Can Contract Workers Ask for Permanency in India?
Introduction – A Situation Every HR Has Faced
Almost every HR professional in India has faced this situation at least once. A group of contract workers, many of whom have been working at the same premises for years, approach HR with a simple but emotionally charged question: “We have completed many years here. Why are we still contract workers? When will we be made permanent?” Sometimes this question comes politely during discussions. At other times, it arrives through a union letter, a legal notice, or a sudden collective demand raised on the shop floor.
From the workers’ perspective, the demand feels logical. They report daily at the same gate, follow the same safety rules, work alongside permanent employees, and often perform similar tasks. In many cases, they have completed several years of continuous service without any serious break. Naturally, they feel that permanency should follow loyalty and long service.
From the HR and management side, the situation is far more complex. Indian labour laws do not automatically convert long service into permanent employment. The legal relationship of a contract worker is primarily with the contractor, not with the principal employer. HR teams are often caught between operational realities, legal boundaries, and human emotions.
This article addresses this exact conflict. It explains, in simple and practical terms, whether contract workers can ask for permanency in India, what the law actually permits, where misunderstandings arise, and how HR should handle such demands without panic or legal exposure.
Who Is a Contract Worker – In Real Workplace Terms
In practical workplace terms, a contract worker is a person hired through a contractor to perform work at the premises of a principal employer. The key point is not where the work is done, but who the employer is in law. The contractor is responsible for recruitment, wage payment, statutory compliance, supervision, discipline, and termination of the contract worker.
In reality, contract workers are commonly deployed in manufacturing plants, warehouses, construction sites, offices, hospitals, malls, and service establishments. They may be involved in housekeeping, security, loading, data entry, production support, maintenance, or even skilled technical roles. Despite working inside the principal employer’s establishment, their appointment letters, salary slips, PF, ESI, and service records are issued by the contractor.
A common confusion arises because contract workers often wear the principal employer’s uniform, follow internal shift timings, and work under indirect instructions from company supervisors. However, operational coordination does not change the legal employer-employee relationship.
Under Indian labour law, especially the Contract Labour (Regulation and Abolition) Act, 1970, the contractor remains the employer unless the contract arrangement is found to be sham, bogus, or a camouflage. Understanding this basic definition is essential before discussing permanency claims.
Can Contract Workers Ask for Permanency?
Short answer: Yes, contract workers can ask for permanency — but only from their employer, which is the contractor, not directly from the Principal Employer (PE).
Under Indian labour law, the legal employer of contract workers is the contractor. The contractor is responsible for appointment, wage payment, statutory compliances, supervision, discipline, and termination. Therefore, any demand related to service conditions, including permanency, must legally be raised against the contractor first.
Contract workers cannot, as a matter of legal right, demand permanency directly from the Principal Employer merely because they work at the PE’s premises. The relationship between contract workers and the PE is indirect and regulated by statute, not by a direct contract of employment. This legal boundary is fundamental under the Contract Labour (Regulation and Abolition) Act, 1970.
However, in practice, contract workers often raise such demands before the PE through unions or collective representations. While they are free to raise demands, the PE is not legally bound to grant permanency unless courts establish that the contractor is not the real employer.
Thus, asking is permissible, but entitlement depends strictly on the existence of a direct employer-employee relationship in law.
What Indian Law Actually Says About Permanency
Indian labour law does not provide any automatic right for contract workers to become permanent employees of the principal employer. The primary law governing contract labour is the Contract Labour (Regulation and Abolition) Act, 1970. This Act regulates the employment of contract labour and, in certain situations, empowers the government to abolish contract labour in specific activities.
Importantly, the Act does not say that contract workers should be absorbed as permanent employees merely because they work for long years. The Supreme Court has clarified this position in multiple judgments. In the landmark Steel Authority of India Ltd. vs National Union Waterfront Workers, the Court held that abolition of contract labour does not automatically result in absorption unless specific conditions are met.
The Industrial Disputes Act, 1947 also plays a role, especially when contract workers raise disputes claiming that the contract system is sham or unfair. Courts then examine the real nature of employment. However, even under the ID Act, permanency is not granted lightly.
Courts focus on factors such as who has control over hiring and firing, who pays wages, who maintains service records, and who exercises disciplinary authority. Merely working inside the premises or performing similar work as permanent employees is not sufficient.
In simple terms, Indian law protects contract workers from exploitation but does not convert them into permanent employees by default. Permanency arises only when the legal employer-employee relationship is clearly established with the principal employer.
When Can Contract Workers Legally Claim Permanency?
Contract workers can legally claim permanency only in limited and exceptional situations. The most important situation is when the contract arrangement is found to be sham, bogus, or merely a paper arrangement. In such cases, courts may lift the veil and declare the principal employer as the real employer.
This typically happens when the contractor has no real independence. If the contractor does not control recruitment, cannot discipline workers, does not pay wages independently, and exists only on paper, courts may conclude that the contract system is being misused.
