Contract Labour: When It Can and Cannot Be Engaged

If you run a manpower or staffing agency in India, "abolition" is the single word that decides whether a placement is a signed contract or an illegal deployment. The old Contract Labour (Regulation and Abolition) Act, 1970 has been subsumed into the Occupational Safety, Health and Working Conditions Code, 2020, and contract labour is now governed by Chapter XI of that Code. The labour codes came into force on 21 November 2025 and the Central Rules were notified on 8 May 2026. This page explains, from the statutory text, when contract labour can be engaged, when it cannot, and what your agency must actually do to stay on the right side of the line. It is written for staffing-firm owners, is general information and not legal advice, and is pending named legal review.

What "abolition" means under the OSH Code 2020

Under the OSH Code 2020, the prohibition of contract labour operates mainly through Section 57. Section 57(1) states plainly that employment of contract labour in the core activities of any establishment is prohibited. That is the modern face of what the earlier law called abolition: in a core activity, contract labour is off the table by default.

Who decides what counts as a core activity is Section 57(2). The appropriate government may appoint a designated authority to advise whether an activity of an establishment is a core activity or not. If a question arises, the aggrieved party can apply to the appropriate government, which may refer the question suo motu or to the designated authority, and then decides. So when the appropriate government prohibits contract labour in a particular process, it is exercising this power: once an activity is settled as core, Section 57(1) bars contract labour in it.

Abolition is therefore not a blanket ban on contract labour. It is a targeted prohibition, activity by activity and process by process, sitting on top of the general licensing regime.

When contract labour CAN be engaged

Contract labour can be engaged for the non-core work of an establishment, provided the contractor holds a valid licence (Section 47) and the deployment complies with Chapter XI.

Even in a core activity, Section 57 leaves three narrow doors open. The principal employer may engage contract labour in a core activity if: (a) the normal functioning of the establishment is such that the activity is ordinarily done through a contractor; or (b) the activities are such that they do not require full-time workers for the major portion of the working hours in a day or for longer periods; or (c) there is any sudden increase in the volume of work in the core activity which needs to be accomplished in a specified time.

These are exceptions, not a general permission. If none of them applies, contract labour in that core activity remains prohibited.

When contract labour CANNOT be engaged

There are four clear situations where you cannot lawfully engage contract labour.

1. In a core activity, unless one of the three Section 57 provisos applies. Once the appropriate government has settled that an activity or process is core, contract labour in it is prohibited.

2. Through an unlicensed contractor. Section 54 provides that where a principal employer employs contract labour through a contractor who is required to obtain a licence but has not obtained one, such employment is deemed to be in contravention of the Code. The exposure lands on the principal employer as well as the contractor.

3. Where the contractor charges the worker. Section 49 prohibits a contractor from charging, directly or indirectly, in whole or in part, any fee or commission from the contract labour. A deployment built on a worker-paid fee is non-compliant on its face.

4. In a process the appropriate government has prohibited. If, through the Section 57(2) route, the activity is determined to be core (or otherwise prohibited), no contractor may supply and no principal employer may engage contract labour in it, regardless of how the arrangement is dressed up.

Who the rules apply to: the 50-worker trigger

Chapter XI Part I applies to (i) every establishment in which fifty or more contract labour are employed or were employed on any day of the preceding twelve months through contract, and (ii) every manpower supply contractor who has employed fifty or more contract labour on any day of the preceding twelve months (Section 45(1)). The look-back is any single day in the last twelve months, not an average.

Part I does not apply to an establishment where only work of an intermittent or casual nature is performed (Section 45(2)). The Code fixes what is not intermittent: work is not of an intermittent nature if it was performed for more than one hundred and twenty days in the preceding twelve months, or if it is of a seasonal character and is performed for more than sixty days in a year.

Treat the 50-worker figure as the statutory Chapter XI trigger, but note that principal-employer registration and contractor-licence thresholds are set by the Code and the rules and vary from state to state. Verify the exact number against your state's notified rule before you rely on it.

The licence a contractor must hold

Section 47 is the core licensing rule: no contractor to whom this Part applies shall supply or engage contract labour in any establishment, or undertake or execute work through contract labour, except under and in accordance with a licence. The licence specifies the number of contract labour that can be supplied or engaged and the security deposit to be paid.

If a contractor does not meet the prescribed qualifications or criteria, Section 47(2) allows a work-specific licence, issued electronically, tied only to the concerned work order.

A licence issued for the purposes of Section 47(1) is valid for five years for the number of contract labour specified (Section 48(3)); to increase that number, the contractor applies for an amendment and deposits additional security. The legacy forms carried into the rules are Form I (principal employer registration), Form IV (contractor licence application), Form V (certificate by the principal employer) and Form VI (the licence itself), and a contractor needs a separate licence for each principal employer. Confirm the exact form numbers against your state's notified rules before citing them.

