CURRICULUM

 What is labour law – historical perspective. European and continental history. Our
legislations are inspired from them.
 How to look at labour law – debate between two authors Brian Langille and Guy
Davidov. What should be the underlying theory behind labour law to make it acceptable
to legislators.
 Role of labour law – Kamla Sankaran. Why labour law is limited in scope and how the
work is different from general understanding.
 ILO – treaties and how they are reflected in our constitution. Employment law as a whole
does not derive from one single source, but from a variety of sources – ILO Treaty,
constitution, statutes and contractual principles.
 Three important cases – PUDR v. UOI, Excel Wear v. UOI and Vishakha v. Rajasthan.
 Essential concepts of labour law. Presently, around 32-44 labour legislations, which will
be compiled and subsumed within 4 unified codes in the recent future. But this is not so
in the present. Basic definitions – industry, workplace, etc.
 Powers of state and central government.
 Trade Unions – history of collective bargaining, how they came into being, fundamental
right to strike. Recognition of trade unions in the form of statute. Some incidents with
regard to strikes and functioning of trade unions.
 Industrial Disputes Act, chapter 5A and 5B. Concept of industrial disputes, lay-off etc.
 Dispute Resolution Process – IDA lays down a complex procedure which needs to be
followed in order to resolve a dispute.
 Standing orders – they are the broad framework/detailed legislations applicable to a
particular area.
 Factories Act and broad framework with respect to timing, wages, conditions of work.
 State legislations
 Filings to be done under IDA, TU Act and Standing Orders Act.
READING 1 – HUGH COLLINS

How labour contract is different from a commodity contract. A dichotomy exists. It can be said
that labour is a commodity as their services can be bought and sold. Labourers offer their
services. We even say labour market. But ILO Convention highlights that labour is not a
commodity. So we need to see what is the problem in labour contract and services being the
same as commodity contract.

There is a dull compulsion of economic necessity for workers to work in return for a wage. Also,
a person is provided a sense of social inclusion by the fact that they are working. For a worker, a
significant amount of inclusion that can come about is from the work he does. Work provides an
important sphere where a person makes friends and acquaintances.

In the matchsticks example, matches are made from white phosphorous, which can lead to
serious diseases if contracted. In this manner, the conditions of work may be very poor and
unsafe. A contract cannot be an all-inclusive tool. The freedom of contract and balance between
both the parties is also not true in all cases.

As we work in a market economy, contracts need to be facilitated. We need to operate within the
system. It is a matter of law and politics to what extent we need to restrict the freedom of
contract.

Otto Kahn-Freund observed that in a contractual relation, in its inception, it is an act of

submission, in its operation it is a condition of subordination, however much the submission and
the subordination may be concealed by that indispensable figment of the legal mind known as
the ‘contract of employment’. The main object of labour law has always been, and will always
be, to be a countervailing force to counteract the inequality of bargaining power which is
inherent and must be inherent in the employment relationship. Thus, the reasons why general
principles of contract are not enough and therefore labour law as a discipline is necessary — (i)
submission, (ii) subordination and (iii) inequality of bargaining power.

