Principal Employer vs Contractor: Who Is Liable for What

If you run a manpower or staffing firm in India, principal employer liability is the single rule that decides who pays when something goes wrong on a deployment. Since the four labour codes came into force on 21 November 2025, contract labour is no longer governed by the Contract Labour (Regulation and Abolition) Act, 1970; it now sits inside the Occupational Safety, Health and Working Conditions Code, 2020 (the OSH Code), Chapter XI. The Central Rules were notified on 8 May 2026. This page explains, in plain terms, who is liable for wages, welfare, provident fund, ESI and licensing, and what your agency must actually do so that a client is never forced to pay your workers and then claw the money back from you. Where a number varies by state, we say so and tell you to check your state's notified rule rather than guess.

Principal employer liability in India: the two-tier rule

The OSH Code sets up a two-tier structure, not a single liable party.

Tier one is the contractor. Section 55(1) makes the contractor responsible for paying wages to each worker it deploys, and section 55(2) requires that payment to go by bank transfer or electronic mode, with electronic intimation to the principal employer of the amount paid. The contractor is also the licence holder, the entity that registers workers for provident fund and ESI, and the entity that must not charge the workers any fee.

Tier two is the principal employer as backstop. If the contractor defaults, the principal employer must step in and pay the workers, and is separately and directly responsible for on-site welfare facilities. The point of the design is that a deployed worker should always be paid and protected, whichever party is at fault, and the state then sorts out recovery between them.

For a manpower firm the practical message is simple: your own discipline on payroll is what keeps liability off your client. The moment you slip, your default converts into a deduction from your billing and a claim on your security deposit.

Who is the principal employer, and who is the contractor

The definitions matter because they decide which tier you sit in.

Contractor: a person who either undertakes to produce a given result for an establishment through contract labour (more than a mere supply of goods), or supplies contract labour for any work of the establishment as mere human resource, and this includes a sub-contractor. A manpower or staffing agency is almost always a contractor in this sense.

Contract labour: a worker who is deemed to be employed in or in connection with the work of an establishment when hired by or through a contractor, with or without the knowledge of the employer. It includes inter-state migrant workers. It does not include a person (other than a part-time employee) who is regularly employed by the contractor itself with periodical increments, social security coverage and welfare benefits under a settled employment relationship.

Principal employer: the establishment where the contract labour actually works. When you deploy your workers to a client factory, office or site, that client is the principal employer for those workers. Note that many staffing firms also directly employ their own back-office staff, so you can wear both hats. These definitions come from the Code on Social Security, 2020, and the OSH Code, 2020.

When Chapter XI applies to you

The OSH Code text (section 45) applies Part I to two categories: an establishment in which fifty or more contract labour are employed, or were employed on any day of the preceding twelve months through contract; and a manpower supply contractor who has employed fifty or more contract labour on any day of the preceding twelve months.

There is a carve-out for work of a purely intermittent or casual nature. But the Code says work is not intermittent if it was performed for more than one hundred and twenty days in the preceding twelve months, or, where it is seasonal, for more than sixty days in a year. Any real, ongoing manpower deployment will usually cross those day counts and be covered.

A caution on the number: the fifty figure appears in the Code, and it is higher than the twenty-or-more workmen threshold that applied under the earlier CLRA. Registration and licensing thresholds are widely reported as raised to fifty, but they can vary by state notified rule. Do not treat one number as universal; check the threshold in your state's notified rule before deciding you are outside the net.

Wages: your duty first, the principal employer as the backstop

This is the heart of principal employer liability, and it is worth reading section 55 closely.

Section 55(1): the contractor is responsible for paying wages to each contract labour, before the expiry of the period prescribed by the appropriate Government.

Section 55(2): the contractor must disburse those wages through bank transfer or electronic mode and inform the principal employer electronically of the amount paid. This electronic intimation is your proof that you paid, and the client's early-warning signal if you did not.

Section 55(3): if the contractor fails to pay within the prescribed period, or makes a short payment, the principal employer is liable to pay the wages in full, or the unpaid balance, to the concerned workers, and may recover the amount so paid from the contractor, either by deducting it from any amount payable to the contractor under any contract, or as a debt payable by the contractor.

Section 55(4): if the contractor still does not pay, the appropriate Government can order that the wages be paid out of the security deposit the contractor lodged under its licence.

So the chain is: you pay first, the client pays if you fail, the client recovers from your bills or as a debt, and the government can reach your security deposit. There is no version of this where a default simply disappears.

Welfare facilities and the unlicensed-contractor trap

Two sections put obligations directly on the principal employer, independent of the contractor.

Section 53: the welfare facilities specified under sections 23 and 24 of the Code are to be provided by the principal employer of the establishment to the contract labour employed there. These are on-site facilities, and they are the client's responsibility, not something the client can push wholly onto the agency by contract.

