Steel Authority of India Ltd v National Union Waterfront Workers (2001)

The 1970 Act was passed to regulate contract labour and — where the appropriate Government thought fit — to abolish it in a given process, operation or class of work by a notification under s. 10. The Act said what would be prohibited. It never said what happened to the men. If contract labour in a stockyard is abolished, do the workers already there become the principal employer's employees, or do they simply lose their jobs?

For four years the answer was yes, they are absorbed. Air India Statutory Corporation v United Labour Union (1997) had so held, and thousands of writ petitions were filed on the strength of it. SAIL reversed that answer. It is the leading case on contract labour, and it is important for a second, separate reason — it also decided who the "appropriate Government" is for an establishment run by a Government company.

Keep the two holdings apart. They are logically independent and an answer that runs them together loses marks. Holding one is about who may issue the notification; holding two is about what the notification does.

Steel Authority of India Ltd (SAIL) is a Government company — a central public sector undertaking. It maintained four stockyards in Calcutta at which steel was received, stored and dispatched. The handling of goods there was done not by SAIL's own workmen but by contract labour engaged through contractors appointed by tender; about 353 contract workers were involved.

Two notifications lay behind the litigation. The first was a notification of the Central Government dated 9 December 1976 under s. 10(1), prohibiting contract labour in certain categories of work in establishments for which the Central Government was the appropriate Government — an omnibus notification, not one directed to any particular establishment after examining its conditions.

The second was a notification of the Government of West Bengal dated 15 July 1989 under s. 10(1), prohibiting contract labour at SAIL's four Calcutta stockyards. The State then suspended its own notification by successive extensions, the last running to 31 August 1994.

The contract workers' union petitioned the Calcutta High Court for absorption into SAIL's regular workforce. On 25 April 1994 the High Court allowed the petition and directed absorption within six months.

SAIL appealed on two branches: that the State Government was not the appropriate Government for a central public sector undertaking, so the 1989 notification was without jurisdiction; and that a valid prohibition notification does not carry absorption with it. The matter went to a Constitution Bench of five judges.

1. What is the meaning of "appropriate Government" in s. 2(1)(a), and in particular of an industry carried on "by or under the authority of the Central Government"?
2. Is the Central Government's omnibus notification of 9 December 1976 valid?
3. Does a prohibition notification under s. 10(1) result in the automatic absorption of the contract labour by the principal employer?

For the workers. Air India had settled both questions in their favour four years earlier and had been acted on. A Government company is an instrumentality of the State and so falls within the Central Government's sphere; "under the authority of" should be read as expansively as "other authorities" in Art. 12. And the Act is beneficial legislation meant to end an exploitative practice; abolition that leaves the workmen jobless abolishes not the practice but the workers.

For SAIL and the employers. "By or under the authority of the Central Government" is about conferment of power to carry on the industry, not ownership or control. Article 12 identifies who is amenable to Part III; importing it means every Government company in the country is administered from Delhi wherever it operates. And absorption is a drastic consequence the Act nowhere provides for.

The appeals were allowed. The Bench decided both questions against the workers and set aside the High Court's absorption direction.

Holding 1 — "appropriate Government"

The test is conferment of authority, not instrumentality. An industry is carried on "by or under the authority of the Central Government" within s. 2(1)(a) only where it is carried on pursuant to a conferment, grant or delegation of power or authority by the Central Government. The question is one of fact in each case, ascertained from the statute or instrument under which the undertaking operates.

Three consequences follow, each examinable:

• Being "State" under Art. 12 is not enough. A Government company may be an instrumentality of the State for Part III and still not be an establishment carried on "under the authority of" the Central Government for the 1970 Act. The two enquiries have different objects.
• There is no blanket rule for Government companies. The Court refused to treat central public sector undertakings uniformly as falling under the Central Government; each establishment must be examined on its own facts.
• The omnibus notification of 9 December 1976 was held invalid, having been issued generally without the establishment-by-establishment consideration s. 10(2) requires — consultation with the Central Advisory Board, and regard to the conditions of work and benefits, whether the work is of a perennial nature, whether it is done through regular workmen in similar establishments, and whether it is sufficient to employ a considerable number of whole-time workmen.

Holding 2 — no automatic absorption

A prohibition notification under s. 10(1) does not result in the automatic absorption of the contract labour by the principal employer. In the Court's words, neither s. 10 nor any other provision provides for automatic absorption; the concept "is not alluded to either in Section 10 or at any other place in the Act."

