to the principal employer. Principals face joint liability for PF defaults of their contractors' employees.

4. Right of Audit

Principal employer has the right to inspect the contractor's wage registers, attendance records, and statutory compliance files at any time with reasonable notice. This protects against surprise liability.

5. Indemnification Clause

Contractor fully indemnifies the principal employer against all claims, fines, penalties, and costs arising from the contractor's labour law defaults. This shifts recovery litigation to the contractor.

Penalties for Non-Compliance

Section 23: Imprisonment up to 3 months, fine up to ₹1,000, or both — for principal employer defaults
Section 24: Failure to produce registers on demand — fine up to ₹500 per defaulting contractor
Orders from the Labour Commissioner to regularize workers in perennial roles
Worker complaints to Labour Court triggering back-wage and reinstatement claims
EPFO enforcement action for PF defaults by contractor workers

New Labour Codes Impact

The Code on Occupational Safety, Health and Working Conditions 2020 (OSH Code) will subsume the CLRA Act when implemented. Key changes expected: increased threshold (possibly 50 workmen), simplified registration, and expanded definition of "contract labour." Until the OSH Code's state-level implementation, the CLRA 1970 remains in force.

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Frequently Asked Questions

When does the Contract Labour (R&A) Act apply?

It applies to establishments employing 20 or more contract labourers on any day in the preceding 12 months, and to contractors employing 20 or more workmen. Several states have reduced this threshold to 10 workmen.

What is the principal employer's liability under CLRA?

If the contractor fails to provide wages or welfare facilities, the principal employer becomes directly liable and must make good the default. The principal can then recover from the contractor.

What are the penalties for CLRA non-compliance?

Under Section 23 of the CLRA Act, non-compliance is punishable with imprisonment up to 3 months, a fine up to ₹1,000, or both. Repeat offences attract enhanced penalties and labour court orders.