Section 54: if a principal employer employs contract labour through a contractor who is required to hold a licence but has not obtained one, that employment is deemed to be in contravention of the Code. This is the unlicensed-contractor trap. It gives the client a strong reason to verify your licence before deployment, and it gives a compliant agency a genuine commercial advantage: a valid, matching licence keeps your client on the right side of section 54.

Provident fund and ESI: the same backstop logic

The wage backstop is mirrored, in principle, for social security dues.

The contractor deducts and deposits provident fund and ESI for the workers it deploys. For provident fund, each worker has a Universal Account Number (UAN) that is portable across employers, and the employer files a monthly Electronic Challan cum Return (ECR) and deposits the contributions. ESI is administered by ESIC through its regional offices.

Indicative rates to build into your costing, to be confirmed against the current notified figures: EPF is 12 percent of wages from the employee and 12 percent from the employer, of which 8.33 percent goes to the pension scheme (subject to the pension wage ceiling) and the balance to provident fund, plus the employer's administrative and EDLI charges. ESI is 0.75 percent from the employee and 3.25 percent from the employer, with an ESI wage ceiling of Rs 21,000 per month (Rs 25,000 for persons with disability).

Where the contractor defaults on provident fund or ESI, the well-established parallel principle is that the principal employer carries a backstop liability, in line with the wage rule in section 55. Verify the current rates and ceiling before you rely on any figure, because these change by notification.

The contractor's licence: your permission to operate

Chapter XI makes the licence non-negotiable for a manpower firm.

Section 47: no contractor to whom this Part applies may supply or engage contract labour, or execute work through contract labour, except under a licence issued by the designated authority. The licence specifies the number of contract labour that can be supplied and the security deposit to be made. Where a contractor does not meet the full criteria, a work-specific licence can be issued for a particular work order.

Section 48: the licence issued for supply of contract labour is valid for five years for the number of workers specified, and can be amended if you need to increase that number, on depositing additional security.

Section 49: the contractor must not charge, directly or indirectly, any fee or commission from the workers. Charging the worker is prohibited.

Sections 50 and 51: you must intimate the authority when you receive a work order, and the authority can suspend or cancel the licence for misrepresentation or breach of conditions.

A critical operational point carried over into the rules: a contractor needs a separate licence for each principal employer. The legacy forms carried forward are Form I for principal employer registration, Form IV for the contractor licence application, Form V for the certificate by the principal employer, and Form VI for the licence itself. Confirm the exact form numbers, fees and the security deposit amount against your state's notified rules before filing.

Inter-state migrant workers: an extra layer

If your deployments cross state lines, Part II of Chapter XI adds duties.

Section 59: Part II applies to every establishment in which ten or more inter-state migrant workers are employed, or were employed on any day of the preceding twelve months. The threshold here is ten, not fifty.

Section 60: the contractor or employer must ensure suitable conditions of work for a worker required to work in a state different from their own, must report any fatal accident or serious bodily injury to the authorities of both states and to the worker's next of kin, and must extend all benefits available to a regular worker of the establishment, including ESI and EPF benefits and the medical check-up facility.

Section 61: the employer must pay every inter-state migrant worker, once a year, a lump sum fare for the to-and-fro journey to the worker's native place from the place of employment, on the terms the appropriate Government prescribes.

Build the journey allowance into your costing for migrant deployments, because it is a statutory cost, not a discretionary perk.

GST, TDS and the money trail on your invoice

Compliance is not only labour law; the tax trail is where clients audit you.

GST: manpower and staffing supply is taxed at 18 percent under SAC 9985. The tax is charged on the full taxable value of the supply (the total billed amount), not only on your margin. A compliant tax invoice carries the GSTIN of both supplier and recipient, the invoice number and date, a description of the service (SAC 9985), the billing period, and the correct tax split: CGST plus SGST for an intra-state supply, or IGST for an inter-state supply, at 18 percent. The client reconciles its input tax credit through GSTR-2B, subject to the section 16 conditions of the CGST Act.

Reverse charge for security services: security services are also 18 percent, but under the reverse charge notification (Notification 13/2017-Central Tax (Rate) as amended by 29/2018, effective 1 January 2019) the registered recipient pays the GST when the supplier is not a body corporate. General manpower supply is not under reverse charge by default; the agency charges and pays the GST in the normal way.

TDS: payments to a contractor for supply of labour attract TDS under Section 194C of the Income-tax Act, at 1 percent if the payee is an individual or HUF and 2 percent otherwise, subject to the thresholds. The client deducts it, and it shows up in your Form 26AS.

The full statutory cost stack of a compliant deployment

To price a deployment without losing money on compliance, cost every statutory element, not just the wage.

