The Contractor Liability Trap Under the New OSH Code

Most companies believe a contractor agreement moves the legal risk away from their business. Under the new Occupational Safety, Health and Working Conditions Code, that belief is wrong, and it can cost lakhs.

By Sandeep Kumar, Co Founder and Labour Law Consultant, Praans Consultech | Reviewed against the OSH Code bare act

A factory owner hires a contractor to run the packing line. A hospital hires a contractor to staff its housekeeping team. An IT firm hires a contractor to supply drivers and office support staff. In every one of these cases, the company believes it has handed off the legal responsibility for those workers along with the work. Under the new OSH Code, that assumption can turn into a very expensive mistake.

The Occupational Safety, Health and Working Conditions Code, 2020 rewrites the rules for how companies use contract labour. It does not stop companies from hiring through contractors. It changes who carries the legal weight when something goes wrong. In most situations, that weight now sits with the principal employer, the company actually using the workers, not only the contractor who signed them up.

This is the contractor liability trap. Very few businesses in India have mapped out how deep it runs. Here are the four places where companies fall into it, and what to do instead.

Trap One: Using Contract Labour For Core Activity

Section 57 of the OSH Code stops a company from using contract labour for its core activity. Core activity means the main work the establishment exists to do, along with anything essential to that work. A garment unit sewing clothes, a call centre answering customer calls, a hospital treating patients, packing lines in a factory, these all count as core activity.

The law allows contract labour in core activity only in three situations. The work is normally carried out through a contractor across that industry. The work does not need full time workers for most of the working day. There is a sudden spike in workload that needs extra hands for a short period.

If a company uses contract labour in core activity outside these three situations, the contract workers can be treated as direct employees of the company. That single finding opens the door to years of back wages, provident fund dues, gratuity, and social security contributions.

Trap Two: Hiring From An Unlicensed Contractor

Any contractor supplying 50 or more workers, or any establishment engaging 50 or more contract workers on any day in the past 12 months, must hold a valid licence. Many companies never ask to see this licence. They assume their vendor has already sorted out the paperwork.

Under Section 54 of the OSH Code, if a company takes labour from an unlicensed contractor, knowingly or not, the company shares the liability for that arrangement. A missing licence is not a small paperwork gap. It can turn an ordinary wage dispute into a direct claim against the company that hired the contractor in the first place.

Trap Three: The Contractor Does Not Pay Wages On Time

Section 55 makes the principal employer responsible for wages if the contractor fails to pay them. A company cannot tell an inspector or a worker that payment was the contractor's job alone. The Code also expects wages to move through bank transfer or another electronic mode, with the contractor informing the principal employer once payment is made.

When that payment trail breaks, the company is expected to step in and clear the dues to the workers directly. Businesses that never asked for wage payment proof from their contractors are the ones most exposed here.

Trap Four: Welfare Facilities Left To The Contractor

Section 53 places the duty of arranging welfare facilities, canteens, clean drinking water, restrooms, and safety equipment, on the principal employer, not the contractor. A company cannot claim it outsourced worker welfare together with the work order.

If an inspection finds these facilities missing for contract workers, the fine and the reputational damage land on the company running the establishment, regardless of what the contractor was supposed to arrange.

What This Actually Costs A Business

Violating contractor related provisions under the OSH Code can attract a penalty starting at Rs 2 lakh and going up to Rs 3 lakh for each contravention. That fine is the smaller part of the bill. The larger cost shows up after a misclassification finding: retrospective provident fund and ESI contributions, gratuity liability, legal fees, and the operational disruption of an inspection or a tribunal proceeding. For a mid sized manufacturing unit running several contractor teams, one wrong classification can grow into a liability worth crores over time.

A Scenario Worth Thinking About

Picture a factory that outsources its final packing stage to a contractor to save on payroll cost. Packing sits inside the factory's core activity. Unless this arrangement fits one of the three legal exceptions under Section 57, the setup sits inside the trap from the very first day of the contract. If a worker later raises a claim, or an inspector reviews the arrangement, the factory faces the consequence, not only the contractor who supplied the workers.

Four Traps At A Glance

TRAP 1

Core Activity Misuse

Contract labour used in core work without meeting any of the three legal exceptions under Section 57.

