Contract Workers Union Formation in India: Rights of Workers & Duties of Principal Employer and Contractor.

Challenges in Contract Workers Union Formation

Introduction – A Real HR Situation

A group of contract workers working inside a manufacturing unit approach HR and inform that they have formed a union. A week later, the Principal Employer (PE) receives a Charter of Demands (COD) by post asking for wage revision and job security. At the same time, the existing permanent employees’ union claims that contract workers have joined their union and insists that management must negotiate with them.
HR is confused.

Can contract workers form a union?
Can the Labour Department force recognition?
Who should receive the Charter of Demands?
What is the contractor’s responsibility?
Can a permanent employees’ union include contract workers as members?

This article answers all these questions in simple and practical language.

Read: POSH Act Case Study: Step-by-Step Guide for HR

Why This Topic Is Important for HR

Contract labour has become an essential part of today’s business model across industries such as manufacturing, logistics, FMCG, warehouses, IT support services, security, housekeeping, and facility management. Organisations rely on contract workers for flexibility, cost control, and operational continuity. At the same time, contract workers are becoming more aware of their legal rights, especially the right to form unions and raise collective demands. This changing ground reality has made union formation among contract workers more frequent than before.

For HR professionals and management, this situation carries significant legal and operational risks. The most common problem is confusion about roles—many organisations fail to clearly distinguish between the responsibilities of the Principal Employer and those of the contractor. A single wrong step, such as directly responding to union demands or entering into discussions without legal clarity, can expose the Principal Employer to avoidable legal complications.

Another major risk is panic-driven decisions, like abruptly terminating contracts, replacing contractors, or indirectly pressuring workers after union activity. Such actions can be treated as unfair labour practices and may attract labour department intervention, conciliation proceedings, or litigation. Inadequate documentation and informal communication further weaken the employer’s position.

A clear understanding of labour laws helps HR respond calmly, lawfully, and strategically—protecting the organisation from disputes, inspections, penalties, and long-term reputational damage.

Who Are Contract Workers? (Simple Explanation)

Contract workers are workers who:
• Are hired and paid by a contractor
• Work at the premises of a Principal Employer
• Are governed mainly by the Contract Labour (Regulation & Abolition) Act, 1970
• Do not have a direct employment contract with the PE

Contract workers are employees who are engaged through a contractor and not appointed directly by the company where they actually work. In simple terms, the contractor hires them, pays their wages, and is responsible for their employment conditions. Even though these workers perform their duties inside the premises of a factory, office, warehouse, or establishment of a Principal Employer, they are not on the direct rolls of that organisation.

These workers are mainly governed by the Contract Labour (Regulation & Abolition) Act, 1970, which clearly defines the roles and responsibilities of both the contractor and the Principal Employer. Under this law, the contractor is treated as the employer for day-to-day employment matters such as recruitment, wage payment, discipline, and termination.

The Principal Employer’s role is limited to ensuring statutory compliance, welfare facilities, and payment of wages only if the contractor defaults. In normal circumstances, there is no direct employer–employee relationship between the contract worker and the Principal Employer, unless the contract arrangement is found to be sham or fictitious.

Read: Factory Act 1948: Karnataka HR Registers & Forms Guide

Can Contract Workers Form a Union in India?

Yes, contract workers have the legal right to form a union in India. This right flows from Article 19(1)(c) of the Constitution of India, which guarantees freedom of association, and from the Trade Unions Act, 1926, which allows workers of all categories to form and register trade unions. The law does not restrict union formation only to permanent employees. Temporary, casual, and contract workers can also form or join a registered union.

However, HR must clearly understand one important point: the right to form a union does not automatically create a right to recognition by the employer. Recognition depends on separate legal or voluntary processes.

👉 Important HR Note:
The right to form a union does not mean the right to automatic recognition.

Which Laws Govern Contract Workers’ Union Formation?