The prohibition operates on the practice: after the notification, contract labour may not be employed in the specified work. It says nothing about the status of the men who were doing it; they remain the contractor's employees. If the principal employer wishes the work done he must have it done by his own workmen — but he is under no obligation to make the former contract labour his workmen.

What was overruled

Air India Statutory Corporation v United Labour Union (1997) was overruled on both branches: it was wrong to hold that the Central Government is the appropriate Government for every central undertaking simply because it is an instrumentality of the State, and wrong to hold that abolition under s. 10 results in automatic absorption. The Court also restored the authority of Dena Nath v National Fertilizers Ltd (1992), which had held that a contractor's failure to obtain a licence does not by itself make the contract labour employees of the principal employer.

The overruling was given prospective effect, the Court being conscious that workers had been absorbed under orders passed in reliance on Air India over the preceding four years. Say so; it shows familiarity with the judgment rather than with a summary of it.

What the Court left the workers

The decision is not as bleak as its bare statement suggests, and a good answer says what remains.

• The sham and camouflage route. Where the contract is found not genuine but a mere camouflage — the contractor a name on paper, the workers in truth engaged, controlled and paid by the principal employer — the so-called contract labour are already the principal employer's employees, and always were. No absorption is needed because there was never a genuine contract. But this is a question of fact requiring evidence, and must be raised as an industrial dispute before the industrial adjudicator, not decided summarily on a writ petition.
• Preference in employment. Where a prohibition notification takes effect and the principal employer intends to employ regular workmen for the work, he shall give preference to the erstwhile contract workers, if found suitable, and if necessary by relaxing the conditions of appointment.
• The Act's own machinery survives — licensing, registration, welfare facilities, the principal employer's liability for wages the contractor fails to pay, and the penalties.

There are two rationes, and you should state them separately.

Ratio 1. "Appropriate Government" in s. 2(1)(a) depends on whether the industry is carried on by or under the authority of the Central Government, meaning pursuant to a conferment, grant or delegation of power by it; being an instrumentality of the State under Art. 12 is not the test, and the question is one of fact in each case.

Ratio 2. A notification under s. 10(1) prohibiting the employment of contract labour does not result in the automatic absorption of the contract labour by the principal employer.

Both were necessary: the first disposed of the challenge to the 1989 notification's competence, the second of the High Court's absorption direction.

The invalidation of the 1976 omnibus notification is a third holding — ratio as to that notification, but narrower, turning on non-compliance with s. 10(2). The preference direction is best described as consequential on the decision rather than ratio: an equitable order regulating the consequences of the ruling, not a proposition derived from the Act — though it has been consistently applied. The observations on sham and camouflage restate an established principle and are commonly treated as part of the ratio, since the Court used them to explain the limits of holding 2.

On the first question, the Court insisted that a word takes its meaning from the statute it is in. Article 12 asks who must obey Part III, and is deliberately wide because fundamental rights should not be evaded by incorporating a company. Section 2(1)(a) asks which Government administers a labour statute — an allocation of administrative responsibility between the Union and the States, needing a workable, territorial answer. Reading Art. 12 into it would mean that every Government company's establishment anywhere in India is administered from Delhi, while a private company's identical establishment next door is administered by the State. Nothing suggests Parliament wanted that.

On the second question, the method was strict construction of a drastic consequence. Absorption converts a contractor's employee into a permanent employee of a large undertaking, with seniority, pension and security, without recruitment, selection or vacancy. The Court declined to infer so large a consequence from a section saying only that a practice is prohibited, observing that Parliament had specified what follows from contraventions and that absorption was not among them. Where a beneficial statute is silent, beneficence does not license adding a remedy the legislature chose not to give.

The candid criticism, which you may fairly record, is that this leaves s. 10 with little practical bite: a prohibition that ends the practice by ending the workers' employment does not obviously serve the Act's purpose, and "preference" is a weak substitute for a right. The counter-argument the Court accepted is that the alternative was judicial legislation on a very large scale.

The sham/camouflage enquiry became the main battleground. Since absorption cannot be claimed as a consequence of abolition, unions instead raise industrial disputes contending that the contract is a sham. The courts apply the familiar indicia — who selects, supervises, controls, pays and disciplines; whose premises and materials; whether the contractor has any independent business — on evidence before the industrial adjudicator.