1. Submission – It is reflected in the take it or leave it form of contract. Corporates have

significant number of resources. They have access to more political and legal power.
They also have access to market. On the other hand, there may be a single person seeking
employment. He may have some savings, some skill, and some information about the
 market. On the weighing scale, it is highly tilted in favour of the employer. They will be
able to impose terms and conditions on the person including the work, the conditions of
work, hiring and firing power, etc. Eventually, the person will have to accept whatever
conditions are put forth by the employer. Thus, employer has wealth, bargaining power
(access to market, information, availability of replacements). Except for some very
famous and successful persons, the bargaining power of labour is very limited. Hence, the
person has to submit himself to uncertainty, because of the fear of losing out on what
opportunity he has been given.
2. When a contract of employment is entered into, most of them are for long-term. In case a
breach takes place (which is fairly possible considering the long-term) or a dispute arises,
then the remedy for breach of contract is litigation and claiming damages. But this is not
realistic in case of employment contracts as the person would not want to leave the
employer. There may be processes to mediate the disputes. These may be included in the
contract, but are not normally found in a typical contract. There is a way in which
disputes progress. Initially they may be referred to the internal committees, and only
when they escalate, they go to other forums. Therefore, a standard contract is not enough.
3. Incompleteness and vagueness of the employment contract – terms are deliberately left
vague so as to enable the employer to alter the area of work as per their convenience.
However, this is also a necessity. For instance, a contract may mention that under some
circumstances, person may be allowed to work from home. Employee therefore does not
know what he may be required to do in the future.
4. Subordination / Authority of the employer – employer has the inherent authority to use
the vagueness to ask the employee to do something which the employee was initially not
agreeing to do. Employee is subordinate to the employer. Employer can also ask to work
overtime, to skip lunch breaks, to transfer to other office, etc. by virtue of his authority.
In this manner, a contract would not be sufficient to protect the interests of the
employees.
5. When a person spends so much time in a particular place, it cannot be summarized in a
contract. At the end of the day, as the human being is providing services, not just the
work, but the connection and interaction also matters. An ordinary contract would not be
able to account for the various interactions and connections inherent to a human.
 Moreover, the privacy that is accorded to workplace. Enforcing strict standards to the
point of infringing the privacy of the person, which hampers the personality of the
worker. A labour cannot be equated with a robot working endlessly without any
distractions or lags. This, in turn, leads to submission by the worker to the employer.
Therefore, labour law is required to respect human being and autonomy.

READING 2 – MANFRED WEISS

Earlier, artisans, etc. were able to regulate to whom they offered their services, and the cost of
those services. Also, persons were shifting from place to place. If work is offered to a person, he
will have to accept it at that rate. Workers could not form associations or refuse to work below a
particular rate.

However, once industrialization happened, trade unions started forming. Lawmakers also
realized the excesses committed by the employers, so trade unions were started to be
decriminalized. Labour laws in the initial days said that there are certain rights which the
workers must be given.

But it was assumed that labour law should only facilitate the negotiations between employers and
employees. Once employed, it is to be decided between the employer and employee. But this
mere collectivization of relationship (come together and form a trade union, identify yourselves
with the group) does not suffice. As labour law should also prevail during the employment with
respect to conditions of work.

Relationship of supervision and subordination – factory workers at the lower level, and white-
collar supervisors overseeing them. In any workplace, we would find different workers
belonging to different employment classes. Collectivization of workforce is not possible as
white-collar persons have low interaction with blue collar workers. Moreover, gender division
can be there among the workforce. Due to such diversity, a trade union might no capture a wide
variety of interests, and competing interests may arise.

Subordination always remains because worker is still dependant on employer for work and
wages.
Globally, companies go from one jurisdiction to another due to low production cost, etc.
Moreover, due to the sub-contracting of work to different corporations, worker is unable to
properly enforce contract. As a result, he is always subordinated, and has to be submissive.

Therefore, we need to restructure and readapt labour law and apply it in the present reality.

The assumptions discussed have become even stronger than what they were in 19 th and 20th
century.

Horizontal and vertical relationship – originally, there were only two categories of workers:

i. Employee – a person working for another for indefinite duration for wages, and they
were completely subordinated to their superiors. He would be bound by the direction
and orders of superior. This test of supervision and control was there.
ii. Independent contractors – by virtue of their skill or the work they do, they were
considered as not being able to be in a relationship of control and supervision. For
example, a painter/sculptor in 17th century. A person approaches him to paint his
picture. The work asked is one time and for specific duration. With respect to control
and supervision, the client cannot tell the painter what colour, layout, etc., as it is
determined by the painter who has experience in it. The client does not normally have
a say in how the work is to be done. Thus, although payment is done, employer would
not be able to control the work. There is an assumption for ICs that they are more
independent i.e., they are free to exercise their discretion and are not dependent on the
employer to provide them work, tools or directions.

In the 21st century, we do not have relationships where workers work for lifetime, rather there are
contracts for fixed terms. If duration of work is indefinite, law recognizes that if termination
happens, the employer has to pay the worker. But if it is a fixed term contract, then indefinite
time element goes away. Also, work has evolved to an extent that the owner/employer
cannot/would not tell the employees how the work is to be done. They are only concerned with
final product. Thus, element of control and supervision has weakened.