TRAP 2

Unlicensed Contractor

Engaging a contractor above the 50 worker threshold without a valid licence under Section 54.

TRAP 3

Wage Default

No system to confirm the contractor actually paid wages, leaving the company exposed under Section 55.

TRAP 4

Welfare Gaps

Canteens, safety gear, and restrooms not extended to contract workers under Section 53.

How To Protect Your Business

Companies do not need to stop using contract labour. They need to structure it correctly, on paper and in practice.

Review every activity given to a contractor and record whether it is core or non core, with reasons noted in writing.
Verify the contractor licence before signing any agreement, and track renewal dates so no gap goes unnoticed.
Build wage payment proof into the vendor contract so bank transfer confirmation reaches your team every month.
Add an indemnity clause that lets your company recover fines or back payments from the contractor when the fault is theirs.
Run a welfare facility check for contract workers on the same schedule as your own employees, not as an afterthought.
Get existing contractor agreements reviewed by a labour law expert before the next inspection cycle, not after a notice arrives.

Is Your Contractor Arrangement Actually Compliant?

Praans Consultech reviews contractor agreements, classifies core and non core activity correctly, and builds a compliance structure that holds up during inspections. Talk to our team for a free initial review of your contractor compliance under the OSH Code.

Book A Free Compliance Review

Frequently Asked Questions

Can a company still use contract labour under the new OSH Code?

Yes. The Code does not ban contract labour. It restricts the use of contract labour for core activity unless one of the three legal exceptions applies, and it places safety, welfare, and wage responsibility on the principal employer.

What counts as core activity under the OSH Code?

Core activity is the main work for which the establishment is set up, along with anything essential to that work. Every company must assess its own operations, since the Code does not list activities industry by industry.

What happens if a company hires labour from an unlicensed contractor?

The company hiring the contractor becomes jointly responsible. This can affect wage claims, safety obligations, and the outcome of any labour inspection.

Who pays the workers if the contractor defaults on wages?

The principal employer must step in and pay the unpaid wages directly to the contract workers under Section 55 of the OSH Code.

What is the penalty for violating contractor provisions under the OSH Code?

The penalty ranges from Rs 2 lakh to Rs 3 lakh per contravention, in addition to the cost of back wages, provident fund, ESI, and gratuity if workers are declared direct employees of the principal employer.

Does this contractor liability apply to small companies too?

The contract labour provisions apply once an establishment or contractor crosses 50 contract workers in the preceding 12 months. Companies below this number should still track it closely, since crossing the threshold brings immediate compliance duties.

How can a company reduce this risk?

By classifying every outsourced activity correctly, verifying contractor licences, tracking wage payment proof every month, adding indemnity clauses, and getting contracts reviewed periodically by a labour law expert.

SK

Sandeep Kumar

B.Sc., LLB, LLM, PGCHRM (XLRI), Pursuing PhD | Co Founder and Labour Law Consultant, Praans Consultech

Sandeep has advised businesses across India on labour law compliance for over 16 years, working on registrations, audits, litigation support, and advisory across the new Labour Codes.

Disclaimer

This article is prepared for general awareness and reads as a plain language summary of the Occupational Safety, Health and Working Conditions Code, 2020 and related rules. It is not legal advice and should not be treated as a substitute for a formal opinion from a qualified labour law professional. Laws, rules, and their state wise notifications keep changing, and the applicability of any provision depends on the specific facts of a business.

Praans Consultech has prepared this content in good faith based on the bare act and publicly available government notifications at the time of writing, and recommends verifying the current position against the original gazette text or a qualified consultant before relying on it for any business decision, contract, or compliance action.

Praans Consultech and the author accept no liability for any loss or consequence arising from actions taken solely on the basis of this article.

The Occupational Safety, Health and Working Conditions Code, 2020, Chapter XI, Part I, Sections 45 to 58, bare act as published on indiacode.nic.in
Press Information Bureau, Ministry of Labour and Employment, notification summaries on the OSH Code, November 2025
Ministry of Labour and Employment, notified rules and clarifications on contract labour and principal employer duties, 2026

Praans Consultech | Labour Law Compliance, Registrations, Advisory and Audits | www.praansconsultech.com

The Contractor Liability Trap Under the New OSH Code

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