The "who is the employer" question was refined in Balwant Rai Saluja v Air India Ltd (2014), which restated the tests, emphasising complete administrative control as decisive and confirming the SAIL framework.

No legislative reversal followed under the 1970 Act. Unlike Bangalore Water Supply, SAIL was never displaced by amendment; it stood until the Act itself was repealed.

Contract labour is not dealt with by the Industrial Relations Code at all. This is the trap in the question. The Contract Labour (Regulation and Abolition) Act 1970 is one of the statutes repealed by the Occupational Safety, Health and Working Conditions Code 2020 (37 of 2020), in force from 21 November 2025. Contract labour is now governed by the OSH Code, Chapter XI, Part I — "Special Provisions relating to Contract Labour and Inter-State Migrant Worker, etc."

Does SAIL survive? The two holdings have opposite fates, and that is the whole point of this section.

Holding 2 — no automatic absorption — survives, because Parliament left the gap exactly where the Court found it. Part I comprises s. 45 (applicability), s. 46 (designated authority), s. 47 (licensing of contractors), s. 53 (principal employer's liability for welfare facilities), s. 54 (employing contract labour from an unlicensed contractor), s. 55 (responsibility for payment of wages), s. 57 (prohibition of employment of contract labour) and s. 58 (power to exempt). None provides for absorption. The Code, like the 1970 Act, says what is prohibited and nothing about what becomes of the men, so the SAIL reasoning applies with full force. Contract labour under the OSH Code have no right to be absorbed on a prohibition; their route to permanent status remains proof that the contract is a sham, raised as an industrial dispute.

The Code does do something the 1970 Act did not. Section 57 prohibits the engagement of contract labour in the "core activity" of an establishment, subject to exceptions — where the establishment ordinarily carries on that activity through contractors, where the activity does not require full-time workers for the major portion of the working hours, and where there is a sudden increase in volume to be completed within a specified time. "Core activity of an establishment" is defined in s. 2(p) as any activity for which the establishment is set up, with support functions expressly excluded — sanitation, security, canteen and catering, transport, gardening, housekeeping, courier and the like — unless the establishment is itself set up to provide that service. That is a statutory prohibition operating by force of the Code, in place of case-by-case abolition by notification: a real advance for workers in core operations, but still with no absorption remedy.

The applicability threshold has risen. The 1970 Act applied at twenty or more contract labour; OSH Code s. 45 applies Part I at fifty or more, so many establishments now fall outside the contract-labour chapter — one of the Codes' recurring moves: thresholds up, coverage down.

Holding 1 — the "appropriate Government" test — has been legislatively displaced, and you should say so plainly. SAIL held that a central public sector undertaking is not automatically under the Central Government, because instrumentality is not authority. The Codes take the opposite view and write it into the statute. OSH Code s. 2(d) defines "appropriate Government" so as expressly to include a Central public sector undertaking and subsidiary companies set up by Central public sector undertakings, and extends to the establishments of contractors for the purposes of such an establishment; and for a central PSU the appropriate Government continues to be the Central Government even if the Central Government's holding falls below fifty per cent equity.

IR Code s. 2(b) does the same for its own purposes, naming a central public sector undertaking, its subsidiaries, autonomous bodies owned or controlled by the Central Government, "including establishments of the contractors for the purposes of such establishment", and any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government. A proviso adds that in a dispute between a contractor and the contract labour employed through him, the appropriate Government is the one which has control over that industrial establishment.

So on the facts of SAIL the appropriate Government today would be the Central Government — the very result SAIL rejected and Air India had reached. Parliament has adopted Air India's outcome on the appropriate-Government question while leaving SAIL's outcome on absorption untouched.

Under the Code. Contract labour moved into the OSH Code 2020, Chapter XI, Part I (ss. 45–58), in force from 21 November 2025. The Code contains no absorption provision, so SAIL's second holding — no automatic absorption on a prohibition — survives intact, and the sham-and-camouflage route remains the workers' remedy. SAIL's first holding is superseded: OSH Code s. 2(d) (and, for its own purposes, IR Code s. 2(b)) expressly name central public sector undertakings and establishments of their contractors.

A caution on section numbers. The bare text of the OSH Code is not in this pack's source folder; the numbers above are taken from the Code's arrangement of sections on India Code and are stated only where they could be checked. If unsure in an examination, write "the corresponding provision of the OSH Code" rather than guess.