Ex-Contract Workers Must Get Preference When Principal Employer Replaces Contract Labourers With Regular Workmen : Supreme Court

The Supreme Court held that when an employer intends to employ regular workers in place of contract labour, then the employer must give first preference to the erstwhile contract workers.

A bench of Justices Pankaj Mithal and SVN Bhatti outlined the modes and methods of re-employment if discontinuation of the labour contract is valid:

"a. If the principal employer intends to employ regular workmen for the work previously done by contract labour, they must give preference to the erstwhile contract labourers.

b. The principal employer cannot simply hire fresh candidates from the open market while ignoring the displaced contract workers. They are legally bound to consider the contract workers who were working in that establishment.

c. To ensure this "preference" is meaningful, the principal employer may relax maximum age limit and academic qualifications; specifically, nontechnical posts to accommodate experienced workers."

When Contract Is Sham, Camouflaged Then Right To Automatic Absorption In Employment Arises

The Court clarified that when “it is proved that the contract was a mere ruse or camouflage to hide the real employer-employee relationship and that the principal employer retained full control and supervision over the workers the contract is disregarded as a legal fiction”, then “in such cases, workmen “will have to be treated as employees of the principal employer who shall be directed to regularise the services of the contract labour”.

“here the workers become direct employees of the company. They are entitled to back wages and benefits as if they were regular employees from the start (or a date determined by the Tribunal).”, the court added.

Background

The appeal was filed by the management/employer against the interim relief granted by the industrial court under Section 33(1) of the Industrial Disputes Act to extend the regular employee-like benefit to the contract workers. The Appellant argued that no interim relief can be granted when the relationship between the Appellant and the Contractual Workers as of master and servant was not established.

Aggrieved by the High Court's decision to affirm the Industrial Court's interim relief in Respondents' favour, the management moved to the Supreme Court.

Setting aside the impugned order, the judgment authored by Justice Bhatti said that Section 33(1) of the ID Act protection becomes available only when the person seeking relief is admitted or established to be a workman of the employer concerned. In situations where the very existence of the employer-employee relationship is contested, invoking Section 33(1) at the interim stage is legally impermissible. Doing so would confer final relief without adjudication.

The Court noted that discharged workmen are not covered under the definition of 'workmen' as per the Contract Labour Regulation and Abolition Act. 

Applying these principles, the Court set aside the interim orders passed by the Industrial Court and the High Court. However, it granted liberty to the workers to approach the Industrial Court again for interim relief strictly in accordance with the framework laid down in the constitution bench judgment of Steel Authority of India Limited and others v. National Union Waterfront Workers and Others, (2001) 7 SCC 1, which gave an option to the contract worker to question the contract as a sham and nominal, and pray for appropriate reliefs such as seeking preference in employment if the management decides to recruit regular employees for the same work.

Accordingly, the appeal was allowed.

Headnote

Industrial Disputes Act, 1947 – Section 33(1) – Contract Labour (Regulation and Abolition) Act, 1970 – Interim Relief – Status of Workman – The Supreme Court set aside the orders of the Industrial Court and the High Court which had directed the Management to provide work and pay wages to contract labourers during the pendency of a dispute - held that the restrictions under Section 33 of the ID Act against changing service conditions are attracted only if the relationship of "workman" and "management" is established - Where workers are engaged through a registered contractor, their status as direct employees of the management is a matter of adjudication - Granting interim relief that directs continuation or regularization at the preliminary stage amounts to a "virtual pre judgment" of the main dispute.

Industrial Disputes Act, 1947 vs. CLRA Act, 1970 – Comparative Scope of "Workman" – Supreme Court observed that while the definition of "workman" in Section 2(1)(i) of the CLRA is textually derived from Section 2(s) of the ID Act, they differ in juridical scope - The ID Act requires a direct master-servant relationship (privity of contract), whereas the CLRA recognizes a tripartite relationship where the workman is hired through a contractor - Unlike the ID Act, the CLRA specifically excludes "out-workers" and does not extend the definition to include terminated employees for the purpose of locus standi in disputes.

Contract Labour – Sham Contracts and Regularization – If a contract is proved to be a "camouflage" or "sham" to hide a real employer-employee relationship where the principal employer retains full control, the workers must be treated as direct employees and regularized - determining whether a contract is "sham" or "genuine" involves disputed questions of fact that must be adjudicated by the Industrial Tribunal/Court, not by Writ Courts under Article 226 – Appeal allowed. [Relied on Steel Authority of India Ltd. and others v. National Union Waterfront Workers and others (2001) 7 SCC 1; Paras 8-11]

Cause Title: M/S PREMIUM TRANSMISSION PRIVATE LIMITED VERSUS KISHAN SUBHASH RATHOD AND OTHERS

Citation : 2026 LiveLaw (SC) 87

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