With the advent of globalization, work is being outsourced. There is a principal establishment
but work is also given out to other employers who have workers under them. They may give to
some other employers also. In this manner, the product and work travels to 3-4 layers before
reaching the industrial establishment. This shows the shift from a vertical relationship to a more
horizontal relationship.

There may also be a community setup of work where a single community is given work. But
now, work is not limited to one person or category of persons, rather it is much more diverse.
Persons from different communities and different geographical areas, economic background,
age, gender, etc. come together. This makes unionization more difficult as the interests are
varied. Even if unionized, trade union might not represent the interests of the minority people in
the union. Many trade unions impose some terms and conditions without even discussing with
the concerned parties. For instance, in Nargiz Mirza, conditions for female air hostesses were
changed without consulting them.

For instance, in a trade union consisting of regular workers and daily wage workers, regular
workers may refuse to undertake the concerns of daily wage workers. Or a male dominated
workforce may not take up issues of female workforce. Thus, the conception that trade union is
the one solution for all worker issues is undermined due to diversity of workforce.

Most of the labour legislations in India are only triggered when a numerical threshold of workers
is reached (10 or 20). Also, labour law does not apply to every single work – works may be
similar, but labour law may apply to one and not to other. But these are points of criticisms as if
the idea is to protect the workers, still the scope of application is considerably restricted. The
numerical threshold test is used as a way to escape liability. A business may outsource work and
create many layers, or it can create sham contracts and say that its number of employees is below
the threshold and hence labour law would not apply.

Another term is ‘gig workers’ (independent contractors, freelancers, online platform workers). In
the traditional labour law test of control and supervision, long term relation, direction, financial
dependence, etc., they would not be considered as employees. But most labour laws provide
benefit/protection only when they fall within ‘employee’. This means gig workers are not
protected in any form, and their contract of employment is the only stipulator. Protection offered
by labour law may be in terms of hiring and firing, compensation, social security benefits, etc.
Employees Compensation Act and Employees State Insurance Act stipulate that for any injury,
employees need to be compensated. But this would not apply to the independent contractors
unless action arises in tort law.
Also, maids and house servants etc. are also not covered within the ambit of labour law because
the test of workers was from industrial point of view. Thus, the limited scope of the traditional
test of employment has become problematic and it does not reflect realities. In India, there is a
distinction between organized and unorganized workforce. Only the organized workforce, which
constitutes only 10% of the workforce, are protected by labour law. The unorganized sector does
not have any protection. Therefore, we need to expand the scope.

But at the same time, extending the scope to all areas of work would make it problematic due to
the increase in liability of employers, and can delegitimize the concept of labour law itself.

With regard to wages, wage thresholds are provided for. If a person earns beyond a particular
threshold, the social security and other protection laws would not be applicable for him. This is
because it is assumed that he has adequate bargaining power by way of unionization.

READING 3 – HARRY ARTHURS

He talks from the perspective of US and Canada. He also says that labour as a class are no longer
what they were in 18th or 19th century. The problem is that collectivization requires persons to
identity with one another, and homogeneity is not there. Moreover, labour as a class in
themselves does not exist. Earlier, workers identified themselves as white or blue collar workers.
But now, concerns have shifted to gender, race, money, and not class as an individualistic issue.
As a result, labour unions have struggled to find members. Free market arguments have come
forward and many workers support such parties. It can be said that labour law has helped them to
come to this level, but at the same time, focus on earlier issues has decreased.

Arthurs criticizes the narrow focus of labour law. To stress why labour law may be palatable to
people, to look at its inter-disciplinary nature has to be done.

Both Weiss and Arthurs ask to link labour law to human rights, which will give strength to the
arguments of labour law. It might also allow for trans-national labour law standards to emerge,
and international instruments may become applicable to labour. Labour laws regulate only
employment. While in human rights, just by the virtue of being human, they are applicable.
Thus, focus should shift from just employment or regulating the workplace to the person doing
the work. A lot of the content of labour law emerges from statutes and constitution. But a lot of
leeway is given to the employers and employees to figure out for themselves. Only broad rules
are made and a lot of flexibility is there.

