Understanding the Complexities of Contractor Compliance

India is entering an accelerated growth phase, with the economy set to breach the $10 trillion mark by the decade’s end. Businesses are leveraging the power of automation, and AI-enabled digital technology, which has increased the efficiency and efficacy of business processes. There is a growing demand for a skilled workforce as corporations worldwide incorporate either a “China Plus One” strategy or a “Minus China” strategy. India has staked its claim to become a factory to the world with an incentive to boost domestic manufacturing fueled by robust domestic and increasing global demand. Consequently, it is becoming increasingly important for businesses to maintain a robust human capital supply chain.

There is an increasing trend among current businesses to delegate and outsource certain business operations to contractors. Whether it’s an MSME or a large corporation with thousands of employees, it must enlist the aid of contractors for specific business functions, operations, and processes. This allows businesses to access individuals with specific skill sets and expertise without providing long-term employment. Principal employers rely on independent contractors so that their businesses can remain flexible and efficient and respond immediately to shifting market demands. Contractors are being hired for increasingly diverse and critical business operations that can be categorised based on the type of work and skill level. 

However, maintaining contractor compliance duties is a non-trivial task for principal employers. They are responsible for the compliance obligations of their contractors in the event of contravention and will be liable. Therefore, they must ensure that regulatory requirements such as timely payment of wages, payment of bonuses, minimum pay, overtime restrictions, and similar labour benefits are extended to the workers being employed by the contractor. Principal employers must establish a strong internal compliance framework to reduce these risks. There must be routine and periodic audits and inspections to assess contractor compliance, and lines of communication must be kept open with contractors to address any issues that may arise quickly. It is the duty of the principal employer to ensure that the contractors are informed and aware of applicable laws, regulations, and industry standards. Additionally, employers can include compliance obligations and provisions in their contracts with the contractor. With clear benchmarks, they can assign accountability to the vendor with regard to their adherence to regulations.

Taking into consideration a principal employer engaged in the manufacture of automobile components with a single manufacturing unit. This enterprise employs the services of third-party vendors for IT support, security, housekeeping, maintaining canteen facilities, engineering works, heavy machinery operators, construction work, repair and maintenance, manpower supply, and waste management, among others. All these contractors are required to keep track of and manage a number of compliances. It is up to the principal employer to ensure they are aware of their obligations, have the tools to manage them, and remain compliant. A contractor must obtain six different licenses and registrations under the State Tax on Professions, Trades, Callings, and Employments Act; the Employees’ Provident Funds Act, 1952; the Employees’ State Insurance Act, 1948; the Labour Welfare Fund Act, 1953; the Contact Labour (Regulation and Abolition) Act, 1970 and the Private Security Agencies (Regulation) Act, 2005. 

Furthermore, they also need to furnish six annual returns, two quarterly returns, one half-yearly and one monthly return. Of these ten returns, the Labour Welfare Fund Act, 1953 is responsible for a quarterly and half-yearly return. The Contract Labour (Regulation and Abolition) Act, 1970 is alone responsible for five different types of registers in addition to the one annual return and one license. Additional annual returns have to be filed under the Maternity Benefits Act, 1961; the Employee Compensation Act, 1923; the Payment of Bonus Act, 1965; the Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act, 2013; and the Industrial Establishments (National and Festival) Holidays Act, 1969. Contractors must also maintain four different registers under the Minimum Wages Act, 1948; Payment of Wages Act, 1936; Maternity Benefits Act, 1961; and the Equal Remuneration Act, 1976. 4 monthly challans for statutory payments under the EPF Act, ESI Act, and State Tax on Professions, Trades, Callings, and Employments Act add another layer of compliance obligation on the contractors.

Non-compliance with these regulations can result in significant penalties with punishments ranging from fines to imprisonment. For instance, if a contractor fails to maintain registers under the Contract Labour (Regulation and Abolition) Act, 1970, the principal employer becomes liable for a jail term of up to 3 months. Failure to maintain the register under the Maternity Benefits Act, 1961 can land the employer in jail for up to 2 years.

Such complexities significantly increase the need for a reliable compliance management system. Digital solutions have the capability to keep track of contractor obligations and generate compliance documents. They enable enterprises to avoid lapses, delays, and default due to missed deadlines and regulatory updates and thus improve compliance filing transparency, accountability and timeliness. Principal employers can assimilate information from all third-party vendors on a single platform and monitor pending and critical obligations that need immediate attention. Incorporating digital technology can allow principal employers to ensure that their contractors are compliant and thus minimise their risk exposure.

Managing contractor regulatory requirements and ensuring compliance is critical, as any violations can impact the primary employer. There is an urgent need to create resilient compliance frameworks and guide and train contractors on the importance of compliance and implementation of the necessary processes.  Principal employers can safeguard their brand and create a positive working relationship with contractors by prioritising contractor compliance.

Contributed by: TeamLease Regtech

You might also be interested to read: Insider Trading and Structural Digital Database 101


Comments are closed.