Another situation arises when the principal employer exercises complete control over the workers. If company officials decide who will be hired, who will be terminated, who will be promoted, and who will be punished, it weakens the contractor’s status as an independent employer.
Courts also examine whether statutory compliances are genuine. If PF, ESI, wage payments, and records are manipulated or directly handled by the principal employer, the risk of permanency claims increases.
It is important to note that long service alone does not create permanency. Even ten or fifteen years of work does not automatically change status unless the above legal factors are present. Legal claims succeed not because of sympathy, but because of evidence showing that the contract system is a disguise.
When Can Contract Workers Be Automatically Absorbed on Permanency – Abolition of CLRA Situation
Many believe that once contract labour is abolished under the Contract Labour Act, workers must automatically be absorbed as permanent employees. This belief is incorrect. Section 10 of the CLRA Act empowers the appropriate government to prohibit employment of contract labour in certain processes or operations.
Earlier, some courts took a view that abolition implied absorption. However, the Supreme Court in the SAIL judgment clearly settled the law. It held that abolition of contract labour does not automatically result in absorption of workers by the principal employer.
After abolition, the principal employer may choose to engage workers directly, but there is no mandatory obligation to absorb the existing contract workers. The employer can also reorganize work, outsource differently, or reduce manpower, subject to other labour laws.
However, if abolition is combined with proof that the contract was sham, courts may direct absorption. Thus, abolition alone is not sufficient. It must be accompanied by evidence of a disguised employment relationship.
HR professionals must be cautious during abolition notifications and should seek legal advice before making any commitments or assurances to contract workers.
Legal Issues Faced by Contractors When Their Workers Demand Permanency
When contract workers demand permanency, the first legal pressure point usually falls on the contractor, not the Principal Employer. Since the contractor is the legal employer, any claim related to employment status, continuity of service, or regularisation is primarily directed against the contractor.
One major issue is misclassification of employment. If the contractor has weak documentation, irregular appointment letters, or inconsistent wage records, workers may allege that the contractor is only a name-lender and not a real employer. This exposes the contractor to findings of sham arrangements.
Another challenge is control and supervision. If the contractor cannot demonstrate independent control over hiring, discipline, leave approval, and deployment, courts may conclude that the contractor lacks real managerial authority. This weakens the contractor’s defence against permanency claims.
Statutory non-compliance is a serious risk. Delays or defaults in PF, ESI, bonus, gratuity, or wage payments strengthen workers’ arguments that the contractor is not operating independently or lawfully. Such lapses often become evidence in labour disputes.
Contractors also face issues arising from long-term engagement of the same workforce. Repeated renewals without rotation or fresh contracts may create an impression of disguised permanent employment, even if legally permitted.
Finally, union intervention complicates matters. Once unions step in, demands often escalate from service issues to permanency claims, increasing litigation exposure for the contractor.
For contractors, strict documentation, compliance discipline, and operational independence are essential to withstand permanency-related legal challenges.
Read: POSH Case Study: Vinod Narayan Kachave Judgment & Bombay High Court
Why Getting Permanency Is Difficult Under Indian Law
Indian courts follow a strict approach when it comes to granting permanency to contract workers. This is because indiscriminate absorption would defeat the purpose of lawful outsourcing and contract labour systems.
One major difficulty is proving sham contracts. The burden of proof lies on workers or unions, and courts require strong documentary and oral evidence. Mere allegations are insufficient.
Another challenge is judicial consistency. Over the years, courts have consistently ruled against automatic absorption. This has created a stable legal position that favours genuine contract arrangements.
Operational control is also misunderstood. Supervisory instructions related to safety, quality, and output do not automatically make the principal employer the real employer.
Finally, courts balance economic realities. Businesses are allowed flexibility in manpower deployment, provided they comply with labour laws. Permanency is treated as an exception, not a rule.
These legal realities make permanency claims difficult, though not impossible.
The Role of “240 Days” – A Commonly Misunderstood Concept
The concept of completing 240 days of work is one of the most misunderstood aspects of Indian labour law. Many contract workers believe that completing 240 days automatically makes them permanent. This is incorrect.
The 240-day rule comes from the Industrial Disputes Act and is primarily relevant for retrenchment protection. It ensures that workers who complete 240 days of continuous service cannot be retrenched without following due process.
It does not confer permanency. It does not change the nature of employment. It does not convert a contract worker into a permanent employee.
Courts have repeatedly clarified that 240 days only provide procedural protection, not employment status. Unfortunately, this myth continues to circulate through unions and informal advice.
HR professionals must clearly communicate this distinction to avoid false expectations and disputes.
Union Angle – Can Unions Demand Permanency of Contract Labour?
Trade unions can demand permanency for contract workers as part of collective bargaining. There is no legal bar on unions raising such demands. However, the success of such demands depends on legal merit.
Unions often argue that contract labour is exploitative and that workers should be absorbed. They may raise disputes under the Industrial Disputes Act and seek conciliation or adjudication.
