The fear is familiar: engage contract workers long enough, on work that looks like core work, and one day they are held to be your employees with backdated service, benefits and reinstatement rights.
The reassurance most legal notes offer is a 2001 Constitution Bench judgment holding that abolition of contract labour does not produce automatic absorption. That reassurance is still broadly sound — but the statutory machinery it was decided about no longer exists in the same form. The Contract Labour (Regulation and Abolition) Act, 1970 was repealed on 21 November 2025 and its subject matter moved into the Occupational Safety, Health and Working Conditions Code, 2020, which handles core-activity engagement quite differently.
| Governing law | OSH Code, 2020, Chapter XI Part I |
| Applicability threshold | 50 contract labour (was 20) |
| Can states vary it? | A single unified threshold applies |
| Core activities | Generally prohibited, with exceptions (s.57) |
| Automatic absorption on abolition? | No — and the abolition mechanism has changed |
Position stated as at July 2026. Central and state rules under the OSH Code are still being notified.
The case everyone cites
In Steel Authority of India Ltd v National Union Waterfront Workers, (2001) 7 SCC 1, decided on 30 August 2001, a Constitution Bench resolved conflicting lines of authority on what happens when contract labour is prohibited.
The holding, in the Court's own summary of its conclusions: neither Section 10 of the CLRA Act nor any other provision, expressly or by necessary implication, provides for automatic absorption of contract labour on the issue of a notification under Section 10(1) prohibiting employment of contract labour. The principal employer cannot be required to order absorption. In so holding, the Court overruled the contrary view in Air India Statutory Corporation v United Labour Union, (1997) 9 SCC 377.
The Court also settled the meaning of "appropriate Government", holding that an industry carried on "under the authority of" the Central Government requires delegated or statutory authority — mere ownership or deep and pervasive control is not enough.
What survives the repeal, and what does not
So the specific holding — that a Section 10 notification does not produce absorption — is about a provision that no longer operates in that form. What survives, and matters more, is the reasoning: there is no statutory basis for automatic absorption, and the real question in a live dispute is whether the arrangement is genuine or a sham.
The sham point is the one to take seriously. SAIL and the cases following it preserve the ability of an industrial adjudicator to enquire into whether a contract is genuine or a camouflage concealing a direct employment relationship. That inquiry is unaffected by the change of statute, because it does not depend on any particular provision — it depends on the facts of control, supervision and integration.
What the OSH Code now requires
| Section | Obligation |
|---|---|
| s.45 | Applicability — establishments in which 50 or more contract labour are employed, or were employed on any day in the preceding twelve months, and manpower supply contractors employing 50 or more |
| s.47–48 | Licensing of contractors, and the procedure for issue and renewal. A single licence replaces the CLRA's establishment-by-establishment licensing |
| s.49 | No fees, commission or cost to be charged to workers |
| s.50 | Work-order information to be given to the appropriate Government |
| s.53 | Liability of the principal employer for welfare facilities |
| s.54 | Effect of employing contract labour from a non-licensed contractor — the principal employer picks up the contractor's duties |
| s.55 | Responsibility for payment of wages — if the contractor fails to pay, the principal employer must |
| s.56 | Experience certificate for contract labour |
| s.57 | Prohibition of employment of contract labour in core activities, subject to exceptions |
The definition of contract labour was also widened to bring in inter-state migrant workers, working journalists, sales promotion employees and persons employed in an operational capacity.
Core activity: the test that now matters most
Core activity means the activity for which the establishment is set up, including any activity essential or necessary to it. Contract labour is generally prohibited there. But engagement in a core activity remains permissible where:
- the normal functioning of the establishment is such that the activity is ordinarily done through a contractor;
- the activity does not require full-time workers for the major portion of the working hours in a day, or for longer periods; or
- there is a sudden increase in the volume of work in the core activity that must be completed in a specified time.
Support services are treated as outside core activity — sanitation, catering, courier, civil works, gardening, housekeeping, transport and similar.
The practical consequence: the question has shifted. It used to be "has the government notified a prohibition for our operation?" It is now "can we bring this engagement within one of the exceptions, and can we evidence it?" That is a question you have to answer for yourself, in advance, and document.