Wages: at least the minimum wage fixed by the appropriate Government under section 5 of the Code on Wages, which cannot be below the Central floor wage under section 9. The employer fixes the wage period (daily, weekly, fortnightly or monthly, not exceeding one month) under section 16, and must pay within the section 17 time limits, including within two weeks on removal, dismissal, retrenchment, resignation or closure.

Provident fund and ESI: the employer contributions above.

Bonus: under the Code on Wages, Chapter IV, a minimum of 8.33 percent and a maximum of 20 percent of wages, with eligibility and ceilings as notified.

Gratuity: 15 days of wages for every completed year of service (the 15 by 26 factor) after five years of continuous service; fixed-term employees get pro-rata gratuity without the five-year condition.

Paid leave: under the OSH Code, annual leave with wages accrues at one day of leave for every twenty days of work performed. Treat this as a real cost element in your rate card.

Journey allowance: the yearly to-and-fro fare for inter-state migrant workers.

Gig and platform work: if your model involves gig or platform workers, the Code on Social Security, 2020, provides for social security schemes that may be funded by contributions, including from aggregators, at a notified rate credited to a social security fund. The rate and scheme are as notified, so treat the exact figure as pending the notified scheme.

Security guard agencies: PSARA and reverse charge

If you supply security guards, you carry an extra licence regime on top of Chapter XI.

PSARA: under the Private Security Agencies (Regulation) Act, 2005, a private security agency must hold a licence from the State Controlling Authority. The licence is separate for each state, and guards must meet training and verification requirements. Fees and validity vary by state, so confirm them against your state's rule.

GST reverse charge: as noted above, security services fall under GST reverse charge when the supplier is not a body corporate and the recipient is a registered person, so the client, not your agency, pays the GST in that case. This changes your invoicing and your cash flow, so set it up correctly from the first bill.

Principal employer liability in 2026: what changed

For anyone last briefed under the old regime, here is the 2026 picture.

The four labour codes came into force on 21 November 2025, and the Central Rules were notified on 8 May 2026. The Contract Labour (Regulation and Abolition) Act, 1970, and the Building and Other Construction Workers Act, 1996, have been subsumed, and contract labour is now governed by the OSH Code, 2020, Chapter XI.

The applicability threshold has moved: under the earlier CLRA it was twenty or more contract workmen, and the OSH Code text uses fifty, with registration and licensing thresholds widely reported as raised to fifty. Because state thresholds can vary, verify the number in your state's notified rule.

The familiar forms carry over into the rules (Form I, Form IV, Form V, Form VI), and the separate-licence-per-principal-employer requirement continues. The core liability logic, contractor first and principal employer as backstop with recovery, is now in section 55 rather than the old CLRA sections. Everything else in this page reflects the position as of the last verified date below.

Last verified, sources and disclaimer

Last verified: 20 September 2026, against the labour codes in force from 21 November 2025 and the Central Rules notified on 8 May 2026.

Sources relied on: the OSH Code, 2020 (Chapter XI, and Chapters VII and XII); the Code on Social Security, 2020; the Code on Wages, 2019; the CGST, SGST and IGST Acts and rules; Section 194C of the Income-tax Act, 1961; and the Private Security Agencies (Regulation) Act, 2005. The full list is in the citation block.

Disclaimer: This page is general information about Indian labour, social security and tax law for manpower and staffing firm owners. It is not legal or tax advice and does not create any advisor relationship. Thresholds, form numbers, minimum wage and floor wage rates, contribution rates and ceilings, licence fees and validity periods vary by state and by year and change by notification. Confirm the exact position for your state and the current year, and take professional advice, before you act.

Reviewer: pending named legal review.

Illustrative example: a contractor fails to pay 40 deployed workers

Illustrative example (the figures are illustrative only; actual minimum wages vary by state and must be checked against the state's notified rule).

Setup: Your agency (the contractor) deploys 40 workers to a factory (the principal employer) for the month. Assume an agreed monthly wage of Rs 18,000 per worker, so the month's wage bill is 40 x Rs 18,000 = Rs 7,20,000. Your agency hits a cash crunch and does not pay the workers by the prescribed date, or pays only part of the amount.

Step 1, the default: Under section 55(1) of the OSH Code, paying those 40 workers was your agency's primary responsibility, and payment should have gone by bank or electronic transfer, with electronic intimation to the principal employer of the amount paid (section 55(2)). The default has now happened.

Step 2, the principal employer must pay: Under section 55(3), because the contractor failed to pay within the prescribed period, or short-paid, the principal employer becomes liable to pay the wages in full, or the unpaid balance, directly to those 40 workers. So the factory has to find the Rs 7,20,000, or the shortfall, and pay the workers itself.