Other theory is in terms of social security. Focussing on the worker not just in his period of
employment, but before he joins the work, after he leaves, and in the period, whenever he faces
any difficulty. Training of workers before joining, employee compensation, insurance, maternity
benefit, post-retirement benefits, etc.

READING 4 – DAVIDOV THE CHANGING IDEA OF LABOUR LAW

Written as a response to his colleague Brian Langel. He talks about the two old stories – unequal
bargaining power, and equity v. efficiency. Labour law was always viewed as an inefficiency in
the free market. Free market assumption with demand and supply was there, and no case of
market failure was assumed. Labour law was viewed as an inefficiency, but it was considered
important because of unequal bargaining power, and submission and subordination of labour.

In equity v. efficiency – market does not allocate resources equally. Sometimes, minimum wages
of people are so low that they have no purchasing power. As a result, goods are not purchased
and market collapse. Thus, wealth needs to be redistributed. Secondly, what is the ‘free’ market,
as we have always functioned under law of contract, property, etc. So there is nothing free about
the market and its allocation. We are just trying to balance the market through laws.

These two stories framed labour law in its original state. But now there is an updated story –
research has shown that labour laws are actually very good for the market, as they try to ensure
that market failures do not take places. After the Great Depression, the labour laws came to
increase the spending power of the people. Labour laws will also increase worker efficiency. If a
person has job security and conducive working conditions, their involvement and productivity
will increase. Studies have shown that labour law is not as problematic as free market scholars
made it to be.

This story does not renounce redistribution of wealth. While other articles say that you only have
labour laws to the extent that they benefit everyone, or only benefit the employers.

When we look at a free market, we think that whoever puts an effort will get reward, demand and
supply operate, etc.
Nationalness in conditions – there is no equity. If a corporation is able to generate profits, it is
because of the effort it puts in.

But Davidov says this is not true, as you have considerations of contract law, of common law,
etc. It has favored the powerful who have been able to control resources. Lot of authors have said
that law has been tilted in favour of persons with power, and helps them consolidate resources.

Thus, market has been tilted in a certain way by the laws. Thus, intervention by labour law is not
unnatural as it just tries to bring back the balance.

These two stories are the old stories and there is an updated story.

There is assumption of rational person in economics – he wants to maximize his satisfaction. But
this assumes that person is aware of all choices and his circumstances.

Neo-classical economists assume that market by itself will take care of everything, and there is
no need of external regulation or interference. But the reality is not so. We have seen market
crashes. Various smaller things are also there which market is unable to correct, for instance,
labour may not be available, etc.

For instance, the four-day work week may be considered an unnecessary intervention.

Langille has written a paper which says we need to have a constituting narrative of labour law.
Labour law should help in enhancing human freedom and maximizing use of human capital.
Labour law should benefit everyone – state, employer and employee.

Hyde has a different argument. He says the focus of labour law should only be efficiency, or
solutions to market failure. This is because in case you have a goal other than this, it would
involve some sort of sanction. But there is very limited scope on legislature to

i. Impose rules and regulations on private players.

ii. Legislature cannot impose sanctions as it may lead to non-compliance.

Researches have shown that though we have a complex web of labour law, compliance is limited
because there are so many laws that persons are not aware, or there are some mechanisms within
the laws to escape responsibility. Therefore, we need to ensure efficiency.

India is trying to do so by reducing paperwork, and subsuming 44 laws into 4 codes, etc.
Davidov’s concern with previous two authors is that they are putting too much focus only on the
marketplace. Thus, they are undermining results which are external to the market. What is
achievable in the marketplace are profits. But things like human rights and dignity are external to
the market, and cannot be left to the market. In the bid to make labour law more attractive to
businesses, we should not forget the aspect of inequality of bargaining position, submission and
subordination, dependency of personal relationships, and the redistributive aspect (power
structures, profits, money should not be allowed to be concentrated in few hands). Thus, focus
should also be on the workers themselves and the rights that they have.