The sham test: what actually creates exposure
Absorption claims that succeed generally succeed because the arrangement was not a genuine contract for services. The indicators:
| Points towards a genuine contract | Points towards direct employment |
|---|---|
| Contractor selects, deploys and replaces its own people | You interview and choose individuals by name |
| Contractor supervises day-to-day work | Your managers assign daily tasks and appraise them |
| Contractor pays wages and bears the employment risk | You effectively set individual pay and approve increments |
| Output or service-defined scope, with a commercial deliverable | Headcount-based billing with no defined deliverable |
| Contractor holds a valid licence | Unlicensed contractor — under s.54 you inherit the duties |
| People rotate; the engagement has a business rhythm | The same individuals for eight years, sitting in your seats, on your systems, with your email addresses |
| Contractor has other clients | Contractor exists solely to supply you |
Read the right-hand column as a description of what an adjudicator will be shown. Duration alone does not create employment, but duration combined with your supervision, your selection and your appraisal is the fact pattern that does.
Practical steps
- Count your contract labour against the 50 threshold, on the basis of any day in the preceding twelve months — not a point-in-time headcount.
- Verify contractor licences and diarise renewals. Section 54 makes the consequence of getting this wrong your problem, not the contractor's.
- Map every contract engagement against core activity and, where it is core, record which exception applies and why.
- Fix the supervision chain. If your managers are directing named individuals daily, you have a sham risk regardless of what the agreement says.
- Audit the agreements against the practice. A well-drafted contract for services describing an arrangement nobody follows is evidence against you.
- Consider fixed-term employment instead. The Industrial Relations Code now recognises it with benefit parity and pro-rata gratuity, and no retrenchment compensation on natural expiry. For genuinely time-bound work it is often cleaner and cheaper in risk terms than a contractor arrangement that will not survive scrutiny.
- Track wage payment. Under s.55 you are on the hook if the contractor does not pay.
Why the headcount question is harder than it looks
The 50 threshold turns on any day in the preceding twelve months, across contractors, at establishment level — which means it is a question about historical daily records, not about today's number. Helion holds contractor-supplied worker records alongside direct employment data on the same schema, so the threshold test and the wage-payment liability under s.55 can be answered from the actual daily record rather than reconstructed from contractor invoices.
Frequently asked questions
Can contract workers become permanent employees in India?
Not automatically. In Steel Authority of India Ltd v National Union Waterfront Workers (2001) 7 SCC 1 a Constitution Bench held that prohibition of contract labour does not produce automatic absorption and that the principal employer cannot be required to absorb. But where the contract is a sham concealing a direct employment relationship, an industrial adjudicator can so find, and that inquiry is unaffected by the change of statute.
Is the Contract Labour (Regulation and Abolition) Act, 1970 still in force?
No. It was repealed on 21 November 2025 and its subject matter is now in Chapter XI Part I of the Occupational Safety, Health and Working Conditions Code, 2020, at sections 45 to 58.
What is the threshold for contract labour compliance?
Fifty or more contract labour employed, or employed on any day in the preceding twelve months, under Section 45 — raised from twenty under the CLRA. The Code applies a single unified threshold rather than allowing state-by-state variation.
Can we engage contract labour in core activities?
Generally no under Section 57, but with exceptions: where the normal functioning of the establishment is such that the activity is ordinarily done through a contractor; where the activity does not require full-time workers for the major portion of the working hours; or where there is a sudden increase in the volume of core-activity work to be completed in a specified time. Support services such as housekeeping, catering, security-adjacent services, gardening and transport are treated as outside core activity.
What happens if our contractor is unlicensed?
Under Section 54, engaging contract labour through a non-licensed contractor shifts the contractor's duties onto the principal employer. Licence verification is therefore a principal-employer risk control, not a procurement formality.
Who pays if the contractor does not pay wages?
Section 55 places responsibility for payment of wages such that where the contractor fails to pay, the principal employer must. Recovery from the contractor is then a commercial matter between you.
Does long service by a contract worker create employment?
Duration alone does not, but it is rarely the only fact. Where long duration is combined with your selection of named individuals, your day-to-day supervision, your appraisal and headcount-based billing with no defined deliverable, the arrangement starts to look like direct employment however the agreement is drafted.
Is fixed-term employment a better alternative?
For genuinely time-bound or project work, often yes. The Industrial Relations Code, 2020 recognises fixed-term employment with parity of wages, allowances and benefits, pro-rata gratuity, and no retrenchment compensation when the term expires naturally. It removes the sham-contract risk entirely, because the person is your employee.