Step 3, the principal employer recovers from you: The same section 55(3) lets the principal employer recover every rupee it paid, either by deducting it from any amount payable to your agency under the contract (typically your running bill or pending invoice), or as a debt payable by your agency.

Step 4, the security deposit: Under section 55(4), if your agency still does not pay, the appropriate Government can order that the workers be paid out of the security deposit your agency lodged under its licence.

The takeaway for a manpower firm: a single missed payroll does not just hurt the workers. It converts into a direct deduction from your client billing, plus a hit to your licence security deposit, and it puts the client relationship at risk because the client was forced to pay your people and then chase you for the money. This is why disciplined, on-time, bank-mode wage disbursement with electronic intimation to the client is the core of managing principal employer liability.

Employer checklist

• Principal employer: register the establishment before engaging contract labour (the Form I equivalent under your state's notified rule) and verify the applicable threshold for your state
• Principal employer: engage only licensed contractors, and check that the contractor's licence covers your establishment and the number of workers being supplied (section 54 makes using an unlicensed contractor a contravention)
• Principal employer: issue the certificate by the principal employer to your contractor (the Form V equivalent; confirm the form number)
• Principal employer: provide the on-site welfare facilities under sections 23 and 24 (section 53 puts this on you directly)
• Principal employer: confirm each contractor paid wages by bank or electronic mode and sent the electronic intimation of the amount paid (section 55(2)) before treating payroll as done
• Principal employer: structure and time the running bill so you can recover any wages you are forced to pay under section 55(3)
• Contractor (agency): obtain a licence before supplying labour, and hold a separate licence for each principal employer
• Contractor (agency): pay wages before the prescribed period, by bank or electronic transfer, and send the principal employer electronic intimation of the amount paid
• Contractor (agency): never charge any fee or commission from the workers (section 49)
• Contractor (agency): register workers for EPF (UAN) and ESI, file the monthly ECR, and deposit contributions on time
• Contractor (agency): intimate the authority on receiving a work order (section 50) and issue experience certificates on demand (section 56)
• Contractor (agency): raise a compliant tax invoice (SAC 9985, 18 percent GST on the full value, correct CGST plus SGST or IGST split, GSTIN of both parties, billing period)
• Contractor (agency): for inter-state migrant workers, budget the yearly to-and-fro journey allowance and report any fatal accident or serious injury to both states and the next of kin
• Contractor (agency, security guards): hold a valid PSARA licence for each state and meet guard training and verification requirements

For the worker

• The worker must be paid wages before the prescribed period, and payment should come by bank or electronic transfer
• If the contractor does not pay or short-pays, the principal employer must pay the worker in full or the unpaid balance (section 55(3))
• The contractor cannot charge the worker any fee or commission (section 49)
• On-site welfare facilities are the principal employer's responsibility (section 53)
• An inter-state migrant worker is entitled to a yearly to-and-fro fare to the native place, and to the same ESI and EPF benefits as a regular worker of the establishment (sections 60 and 61)
• A worker can demand an experience certificate from the contractor (section 56)
• Annual leave with wages accrues at one day for every twenty days of work performed (OSH Code Chapter VII)
• Provident fund is tracked under a portable Universal Account Number (UAN) that stays with the worker across employers

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.

• Contract labour applicability and principal employer registration and contractor licensing thresholds (the fifty figure in section 45 versus the earlier CLRA twenty): verify against the state's notified rule before relying on a number
• Exact form numbers carried into the rules (Form I principal employer registration, Form IV contractor licence application, Form V certificate by principal employer, Form VI licence): verify against the state's notified rule
• Security deposit amount required under the contractor licence: verify against the state's notified rule
• Prescribed wage-payment period under OSH Code section 55(1): verify against the appropriate Government's notified rule
• Minimum wage and Central floor wage rates under Code on Wages sections 5 and 9: verify against the state's notified rule and the current Central floor wage notification
• EPF and ESI employer and employee contribution rates, the EPS pension wage ceiling, and the ESI wage ceiling (Rs 21,000, Rs 25,000 for persons with disability): verify current rates and ceilings before costing
• Bonus eligibility wage ceiling and calculation ceiling under Code on Wages Chapter IV: verify against the current notified figures
• TDS thresholds under Section 194C of the Income-tax Act: verify current thresholds
• Professional Tax registration and slabs (a standard registration for a staffing agency): verify against the state's notified rule
• Shops and Establishment registration for the agency's own office: verify against the state's notified rule
• PSARA licence fees and validity for security agencies: verify against the state's notified rule
• Gig and platform worker aggregator contribution rate and scheme under the Code on Social Security, 2020: as per the notified scheme, verify the current rate
• Core-activity designation under section 57 (whether contract labour may be engaged): the appropriate Government decides, so verify the position for the specific activity