What a manpower agency must actually do

Beyond holding the licence, Chapter XI puts specific duties on the contractor:

Wages: The contractor is responsible for paying wages to each contract labour, and payment must be made by bank transfer or electronic mode, with the principal employer informed electronically of the amount paid (Section 55(1) and (2)). If the contractor fails to pay or short-pays, the principal employer must pay the full or unpaid balance to the workers and recover it from the contractor, including by deduction or from the licence security deposit (Section 55(3) and (4)).

No worker fees: You cannot charge the worker any fee or commission (Section 49).

Experience certificate: On demand, you must issue an experience certificate to the contract labour giving details of the work performed (Section 56).

Welfare: Welfare facilities under Sections 23 and 24 are the responsibility of the principal employer of the establishment (Section 53), so your client, not you, carries that duty for the workers deployed there.

Inter-state migrant workers: If you deploy ten or more inter-state migrant workers, Part II applies (Section 59), including the duty to extend the same benefits available to a worker of that establishment (Section 60) and payment of a lump-sum to-and-fro journey allowance each year (Section 61).

Security agencies: If you supply security guards, you also need a licence under the Private Security Agencies (Regulation) Act, 2005 from the State Controlling Authority, with a separate licence per state and guards meeting training and verification requirements. Fees and validity vary by state.

The cost stack behind your bill rate

A compliant bill rate has to carry the statutory on-costs, so build them in before you quote.

EPF: employee 12% of wages and employer 12% (of which 8.33% goes to EPS subject to the pension wage ceiling, the balance to EPF), plus the employer administrative and EDLI charges. Each member has a portable Universal Account Number (UAN), and you file the monthly Electronic Challan cum Return (ECR) and deposit contributions.

ESI: employee 0.75% and employer 3.25%, with a wage ceiling of Rs 21,000 per month (Rs 25,000 for a person with disability), administered by ESIC.

Bonus: under the Code on Wages, minimum 8.33% and maximum 20% of wages. Gratuity: 15 days wages for every completed year of service using the 15/26 factor after five years of continuous service, with fixed-term employees getting pro-rata gratuity without the five-year condition.

Paid leave: under the OSH Code a worker earns one day of leave with wages for every twenty days of work, which is a real cost element to price in.

GST: manpower supply and staffing services are taxed at 18% under SAC 9985, charged on the full taxable value billed, not just your margin. A compliant tax invoice carries both GSTINs, the invoice number and date, the SAC and billing period, and the CGST plus SGST (intra-state) or IGST (inter-state) split. Security services are also 18%, but where the supplier is a non-body-corporate and the recipient is a registered person, GST is payable by the recipient under the Reverse Charge Mechanism (Notification 13/2017-Central Tax (Rate) as amended by 29/2018, effective 1 January 2019). General manpower supply is not under RCM by default. Input tax credit is available subject to Section 16 conditions.

TDS: payments to a contractor for supply of labour attract TDS under Section 194C of the Income-tax Act, at 1% if the payee is an individual or HUF and 2% otherwise, subject to thresholds. The recipient reconciles input tax credit via GSTR-2B and TDS via Form 26AS.

Minimum and floor wages: wages paid must be not less than the minimum rate fixed by the appropriate government (Code on Wages Section 5), and a state's minimum wage must not fall below the Central floor wage (Section 9). You fix the wage period, not exceeding one month (Section 16), and pay within the time limits in Section 17, including within two weeks on removal, dismissal, retrenchment, resignation or closure.

Also hold the standard registrations a staffing agency typically needs: Professional Tax registration where the state levies it, Shops and Establishment registration for your own office, and GST registration once turnover crosses the threshold. Confirm slabs, thresholds and forms against each state's rule.

Sources, last verified and disclaimer

Last verified: 20 September 2026.

This page is general information for staffing and manpower firm owners and is not legal advice. Rates, thresholds, fees and form numbers referred to here must be confirmed against the current Central and State notified rules before you act on them. Reviewer byline: pending named legal review.

Governing provisions relied on are set out in the citations block below.

Illustrative example: 60 housekeeping workers in a prohibited process

Illustrative example. A principal employer deploys 60 housekeeping workers through your agency as the contractor. The appropriate government, acting through its Section 57(2) designated authority, has determined that this particular housekeeping process is a core activity of that establishment and has therefore prohibited contract labour in it under Chapter XI.

Step 1, applicability. Sixty workers is above the fifty-worker trigger in Section 45(1), so Chapter XI Part I clearly applies to both the establishment and to you as a manpower supply contractor.

