So by he virtue of Contract Labour (regulation and abolition) Act, yes the organisation i.e. principle employer where my friend is working liable.
Yes, it is true that his organisation had a service agreement with the vendor, the labour officers and inspectors are clever enough to detect this and such type of strategy does not stand in the court of law. If my friend decide to protest and go in the court, chances are rare that he will get relief.
The second question is what will be the implication?
As per the section 14 of the Employees Provident Fund and Miscellaneous Provisions Act, The penalty is as follows:
Default period Penalty
for 0-2 months- 5% p.a. on arrear amount
for 2-4 months 10 % p.a. on arrear amount
for 4-6 months 15 % p.a. on arrear amount
For above 6 months 25% this 25% should not exceed 100% maximum of the defaulted amount
Only those companies declared sick by BIFR can get penalty waiver. So it is clear that organisation has to bear a huge cost.
So suppose my this friend's organisation hired services of the contractor for 2 years and he hired 30 people. Considering the maximum limit of Rs. 6500 basic + DA the PF amount @ 12% comes to 780 per month per contract labour (The organisation's share) then the liability comes = 780 X 30 = 23400 per month so for 2 years the total amount is 561600
Now the penalty @ 25% p.a. comes to
For 1st year 280800 + 25 % = 280800 + 70200 = 351000
For second year 351000+ 25% = 351000+87750 = 438750 (For previous years arrear) + 351000 for current year's arrear = 838750
Finally the organisation (first, the contractor and if organisation cannot find them themselves) liable to almost Rs. 3 Lakhs additional.
3. The question is it labour law violation?
The answer is yes. Violation of Contract Labour Act as well as PF and Misc Act.
4. What is the solution?
The solution is to catch the contractor and ask him to pay the contribution as well as the penalty and if it is not traceable the organisation has to pay it.
The second solution which I ethically and personally never recommends but practiced in our country is to meet the PF inspector and settle the matter with a small portion of money say 30-35 thousand (and most of the PF or labour inspector prefer this way) and nothing let come into the records.
This is a lesson for every business owner, HR manager while looking into compliance and as well as selecting vendor. We may save little money by allowing those vendor playing such tricks but for long term it is not good for the organisation, its brand value and reputation.
1. The example is a real business case scenario
2. Calculations are indicative only however the penalty charges are factual.
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