CONTRACTORS REGISTERED WITH THE PF DEPARTMENT, HAVING INDEPENDENT CODE NUMBER ARE TO BE TREATED AS ‘INDEPENDENT EMPLOYER’

[Mr. M. GOVINDARAJAN]

In the present scenario it is inevitable for a business organization to get the work done by contractors.  The Contractor Labor (Regulation and Abolition) Act, 1970 regulates the appointment of contract labor, payment of wages etc., The organization which engages contractors who in turn employed various persons to carry out the work is called the Principal Employer. The wages for that laborers shall be payable by the contractor in the presence of Principal employer or his agent appointed in this behalf.   If the contractor fails to pay the benefits the Principal employer is liable to pay the wages. The PF Act provides for the payment of contribution of PF of employee’s share and employer’s share to the Department for the employees appointed directly by the organization or through the contractors.   If the contractor fails to deposit the PF contributions/administrative charges, then the Principal Employer is liable for the same.   In this article the case laws which held that the contractor who obtains a separate PF code he will be treated as an ‘independent employer’ and he is the person to comply with the provisions of PF Act.   The Principal Employer will not be liable in such a situation, are discussed in detail.

In ‘The Madurai District Central Co-operative Bank Limited V. Employees Provident Fund Organization’ – 2011 (9) TMI 944 - Madras High Court  the Madras High Court held that in case of a separate code number was allotted, the employees of the contractor, by no stretch of imagination can be treated to be employees of the principal employer, but as rightly conceded by the petitioner, the liability of unregistered contractors, would fall on the petitioner, view of clause 30 of the Employees Provident Fund Scheme, 1952.  The Court further held that with respect to the contractors, who are registered with the PF Department, having independent code number, they are to be treated as ‘independent employer’.   The petitioner therefore cannot be treated to be ‘principal employer’ of those contractors.                 

In ‘M/s Brakes India Limited V. The Employees Provident Fund Organization, Vellore’  2015 (7) TMI 786 - MADRAS HIGH COURT (Madras High Court – WP 391/2014 decided on 06.02.2015) the petitioner, in the course of its business, engaged various contractors to carry out non perennial work.  The contractors employed various persons to carry out the work.  The petitioner company is a Principal employer under the Contract Labor (Regulation and Abolition) Act, 1970. 

One, Shri A. Govindaraj, a likened Contractor has been doing certain contract work for the petitioner company, as and when required since 1995. Insofar as the petitioner company is concerned, the contractor would supply labor as was required by them.  The contractor was given certain civil works to be done insider the factory.  The contractor employed 15 to 20 contract workmen inside the petitioner’s factory and the petitioner company never employed the contractor continuously.  The contract with the contractor came to an end in October 2004 and was not renewed thereafter.

The said contractor applied for a separate PF code number under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, and obtained code with retrospective coverage from 25.9.1995.  The contractor had been deducting the employees share from December 2002 onwards and has been remitting it along with employer’s share of contribution to the PF authorities. 

The Department initiated proceedings under Section 7-A of the Act against the contractor.  He was directed to produce all the records pertaining to wage payment relating to workmen from April 1995 to November 2002.  The contractor had given a statement that an amount of ₹ 9,66,333/- was payable by him and he paid the same in two installments.  Thereafter the Department advanced the coverage from 25.9.1995 to 1.6.94 and a show cause notice was issued on 30.08.2004 under Section 14 of the Act for prosecuting the contractor.  The Department granted 15 days time to the contractor to pay the amount.   If he defaulted the petitioner was directed to pay the amount.

On 31.08.2004 the petitioner company received a letter from the Department directing the petitioner company to pay the dues within three days as against the period of 15 days mentioned in the letter dated 30.08.2004.   The petitioner company informed the department that there was no dues payable by the petitioner company to the contractor as per the books of the petitioner The petitioner company was never a party to the proceedings nor was aware of the same. The Department thereafter assessed the amount payable under Section 14B and Section 7Q at ₹ 28,61,326/-.  The petitioner company came to know when the contractor had approached the petitioner for an advance after having suffered an order under Section 7A. The petitioner company received a notice under Section 8Fdated 23.02.2005 calling upon the petitioner to withhold any amount that may be payable to the contractor and pay over the same to the department.

The Department vide  letter dated 25.02.2005 informed the petitioner under Section 8A, that the petitioner would also be liable for payment of the amounts as damages and interest and non payment would amount to ‘default’ and directed the petitioner to pay the amount immediately.  The petitioner company challenged the impugned order. The High Court allowed the petitions and set aside the impugned order. 

The Department issued a show cause notice on 28.10.2011 under Section 14B of the Act calling upon the petitioner to show cause why damages should not be imposed upon the petitioner. This was followed by a notice cum levy order dated 31.10.2011.  The petitioner in their reply, dated 12.06.2012 informed that the proceedings under Section 14B was not maintainable and the Court has already quashed the proceedings and had given liberty to the Department to proceed against the legal heirs of the contractor.  Again on 26.12.2013 the Department issued a levy order against the petitioner.  

The petitioner has challenged the said order in this writ petition.  The Department contended the following:

• As per the definition of Section 2(f) of the Act, any person employed directly or through a contractor falls within the meaning of ‘employee’ and both the Principal Employer and the Contractor are jointly and severally legally responsible for non compliance of the scheme provisions;
• An  employee, even if engaged through or by a contractor explicitly falls under the meaning of ‘employee’ for the purpose of the Act and the employer/contractor ought to have remitted the contributions/administrative charges;
• The allotment of code numbers to the contractors is meant for administrative convenience only for facilitating remittance and accounting of the contributions etc.,;
• In case of any default by the contractor, the principal employer is also liable for action and he cannot absolve himself of his responsibilities under the Act;
• It is the responsibility of the principal employer to pay both the contributions payable by himself in respect of the employees directly employed by him and also in respect of the employees employed by or through a contractor and also administrative charges;
• The proceedings under Section 7(A) is meant for assessment of dues payable in respect of workers.  It is a quasi judicial enquiry and the officer, who is conducting such enquiry, is the sole authority to decide upon to be summoned. The mere fact that the principal employer was no summoned for Section 7A inquiry cannot have the effect of nullifying the statutory responsibilities casted upon the petitioner company;
• The orders passed by the High Court filed by the petitioner company previous are not binding on the department;
• Therefore the petition is liable to be dismissed.

The petitioner submitted the following:

• Since the contractor was allotted a separate PF Code number, the petitioner company is not liable to pay any amount to the Department;
• The High Court has already allowed the writ petitions filed by the petitioner company giving liberty to the department to initiate appropriate recovery proceedings as against the legal heirs of the contractor;
• The department cannot initiate proceedings against the petitioner company;
• The present proceedings which was initiated against the petitioner after a lapse of several years, is liable to be set aside.

The High Court considered the arguments put forth before the Court. The contract was allotted with EPF allotment number in the year 2003 itself. Shri A. Govindaraj should be treated as an independent employer.  In the previous writ petitions filed by the petitioner company the High Court quashed the proceedings initiated against the petitioner which have not been appealed by the Department.  Therefore the orders in the said writ petitions have become final. The Court was of the considered view that the impugned order dated 26.12.2013 of the Department is liable to be set aside and accordingly the same was set aside. 

Discussions to this article

[vasudevan unnikrishnan]

Well discussed .Pl clarify the impact on the left of service tax as Manpower supply on the principal manufacturer. When job work is arranged at his factory and wages are paid on piece rate basis and not w.r.to no.of Manpower deployed..