1. Trade Unions Act, 1926

• Governs formation and registration of trade unions
• Allows workers of any category to become members
• Does not force employers to recognise unions

2. Contract Labour (Regulation & Abolition) Act, 1970

• Defines Principal Employer and Contractor
• Makes contractor the employer of contract workers
• Fixes PE responsibility mainly for statutory compliance

3. Industrial Disputes Act, 1947

• Governs industrial disputes
• Provides conciliation and adjudication
• Applies when disputes are raised against the employer

After Union Formation – Can the Labour Department Force Employer to Recognise the Union?

No, the Labour Department cannot force an employer to recognise a union merely because it is formed or registered. Registration of a union only gives it a legal identity under the Trade Unions Act; it does not create a compulsory obligation on the employer to recognise it.

In India, there is no general central law mandating automatic union recognition. Recognition can happen only through voluntary acceptance by the employer, through a settlement, or based on an order of a Labour Court or Tribunal. In some states, limited recognition laws exist. The Labour Department’s role is mainly to facilitate conciliation, examine unfair labour practices, and help resolve disputes—not to compel recognition.

What Is a Charter of Demands (COD)?

A Charter of Demands (COD) is a formal written document submitted by a trade union to raise collective demands of workers. It usually includes issues such as wage increases, allowances, working hours, leave benefits, and job security. The COD represents the common concerns of workers and is generally the first step in collective bargaining. If discussions do not resolve the issues, the COD can lead to conciliation proceedings or further dispute resolution under labour laws.

To Whom Should a Newly Formed Contract Union Submit the Charter of Demands (COD)?

From a legal standpoint, a newly formed contract workers’ union must submit its Charter of Demands (COD) to the contractor, not to the Principal Employer. This is because, under Indian labour laws, the contractor is treated as the employer of contract workers. The contractor is responsible for hiring, payment of wages, deployment, supervision, discipline, and termination of contract workers. Matters such as wage revision, allowances, working hours, leave, and service conditions fall squarely within the contractor’s control. Therefore, any collective demands raised by contract workers must be addressed to the contractor who has the legal authority to negotiate and respond to those demands.

Even though contract workers perform their duties within the premises of the Principal Employer, the place of work does not determine the employment relationship. What matters is who appoints the worker, who pays wages, and who has disciplinary control. The Principal Employer’s role is generally limited to ensuring statutory compliance and welfare facilities under the Contract Labour (Regulation & Abolition) Act, 1970. Unless the contract arrangement is found to be sham or fictitious, the Principal Employer cannot be treated as the employer for collective bargaining purposes. Therefore, submitting the COD directly to the contractor is the legally correct and safest approach for both workers and management.

If COD Is Sent by Post to the Principal Employer – What Are PE’s Duties?

When a Charter of Demands (COD) from a contract workers’ union is received by post, the Principal Employer (PE) must handle the situation carefully and in a legally correct manner. Accepting the letter does not mean accepting employer responsibility. The PE’s response should be limited, neutral, and properly documented to avoid future legal complications.

What the Principal Employer Should Do

• Acknowledge receipt politely without expressing agreement or disagreement with the demands.
• Clearly clarify in writing that the contract workers are employed by the contractor and not by the Principal Employer.
• Redirect the union to raise all service-related demands with the contractor, who is the actual employer.
• Inform the contractor immediately about the receipt of the COD and share a copy for necessary action.
• Maintain written records of all communications for future legal reference.

What the Principal Employer Should Not Do

• Do not enter into negotiations with the union on wages or service conditions.
• Do not promise wage revisions or benefits, even informally.
• Do not recognise the union as a bargaining agent for contract workers.
• Do not give oral assurances, as they can be misinterpreted or misused later.

A brief and clear written response helps the Principal Employer protect its legal position and avoid being treated as the employer of contract workers.

Read: Standing Orders Act 2025: HR Guide to Compliance & Avoiding Fines

If a Contract Union Tries to Submit the COD Directly to the Principal Employer – How to Avoid and Take Legal Support

When a contract workers’ union attempts to submit a Charter of Demands (COD) directly to the Principal Employer (PE), HR must respond carefully and professionally. The goal is to avoid accepting any employer role while maintaining a lawful and respectful approach.

