Dena Nath v National Fertilizers Ltd (1991)

This is the case that fixes the consequence of non-compliance with the registration and licensing provisions of the Contract Labour (Regulation and Abolition) Act 1970. Four High Courts had held that if the principal employer had no registration under s. 7, or the contractor no licence under s. 12, the contract labour became the direct employees of the principal employer. Two had held that the only consequence is prosecution. The Supreme Court resolved the conflict in favour of the second view.

It matters equally for what it says about the writ jurisdiction: whether contract labour should be abolished is for the appropriate Government under s. 10, not for the High Court; and a breach of the Act does not entitle a court under Art. 226 to declare the workmen to be the employees of the principal employer.

The lead appeal, Civil Appeal No. 2355 of 1991, arose from a decision of a Division Bench of the Punjab & Haryana High Court dated 27 February 1991 in a batch of writ petitions, which followed that Court's earlier decision in Gian Singh v F.C.I. There it had been held that where the principal employer does not obtain registration under s. 7 and/or the contractor does not obtain a licence under s. 12, the only consequence is the penal provisions in ss. 23 and 24, under which they may be prosecuted, and that the Act nowhere provides that such employees become the employees of the principal employer.

The Supreme Court recorded the split squarely: there was a direct conflict between the High Courts of Punjab and Kerala on the one hand and those of Madras, Bombay, Gujarat and Karnataka on the other. The first view was that non-compliance attracts prosecution only; the second, that "in such a situation the contract labour becomes directly the employee of the principal employer."

The question for decision was therefore: if the principal employer does not get registration under s. 7 and/or the contractor does not get a licence under s. 12, are the persons appointed through the contractor deemed to be the direct employees of the principal employer?

The Court began with the object, taking it from M/s Gammon India Ltd v Union of India, where it was said that the Act was passed to prevent the exploitation of contract labour and to introduce better conditions of work: "The underlying policy of the Act is to abolish contract labour, wherever possible and practicable, and where it cannot be abolished altogether, the policy of the Act is that the working conditions of the contract labour should be so regulated as to ensure payment of wages and provision of essential amenities." In that passage, "Section 10 of the Act deals with abolition while the rest of the Act deals mainly with regulation."

The long title and preamble show an Act to regulate the employment of contract labour in certain establishments, to provide for abolition in certain circumstances, and for matters connected therewith. The Statement of Objects and Reasons records that the system "has tended itself to various abuses" and that its abolition had long been under the Government's consideration; the Planning Commission's study in the Second Five Year Plan led to the consensus that contract labour should be abolished wherever possible and practicable and, where not, its working conditions regulated.

The Court then walked through the scheme: definitions in s. 2, the Central and State Advisory Boards under ss. 3 and 4, registration of establishments in Chapter III (s. 7 registration, s. 8 revocation, s. 9 effect of non-registration), prohibition under s. 10, licensing of contractors in Chapter IV (s. 12, with revocation under s. 14 and appeal under s. 15), penalties in Chapter VI (ss. 22 to 25), and s. 30 avoiding inconsistent laws and agreements except where they are more favourable to employees.

Two provisions deserve separate mention in an answer. Section 10(2) requires the appropriate Government, before prohibiting, to have regard to the conditions of work and benefits provided and to factors such as whether the process, operation or other work is incidental to or necessary for the industry, trade, business, manufacture or occupation carried on in the establishment; "whether it is of perennial nature"; whether it is ordinarily done through regular workmen in that or a similar establishment; and "whether it is sufficient to employ considerable number of whole time workmen." Rule 25(2)(v)(a) requires that where the contractor's workmen perform the same or similar work as those directly employed, "the wage rates, holidays, hours of work and other conditions of service of the workmen of the contractor shall be the same as applicable to the workmen directly employed" by the principal employer of the establishment on the same or similar kind of work.

From this the Court drew its first proposition: the Act serves a two-fold purpose — regulation of the conditions of service of workers employed by a contractor, and provision for the appropriate Government to abolish contract labour altogether in certain notified processes, operations or works. "Neither the Act nor the Rules framed by the Central Government or by any appropriate Government provide that upon abolition of contract labour, the said labour would be directly absorbed by the principal employer."

The Court set out at length the reasoning it was to reject.

The Bombay High Court in United Labour Union v Union of India had held that for a valid employment of contract labour two conditions must be fulfilled, registration by the principal employer and a licence held by the contractor, so that registration by the one or a licence held by the other, standing alone, would not enable the management to treat the workmen as contract labour. Reading the Act as beneficial legislation, that Court reasoned that "It is not the purpose of the Act to render workmen jobless", that there is no provision ending the relationship of principal employer and workmen on abolition, and that where either condition is unfulfilled "the necessary implication would be that the workmen remain workmen of the principal employer." The penal provisions, on that view, "are provided to dissuade employers from attempting to commit a breach of the provisions of the Act" and do not displace that implication.