Langille’s reading is a response to what Davidov has said. He says that what I am trying to say is
different from what you understood.

SOURCES OF LABOUR LAW

Constitution, Legislations, contracts, code of conducts (implemented by way of contract), trans-

national agreements between human rights organizations, international agencies, etc. Sometimes
national law might not tell us everything, but due to international human rights agreements, etc.
we implement them.

In the global sphere, international labour law has existed since 1880s. Efforts have been made by
Europeans for the welfare of children and women. The developments in Europe coupled with
World Wars, revolutions in nations, etc. eventually led to formation of International Labour
Organization [ILO] incorporated by the Treaty of Versailles, 1919. It sets itself as a body that
will implement global labour standards. Need was felt for the labour law internationally.
Preamble of the ILO treaty also links peace and social justice. World piece cannot be achieved
without social justice. League of Nations failed then ILO came under UN purview.

International labour standards can also be found in other international documents. For instance,
UN Human Rights Charter, Convention for Economic, Social and Political Development,
Conditions of Work, Minimum Wages, etc.

ILO in its structure is a somewhat special body. It implements the tripartite system – the
representation given to the member states is not just limited to them, it is also extended to NGOs
and persons working in the nation states. Governments, employers and employees, all come
together and discuss issues. Thus, discussion is not just limited to one party. They try to
implement standards that are fair and equitable to all parties and stakeholders.

ILO has three major organs:

i. International labour conference – legislative body of ILO. Meets at least once a year
to discuss agendas and come up with legislations. Members delegate 4 persons – 2
from government’s side, 1 from employers side and 1 from employees side. Each
delegate is accompanied by adviser. The non-governmental persons have to be
selected in agreement with industrial groups, etc. If there are doubts about
creditability of person, the conference members can vote and decide upon it. There is
also an aspect of independence in the form of individual voting – as an NGO member,
there is no obligation to vote in consonance with the government of his country.
ii. Governing body – executive body. It also sets the agenda to be discussed. Agenda
will be communicated by way of DG to the member states. Body consists of 56
members, 28 represent governments, and 28 represent employers and employees
(14+14). 10 are members of nations of chief industrial importance (India is one such
nation). These are permanent. Other members are voted upon. In 14+14 also, they are
voted upon in the conference. The criteria to determine chief industrial importance is
of an impartial committee which only consists of experts.
iii. International labour Office/office of the DG – run by the DG. It is responsible for
information collection and distribution of information on all subjects relating to
international adjustment of conditions of industrial life and labour [Article 10 of ILO
Constitution].

Thus, ILO has a great advisory and awareness generation role also. It also offers courses related
to labour law which generate awareness.

For law-making process – agenda is decided by governing body on the basis of reports and
suggestions of members states. DG will communicate the agenda to states. Once conference
starts, law can be either in form of conventions or recommendations. Conventions are binding,
while recommendations are soft guidelines.
Voting on a convention is done by 2/3 rd majority. Then member is required to go back and take
approval from the competent authority. Once this is done, the state can implement it. However,
in case the member does not obtain the consent of the authority, no further obligation shall rest
upon the members, except that it will report to the DG about the position of its law and practice
with respect to the matters in the Convention, and show to what extent effect has been given, and
what other developments have taken place, and what are the difficulties faced in the
implementation of the Convention.

With respect to enforcement mechanism, WTO DSU is considered the strongest mode of
implementation. But in ILO, it is a major reason for criticism. ILO does not rely on strong
implementation, rather it relies on soft accountability. They see if the country is implementing
the convention, and if not, ILO will make an adverse remark. One way of holding accountable is
by negative publicity – creating awareness that the member is not implementing provisions.
Supervision can be in two ways:

i. Regular supervision [article 22-25 of ILO Constitution] – Committee of Experts is

there. They analyse the reports submitted by members and see the implementation of
labour standards. They will have discussion with the members, and then will prepare
a Report which is sent to the Conference Committee. This committee will call the
members and ask them about it. They will make certain observations and then publish
document under article 25.
ii. Complaint procedure – only initiated when there is a complaint made by member. A
Commission of Inquiry consisting of independent persons examine the complaint and
report on it. Report is sent to the government, to accept or not. If accept, then they
need to implement them. If they reject, the dispute then goes to the ICJ. ICJ will
decide upon it.

