If you engage contract labour in India, this is the judgment your lawyers rely on when they tell you the workers will not automatically become your employees. It is a Constitution Bench decision, it is emphatic, and it settled a question that had been going the other way.
It is also, as of 21 November 2025, a judgment about a statutory mechanism that no longer exists in the same form. That does not make it irrelevant — but it changes what you should be relying on it for.
| Citation | (2001) 7 SCC 1 |
| Bench | Constitution Bench (5 judges) |
| Decided | 30 August 2001 |
| Overruled | Air India Statutory Corporation v United Labour Union, (1997) 9 SCC 377 |
| Statute construed | CLRA Act, 1970 — repealed 21 Nov 2025 |
Position stated as at July 2026.
The question
Section 10 of the Contract Labour (Regulation and Abolition) Act, 1970 allowed the appropriate Government to prohibit, by notification, the employment of contract labour in a specified process, operation or work. The Act said nothing about what happened to the workers afterwards.
In Air India Statutory Corporation v United Labour Union (1997), the Supreme Court had filled that silence by holding that on a s.10 notification, the contract labour stood absorbed by the principal employer. That decision drove a wave of absorption claims.
What the Constitution Bench held
Neither s.10 nor any other provision of the CLRA Act, expressly or by necessary implication, provides for automatic absorption of contract labour on the issue of a notification under s.10(1). The principal employer cannot be required to order absorption of the contract labour working in the establishment concerned. Air India Statutory Corporation was overruled on that point.
Two further holdings from the same judgment are worth knowing:
- "Appropriate Government." An industry is carried on "under the authority of" the Central Government only where it is carried on by or under authority conferred by the Central Government — delegated or statutory authority. Mere ownership, or deep and pervasive State control, is not enough.
- Sham contracts survive scrutiny. Where the contract between the principal employer and the contractor is a camouflage — not genuine but a device concealing what is in truth direct employment — an industrial adjudicator can enquire into it and find the workers to be employees of the principal employer. This is preserved, not foreclosed.
So the precise holding — that a s.10 notification does not produce absorption — is now about a provision that no longer operates. What survives is the reasoning: absorption requires a statutory basis, and there is none. That reasoning is if anything stronger under the Code, which contains no absorption provision either.
What you should actually rely on it for
| Proposition | Still good? |
|---|---|
| There is no statutory basis for automatic absorption of contract labour | Yes — and the Code does not supply one |
| A prohibition notification under CLRA s.10 does not absorb workers | Correct, but the provision is repealed |
| A sham or camouflage contract can be enquired into and set aside | Yes — this never depended on the statute |
| "Under the authority of" the Central Government requires delegated authority | Reasoning likely survives; the Code's own definitions should be checked |
| Contract labour engagement in core activities is a matter of government notification | No — now a general statutory prohibition with exceptions |
The practical reading for employers
The reassurance SAIL offers is narrower than it is usually presented. It protects you against a claim that says the government prohibited contract labour here, therefore these workers are ours. It does not protect you against a claim that says look at how this arrangement actually operated.
And it is the second claim that succeeds. Where the principal employer selects named individuals, supervises them daily, appraises them, and pays on a headcount basis with no defined deliverable, the arrangement invites the sham finding that SAIL expressly preserved. No amount of careful drafting survives a factual picture of direct control.
The current obligations, the 50-worker threshold and the core-activity exceptions are in can contract workers claim to be your permanent employees? — and on whether older judgments survive the Codes generally, see do old labour law judgments still apply?
Frequently asked questions
What did SAIL v National Union Waterfront Workers hold?
A Constitution Bench held on 30 August 2001 that neither Section 10 of the Contract Labour (Regulation and Abolition) Act, 1970 nor any other provision provides for automatic absorption of contract labour on a notification prohibiting its employment, and that the principal employer cannot be required to order absorption. It overruled Air India Statutory Corporation v United Labour Union (1997) 9 SCC 377 on that point.
Does the judgment still apply after the CLRA Act was repealed?
The specific holding concerns Section 10 of a statute repealed on 21 November 2025, and the Occupational Safety, Health and Working Conditions Code, 2020 does not carry forward prohibition-by-notification — it imposes a general statutory prohibition on core-activity engagement with defined exceptions. The reasoning survives and is arguably stronger: absorption requires a statutory basis and the Code supplies none.
Can a sham contract still be challenged?
Yes. The judgment expressly preserved the ability of an industrial adjudicator to enquire into whether a contract is genuine or a camouflage concealing direct employment. That inquiry never depended on any particular statutory provision, so it is unaffected by the repeal.
What did the case decide about 'appropriate Government'?
That an industry is carried on under the authority of the Central Government only where it is carried on by or under authority conferred by the Central Government — delegated or statutory authority. Mere ownership, or deep and pervasive State control, is not sufficient.
What does the judgment not protect an employer against?
It protects against a claim that a government prohibition notification converted contract workers into employees. It does not protect against a claim based on how the arrangement actually operated. Where the principal employer selects named individuals, supervises them daily, appraises them and pays on a headcount basis with no defined deliverable, the sham finding the judgment preserved becomes available.