Practical HR Steps

• Politely decline acceptance of the COD and explain that service-related demands must be addressed to the contractor.
• Explain the legal position calmly, without confrontation, stating that the contractor is the employer of contract workers.
• Avoid arguments, threats, or aggressive language, as this may be seen as victimisation or unfair labour practice.
• Record the incident in writing, including date, time, persons involved, and what was communicated.
• Inform senior management immediately so that responses remain consistent and aligned.
• Seek legal advice before issuing any written communication or taking further action.

Legal Support Options

Following these steps helps the PE avoid legal exposure while handling the situation lawfully and professionally.

• Consult a labour law expert to assess legal risks and guide next steps.
• Issue an advocate’s notice, if required, to formally clarify the employer relationship.
• Send a clarification letter to the Labour Officer, if the issue escalates or enters conciliation.

How Can the Contractor Resolve This Issue Legally?

In matters relating to union formation and Charter of Demands (COD) by contract workers, the contractor plays the primary and most critical role, as the contractor is the legal employer of the workers. Any failure or improper action by the contractor can quickly escalate the matter into a legal dispute.

What the Contractor Should Do

• Verify the union registration to confirm that the union is validly registered under the Trade Unions Act, 1926.
• Acknowledge receipt of the COD in writing and avoid ignoring union communication.
• Communicate respectfully and professionally with union representatives, even if demands are not acceptable.
• Avoid victimisation of workers who are union members, as this can attract allegations of unfair labour practice.
• Continue full statutory compliance, including timely payment of wages, PF, ESI, and other legal obligations.

Legal Routes Available to the Contractor

• Conciliation under the Industrial Disputes Act, 1947, through the Labour Department.
• Settlement under Section 12(3), where issues are resolved with official mediation.
• Negotiation within legal limits, keeping financial viability and contractual terms in mind.

What the Contractor Must Avoid

• Illegal termination or retrenchment of workers due to union activity.
• Blacklisting union members or reducing work unfairly.
• Withholding wages or benefits as pressure tactics.
• Threats, intimidation, or coercive behaviour, which can lead to serious legal consequences.

A lawful, calm, and documented approach protects the contractor from disputes and strengthens credibility before labour authorities.

Read: POSH Act 2025: The Ultimate HR Guide

Legal Provisions Applicable to the Principal Employer (Current Law Context)

Under the Contract Labour (Regulation & Abolition) Act, 1970 (CLRA Act), the Principal Employer (PE) has clearly defined statutory responsibilities when engaging contract labour. These duties are mainly related to compliance, welfare, and oversight, and not to day-to-day employment management.

What the Principal Employer Must Do

• Register the establishment under the CLRA Act if the prescribed number of contract workers are engaged.
• Ensure that the contractor holds a valid licence issued by the competent labour authority before deployment of workers.
• Ensure payment of wages to contract workers if the contractor fails to pay, with the right to recover the amount from the contractor.
• Provide statutory welfare facilities, such as canteen, rest rooms, drinking water, and sanitation, either directly or through the contractor, as required under law.

What the Principal Employer Is Not Responsible For

• Wage bargaining or revision for contract workers, as this lies with the contractor.
• Recognition of trade unions formed by contract workers.
• Disciplinary action or termination of contract workers in normal circumstances, unless the contract arrangement is found to be sham or fictitious.

Understanding this distinction helps HR ensure compliance without overstepping legal boundaries.

Under Trade Unions Act

• Union registration allowed
• No compulsory recognition

Under Industrial Disputes Act

• Dispute must be against actual employer
• Conciliation available
• PE role is limited

When Can the Principal Employer Become Legally Vulnerable?

Although the contractor is normally treated as the employer of contract workers, the Principal Employer (PE) can become legally vulnerable in certain situations. Courts do not look only at written contracts; they examine the actual working relationship. If the arrangement appears artificial or designed only to avoid labour laws, the PE may be held responsible.

Situations Where PE May Face Legal Risk

• Contract is sham or camouflage: If the contractor is merely a name-lender and the PE actually controls the workers, courts may ignore the contract arrangement.
• PE controls hiring and firing: When the PE selects workers, decides who should be removed, or directly issues termination instructions, it indicates employer control.
• PE pays wages directly: Direct payment of wages or incentives by the PE weakens the contractor–employee relationship.
• Contractor exists only on paper: If the contractor has no independent office, management, or financial control, and functions only as an intermediary, the arrangement may be treated as fictitious.