However, courts examine facts, not slogans. If the contractor is genuine, unions cannot force permanency merely through pressure tactics.
HR should not ignore union communications, but should respond calmly, stating the legal position. Recognizing unions for contract labour issues without legal review can create complications.
Unions can negotiate better wages and conditions, but permanency remains a legal determination.
Legal Provisions Governing Principal Employer
The principal employer has specific statutory obligations under the CLRA Act. These include registration, ensuring contractor licensing, payment of wages in case of default, and providing welfare facilities.
However, these obligations do not make the principal employer the direct employer of contract workers. The law clearly separates responsibility from employment relationship.
Failure to comply can attract penalties, but it does not automatically result in permanency.
HR must ensure strict compliance to avoid legal exposure while maintaining clear boundaries.
Legal Position of the Principal Employer (PE)
The principal employer becomes legally vulnerable only in specific situations. If the contract is sham, if control is excessive, or if statutory roles are ignored, courts may lift the veil.
PEs should avoid issuing appointment letters, controlling leave directly, or making verbal assurances of permanency.
Clear documentation, proper contractor management, and legal audits are essential to protect the PE.
If Contract Workers Go on Strike Demanding Permanency without Formation of Unions – HR’s Legal Stand
When contract workers go on strike inside factory premises demanding permanency, HR must act strictly within the legal framework. The first step is to assess whether the strike is valid under the Industrial Disputes Act, as contract workers must raise disputes against their employer, the contractor, not the Principal Employer.
HR should verify whether mandatory strike notice requirements are met. An illegal strike has no statutory protection. Any obstruction of gates, production, or safety-critical areas should be documented and addressed through the contractor. HR must record that permanency is not negotiable with the Principal Employer. Discipline rests with the contractor.
Read: Can a Probationary Employee Terminate Without Notice Period?
If Contract Workers Form a Union and Go on Strike for Permanency – HR’s Legal Position
When contract workers form a union and then proceed on strike within factory premises demanding permanency, HR must clearly separate union rights from employment rights. Formation of a union by contract workers is legally permissible under the Trade Unions Act, even if they work inside the Principal Employer’s premises. However, union formation does not alter the employer–employee relationship.
The strike’s legality must be assessed carefully. Even if a registered union calls for a strike, the dispute must be raised against the contractor, who is the legal employer. A strike aimed at compelling the Principal Employer to grant permanency lacks legal foundation and may be treated as an illegal strike under the Industrial Disputes Act.
HR should immediately document whether proper strike notice has been issued and whether conciliation has been attempted. Absence of statutory notice weakens the union’s protection. HR must also assess workplace safety and continuity of operations, especially in factories where obstruction can pose safety risks.
Importantly, HR must avoid recognizing the union for matters concerning permanency or absorption. Any recognition or negotiation on this issue may be construed as acceptance of an employment relationship.
All communications should reiterate that employment-related demands must be addressed by the contractor. Disciplinary measures, if required, must be initiated only through the contractor, following due process.
The Principal Employer’s role is to maintain lawful operations while respecting statutory union rights without crossing legal boundaries.
Final Practical HR Insight – Critical Do’s and Don’ts for HR
✅ What HR MUST Do (Legally Safe Practices)
• Ensure the contractor is the real employer in practice, not just on paper
• Verify contractor’s independent control over hiring, deployment, leave, discipline, and exit
• Maintain clear documentation: agreements, licenses, wage records, PF/ESI challans
• Route all permanency demands and strike notices through the contractor
• Respond only in writing, clearly stating that the contractor is the employer
• Train line managers on limits of supervision over contract workers
• Conduct periodic legal audits of contract labour arrangements
❌ What HR MUST NOT Do (High-Risk Actions)
• Do not create or tolerate sham / camouflage contracts
• Do not directly supervise contract workers on employment matters
• Do not approve leave, overtime, discipline, or termination of contract workers
• Do not issue appointment letters, warnings, or performance appraisals
• Do not promise permanency, regularisation, or absorption (even informally)
• Do not negotiate permanency with unions of contract workers
• Do not ignore legal notices, strike intimation, or union communications
📌 HR Legal Reality:
Excessive control, poor documentation, or sympathy-driven actions can lead courts to lift the veil, declare the contract sham, and order permanency absorption.
Conclusion
The concept of completing 240 days is often misunderstood. It does not give contract workers any automatic right to permanency; it only provides limited protection against retrenchment under the Industrial Disputes Act. Contract workers can raise demands for permanency only with their employer, the contractor, and not directly with the Principal Employer, unless the contract arrangement is proven to be sham or bogus in law.
Resorting to strikes inside factory premises to demand permanency, especially against the Principal Employer, is legally unsustainable and may be treated as an illegal strike, exposing workers to disciplinary action through the contractor. For HR, clarity of law, documentation, and calm handling are essential to prevent escalation and litigation.
Read: Handling Fake Experience Certificates: Can HR Terminate Without Notice or Withhold Salary?