The Gujarat High Court in Food Corporation of India Workers Union v Food Corporation of India had gone further and declared that during the period when registration and licence are absent, "the workmen can claim to be direct employees of the principal employer."

The Madras High Court in The Workmen of Best & Crompton Industries Ltd had taken a similar position on the effect of non-registration and non-licensing.

The Court's answer rests on the structure of the statute rather than on the equities. The Act "merely regulates the employment of contract labour in certain establishment and provides for its abolition in certain circumstances. The Act does not provide for total abolition of contract labour but it provides for abolition by the appropriate Government in appropriate cases under Section 10 of the Act." In the case before it, and in the connected matters, "no notification has been issued by the appropriate Government under Section 10 of the Act" in relation to the type of establishment concerned.

On the division of functions: "It is not for the High Court to inquire into the question and decide whether the employment of contract labour in any process, operation or in any other work in any establishment should be abolished or not. It is a matter for the decision of the Government after considering the matter, as required to be considered under Section 10 of the Act."

On the consequence of breach, the statute itself supplies the answer: the only consequence provided where the principal employer or the labour contractor violates the relevant provisions "is the penal provision, as envisaged under the Act", ss. 23 and 25 being the reference. Hence the conclusion: "We are thus of the firm view that in proceedings under Article 226 of the Constitution merely because contractor or the employer had violated any provision of the Act or the rules, the Court could not issue any mandamus for deeming the contract labour as having become the employees of the principal employer."

The judgment is careful not to leave the workmen without a forum. A reference to a Labour Court or Industrial Tribunal may raise whether it is necessary for the management to employ contract labour directly or indirectly, and "a question can as well be referred whether the engagement of contract labour was bona fide or it was a camouflage. In appropriate cases in industrial adjudication appropriate directions can be given to the principal employer in this behalf."

Standard Vacuum Refining Co. v Their Workmen is the illustration. There the cleaning and maintenance work was incidental to and necessary for the manufacturing process and of a perennial nature, the contract labour being paid far less than the company's unskilled workmen and without provident fund, gratuity, bonus or privilege leave; the Tribunal directed abolition of the contract system, and that direction was upheld. The Supreme Court in that case had, however, drawn the crucial distinction: "If the contract had been mala fide and a cloak for suppressing the fact that the workmen were really the workmen of the company, the tribunal would have been justified in ordering the company to take over the entire body of workmen and treat it as its own workmen. But because the contract in this case was bona fide, the tribunal has not ordered the company to take over the entire body of workmen." The result there was only a direction of preference in selection.

The present Court added a point of legislative history worth a mark: after those observations, Parliament, when empowering the appropriate Government to prohibit contract labour, framed the guidelines in cl. (a) to (d) of s. 10(2), and those guidelines "are practically based on the guidelines given to the Tribunals in the aforesaid case of Standard Vacuum Refining" by the Supreme Court.

1. The appeals were dismissed, parties to bear their own costs.
2. Non-compliance by the principal employer with the registration requirement and by the contractor with the licensing requirement attracts only the penal consequences under the Act; it does not convert the contract labour into direct employees of the principal employer.
3. Neither the Act nor the Rules provide that on abolition of contract labour the labour is to be directly absorbed by the principal employer.
4. Whether contract labour in a given process, operation or work should be abolished is for the appropriate Government under s. 10, and not for the High Court to inquire into.
5. A High Court under Art. 226 cannot issue a mandamus deeming the contract labour to have become the employees of the principal employer merely because of a violation of the Act or the Rules.
6. The decisions of the Punjab & Haryana High Court in Gian Singh, the Madras High Court in Best & Crompton and the Bombay High Court in United Labour Union were dealt with accordingly, the Court recording that it did not agree with the observations of the Madras High Court on the effect of non-registration or non-licensing, nor with the view of the Bombay High Court; the decisions of the Kerala High Court in P. Karunakaran and the Delhi High Court in New Delhi General Mazdoor Union were approved. The Court expressly declined to express any view on the Karnataka and Gujarat decisions, as those were themselves under challenge before it.
7. The workmen's remedy, where the contract is alleged to be a mere camouflage, lies in industrial adjudication, where appropriate directions may be given.

The Contract Labour (Regulation and Abolition) Act 1970 provides for regulation and, under s. 10, for prohibition by the appropriate Government; it creates no deeming provision making contract labour the direct employees of the principal employer, whether on abolition or on failure to register or to obtain a licence, the sole consequence of such failure being penal. A writ court cannot supply that deeming, nor decide for itself that contract labour should be abolished.