Legal Consequence

In such cases, courts may “lift the veil” and treat contract workers as employees of the Principal Employer, exposing the PE to labour liabilities and disputes.

Can a Permanent Employees’ Union Enrol Contract Workers as Members?

Simple Answer

Yes. A permanent employees’ union can legally include contract workers as members—but with limitations.

Legal Position

Under the Trade Unions Act, 1926:
• Membership is not restricted to permanent employees
• Contract workers can become members of an existing union

Important Clarification

Membership does not change who the employer is.

Even if contract workers join a permanent employees’ union:
• Contractor remains the employer
• PE is not automatically bound to negotiate

What the Permanent Employees’ Union Can Do

• Represent contract workers before authorities
• Support them during disputes
• Raise welfare and statutory issues

What It Cannot Force

• Cannot force PE to treat contract workers as direct employees
• Cannot compel PE to negotiate wages of contract workers
• Cannot bypass the contractor

Key Legal Principle

Union membership does not decide employer–employee relationship.
Control and supervision decide it.

HR Risk Area

From an HR perspective, the Principal Employer (PE) becomes legally vulnerable only in limited and clearly identifiable situations. The main risk arises when the contract labour arrangement does not reflect the real working relationship. If the contract is sham or only on paper, or if the PE exercises complete control over contract workers in matters such as recruitment, discipline, supervision, and termination, courts may treat the PE as the actual employer. In such cases, union membership, demands, or disputes raised by contract workers can directly expose the PE to legal proceedings.

What HR Should Do

• Do not object to union membership, as forming or joining a union is a legal right of workers.
• Do not recognise the union for contract labour issues, since recognition lies with the contractor, not the PE.
• Clearly document the legal position in all communications, stating that the contractor is the employer of contract workers.
• Seek legal advice promptly if union pressure increases or if the Labour Department intervenes, to ensure responses remain legally compliant and consistent.

Following these steps helps HR manage union-related situations calmly while protecting the organisation from unnecessary legal exposure.

Common HR Mistakes to Avoid

When dealing with union formation or demands by contract workers, HR actions taken in haste or without legal clarity can create serious problems. Avoiding the following common mistakes helps protect the organisation from unnecessary disputes and legal exposure.

• Panic decisions: Abrupt actions such as terminating contracts, changing contractors, or redeploying workers immediately after union activity can be seen as victimisation and unfair labour practice.

• Verbal assurances: Informal promises made during discussions, even casually, can later be misquoted or used against the organisation. Always communicate in writing.

• Ignoring union letters: Not responding to union communication may escalate the issue and invite labour department intervention. A proper, neutral reply is essential.

• Recognising the union without legal review: Recognition of a union without understanding legal implications can shift responsibility to the Principal Employer unnecessarily.

• Threatening workers: Any form of intimidation, pressure, or indirect threats can attract serious legal consequences and damage employee relations.

A calm, lawful, and documented approach is always the safest HR strategy.

One Practical Example

A logistics company receives a COD from a contract union. HR acknowledges receipt, clarifies employment relationship, informs contractor, and seeks legal advice. Contractor handles conciliation. Dispute does not escalate.

Final HR Takeaway

Contract workers in India have the legal right to form their own unions and may also become members of existing permanent employees’ unions. However, union membership by itself does not change the employer–employee relationship. Legal responsibility continues to depend on who actually hires, pays, supervises, and controls the workers. In normal circumstances, the contractor remains the employer, while the Principal Employer’s role is limited to statutory compliance and oversight.

Problems arise only when roles are mixed or actions are taken without legal clarity. For HR and management, a clear understanding of labour laws, proper documentation, and a calm, legally correct response to union activities are essential to protect both the Principal Employer and the contractor from disputes and litigation.

Read: Grievance Redressal in Indian Manufacturing: Guide to ID Act 1947