Step 2, what the prohibition does. Once the process is settled as core, Section 57(1) prohibits contract labour in it. None of the three provisos rescues the deployment unless the establishment can show, on the facts, that the activity is ordinarily done through a contractor, or does not need full-time workers for the major portion of the day, or is a sudden surge to be finished in a specified time. If it cannot, the engagement of all 60 workers in that process is prohibited going forward. It cannot lawfully continue as a contract-labour arrangement.

Step 3, the contravention exposure. Continuing to run the 60 workers in the prohibited process is a contravention. If, on top of that, you are not licensed for this principal employer, Section 54 deems the employment itself to be in contravention of the Code, and that exposure attaches to the principal employer as well as to you.

Step 4, what is still owed for work already done. For the period the 60 workers were engaged, the wage and welfare backstop still runs. You must pay their wages by bank transfer or electronic mode (Section 55). If you fail, the principal employer must pay the balance and recover it from you, including from your licence security deposit (Section 55(3) and (4)). Welfare facilities remain the principal employer's duty under Section 53, and you cannot have charged any of the 60 workers a fee or commission (Section 49).

Step 5, the lawful paths. The deployment has to be restructured: the workers are moved off the prohibited core process onto genuinely permitted work, or the principal employer takes them on directly as its own employees under its own rules. Note that this pack does not address any automatic absorption right, so any claim that the 60 workers must be absorbed by the principal employer needs separate legal review.

Employer checklist

• Confirm which of your placements sit in a client's core activity versus non-core work, and check any Section 57(2) determination for that establishment and state.
• Hold a valid Section 47 licence for each principal employer, with the correct specified worker count and security deposit, and renew before the five-year validity lapses.
• Never let a client run your workers before your licence for that client is in place: Section 54 exposes the principal employer to a deemed contravention.
• Never charge a worker any fee or commission (Section 49), and keep evidence that no such charge was made.
• Pay all contract labour by bank transfer or electronic mode and inform the principal employer of the amount, to satisfy Section 55.
• Issue experience certificates on demand under Section 56.
• Where you deploy ten or more inter-state migrant workers, meet the Part II duties including journey allowance under Section 61.
• Hold a separate PSARA licence per state if you supply security guards.
• Build EPF, ESI, bonus, gratuity, paid leave, GST at 18% on full value, and Section 194C TDS into your bill rate, and keep UAN, ECR, GSTR-2B and Form 26AS records aligned.
• Confirm minimum and floor wage compliance and pay within the Section 17 timelines, including within two weeks on exit.

For the worker

• A contractor cannot charge you any fee or commission to place you (Section 49).
• Your wages must be paid by bank transfer or electronic mode, and if the contractor fails to pay, the principal employer is liable to pay you and recover it from the contractor (Section 55).
• You can demand an experience certificate for the work you performed (Section 56).
• Welfare facilities at the establishment are the principal employer's responsibility (Section 53).
• If you are an inter-state migrant worker, you are entitled to the same benefits as a regular worker of that establishment and to a yearly to-and-fro journey allowance (Sections 60 and 61).

Common questions

Check these for your state

These items are set state by state. Confirm each against your state's current notified rule before you rely on it.

• Principal-employer registration and contractor-licence head-count thresholds vary by state: verify against the relevant state's notified rule rather than assuming the Section 45 figure of 50 applies for registration or licensing.
• Exact form numbers (Form I principal-employer registration, Form IV contractor licence application, Form V principal-employer certificate, Form VI licence) are carried from the legacy CLRA scheme: confirm the current numbering against each state's notified rules before citing.
• Whether a specific process such as housekeeping is a core activity is a Section 57(2) determination by the appropriate government or its designated authority: verify the actual determination for the relevant establishment and state.
• GST Reverse Charge Mechanism applies to security services from a non-body-corporate supplier to a registered recipient; general manpower supply is not under RCM by default: confirm the supply type and recipient status before deciding who pays GST.
• Current EPF and ESI contribution rates, the EPS pension wage ceiling, and the ESI wage ceiling should be re-checked against the latest EPFO and ESIC notifications before publishing.
• PSARA licence fees and validity vary by state and require a separate licence per state: verify against each State Controlling Authority's rules.
• Professional Tax slabs, Shops and Establishment registration requirements, and the GST registration turnover threshold vary by state: verify against each state's notified rule.
• The gig and platform worker social security contribution, including any aggregator rate, applies as per the notified scheme under the Code on Social Security 2020: state the mechanism and verify the notified rate and scheme.
• Any consequence of prohibition beyond cessation of the deployment, including whether workers must be absorbed by the principal employer, is not addressed in the grounding pack and requires named legal review.