Contract Labour Compliance: Rules, Principal Employer Duties and the Monthly Calculation
For plant heads, HR and accounts teams that use manpower contractors: what the law expects of you, how to check a contractor's wages, PF and ESI each month, and how to keep the proof.
Contract labour compliance is the part of labour law that follows the work, not the payroll. When a manpower contractor supplies loaders, security guards or line helpers, the contractor pays them, but the principal employer still answers for whether they were paid correctly and covered by PF and ESI.
Most SMEs discover this during an inspection or a claim, when a contractor has vanished and the unpaid contributions land on the factory that used the workers.
This guide explains the rules in plain terms, works through the monthly numbers with an illustrative example, and shows how Apragya keeps contractor records, attendance and proof in one place.
Contract labour rules and the monthly calculation
For decades the Contract Labour (Regulation and Abolition) Act, 1970 governed this area. It applied to establishments using 20 or more contract workers, a threshold several states had raised. The labour codes that took effect in November 2025 moved these rules into the Occupational Safety, Health and Working Conditions Code, which uses a higher general threshold. State rules and forms are still being settled in places, so check what your state has notified.
The duties are broadly the same. The principal employer registers the establishment, uses licensed contractors, provides welfare facilities such as drinking water, restrooms and first aid, and makes sure wages are paid on time. If the contractor fails to pay wages or contributions, the principal employer can be made to pay and recover the amount from the contractor.
The calculation is a check, not a payroll. In the illustrative case above, each worker's PF is 12 percent of the INR 12,000 wage, so INR 1,440 from the worker and INR 1,440 from the employer. ESI applies because gross is within INR 21,000: 0.75 percent, INR 135, from the worker and 3.25 percent, INR 585, from the employer. For 60 workers the contractor should show INR 86,400 of employer PF and INR 35,100 of employer ESI each month.
- Confirm the establishment's registration and each contractor's licence are valid.
- Match the contractor's claimed headcount with your own attendance.
- Check wages paid against the notified minimum wage for the work.
- Recompute PF and ESI for the headcount and compare with the challans.
- Release the bill only when the proof matches, and file the proof.
What weak contract labour compliance costs
Paying twice
If a contractor defaults on wages or contributions, the principal employer can be made to pay.
Inspection findings
Missing registrations, registers or challan copies show up as notices.
Unclear headcount
Nobody can say how many contract workers were on site on a given day.
Scattered proof
Licences, challans and wage sheets sit in email threads and cupboards.
An example: a Hosur auto parts unit with two contractors
Take an illustrative unit in Hosur that uses 60 contract workers from two agencies for loading and cleaning. Each worker earns INR 18,000 gross a month, of which INR 12,000 is basic wage. Before releasing the monthly bills, the accounts team runs the same six checks.
The six checks before a contractor bill is paid
- HeadcountBiometric attendance shows the same 60 workers the bill claims.Matched
- Wage sheetWages paid are not below the notified minimum.Checked
- PF challanThe second agency's challan covers only 52 members.Mismatch
- ESI challanContributions paid for every covered worker.Matched
- Contractor licenceValid for the period, copy on the vendor record.Ready
- Bill releaseHeld until the missing eight members are shown.Pending
The second agency's bill was held. It sent a revised challan covering all eight missing workers within a week, and the unit paid the bill with the proof already attached to the contractor's record.
How Apragya supports principal employer responsibilities
Step 1 of 5
Contractor record
Each agency is onboarded as a vendor with its licence, registrations and documents.
- Contractor record: Each agency is onboarded as a vendor with its licence, registrations and documents.
- Worker records: Contract workers can be kept as employees with a contract employment type.
- Attendance: eSSL biometric punches give a daily headcount by contractor.
- Bill approval: Contractor bills pass through approvals in purchase and payables before payment.
- Monthly proof: Challan copies and wage sheets are stored against the contractor.
Keeping contract labour registers and proof in one place
A register in a cupboard can satisfy an inspector on a good day. It cannot tell accounts that this month's PF challan is short before the bill is paid. That link between headcount, proof and payment is what protects the principal employer.
Manual contractor files, against Apragya
| Feature | Files and email | Apragya |
|---|---|---|
| Contractor documents | In folders, often expired | On the vendor record, with dates |
| Daily headcount | Gate register | Biometric attendance by contractor |
| Challan check | Rarely before payment | Part of the bill approval |
| Bill payment | Released on the invoice | Released after approval |
| Inspection file | Assembled in a hurry | Pulled from one place |
Checked against public information on 16 September 2026.
What sets Apragya apart for contract labour compliance
One record
Contractor, workers, attendance and bills sit on shared records.
AI you can put to work
An agent can compare challan headcount with attendance, built in the no-code builder.
Human review
Bills are approved, rejected or sent back by a person.
Audit log
Who approved which bill, and when, is recorded.
Access by role
Contractors' documents are visible only to the teams that need them.
Your own types
Employment types, documents and approval steps are configurable.
Contract workers' attendance runs on the attendance feature, and your own staff's statutory payroll is covered in payroll software for India.
Getting started with a contract labour act compliance checklist
- List every contractor, the work they do and the number of workers they supply.
- Collect each contractor's licence, registrations and PF and ESI codes.
- Put contract workers on biometric attendance, tagged by contractor.
- Agree the monthly proof each contractor must send with the bill.
- Hold any bill whose proof does not match the headcount.
The first month usually finds at least one gap. That is the point of starting.
What it costs to start
Contract labour compliance, answered
Is the principal employer liable for the contractor's PF and ESI?
Does Apragya file contract labour returns?
Can contract workers use the phone-friendly app?
Has the Contract Labour Act changed?
What does it cost to start?
Check the proof before the contractor is paid
Set up one contractor, its workers and its monthly proof, and hold the next bill until it matches.