Modifications for special local conditions is allowed by ILO [Article 19]. Climatic conditions,
imperfect development of industrial organization, or other special circumstances which make the
industrial conditions substantially different shall be taken into consideration by ILO.

India is a founding member of ILO and a lot of Indian legislations have been influenced by ILO
Conventions. For instance, Code of Minimum Wages in India is sector specific, but the ILO
stipulates that minimum wages should be irrespective of sector. Therefore, India did not ratify
the ILO treaty. But now, there is the Code on Wages which is in consonance with ILO treaty and
hence it is in consonance with it.

Kamala Shankaran Reading

She discussed the parallel which is emerging between Indian and ILO. Civil and political rights
are what are the core human rights as per ILO, while social, economical and cultural rights are
relegated to the second tier. For this, we need to see history of ILO. Although ILO had
significant impact on states which fought in WWI, but by the time of 1930s, many states had
own political ideologies – Germany, Italy, USSR, etc. ILO was able to bring some regulations
with respect to labour. But after 1930s, due to this dissidence within the ILO, it was unclear as to
what should be the ideology governing ILO. USSR was suspicious as it saw ILO as a western
creation. US was not part of ILO.

ILO was struggling to maintain it existence around 1930s. At this point, Great Depression was
there. This led to significant unemployment and workers were adversely affected. Thus
importance of ILO was reinforced. Idea of JM Keynes came – we need to have counter-cyclical
spending by the government for the protection of individuals through social security and public
works programmes. As people will have greater income to dispose off, it would create demand,
which would increase production, thereby taking countries out of depression. This provided
trigger for the US also to join ILO. Until Roosevelt’s government came, US was very suspicious
of ILO and of providing protections to labour. Politicians and laws in US argued that freedom of
contract would be given priority over any other laws such as minimum wages.

Once Roosevelt came into power, he started the New Deal. He brought about social security
programmes for workers and got them out of depression. This established ILO’s turn towards
Keynesian philosophy. Thus, linkage between social and economic aspects – if you provide
social security, markets would improve. You cannot have free market and freedom of contract to
such a high extent as the market is unable to function by itself. After this, WW2 happened and it
further strengthened the link between social and economy.

In 1970s, the world started facing a slow economic crisis. Keynes’ policies were unable to solve.
This led to neo-classical economists which said that labour standards which are creating
limitations in the functioning of businesses is wrong. What is needed is greater privatization.
IMF and World Bank gave loans to countries, but on certain conditions. This led to de-linkage
between economic and social aspects. Companies functioned in different jurisdictions and
exerted influence on nation-states. Structure of ILO which was based on power of national
governments to impose labour standards was threatened. USSR also fell down and social and
economic linkage was further threatened. Neo-classists became more influential.

ILO was struggling to justify its existence as to why there should be link between economic and
social. As many countries were flourishing through de-linking social and economic aspects.
Around this time, WTO came into existence. Idea was to link economy with trade. Protectionist
measures were sought to be eliminated. Developed nations suggested linking labour standards
with trade. ILO standards were more in form of appraisals rather than sanctions.

A criticism that came was that ILO had no focus on what it wanted to achieve. In trying to link
social and economic, it was trying to do too many things at once, and was losing out on what
actually needed to be done. So to rejustify its existence, ILO focused on only some core aspects.
These are the 4 core things –

i. child labour
ii. freedom of association and recognition of right of collective bargaining – this came
from agreement of trade unions.
iii. elimination of discrimination
iv. elimination of all forms of forced/compulsory labour.

At this time, human rights discourse was focused on political. There is responsibility on state to
implement this, but no timeline is given. Developing countries accepted that in these core areas,
we can implement, but in other areas, we cannot. ILO also tried to pick things which will get
more support and things in which they will get the most support of nations. Both DCs and
developed countries were expected to agree upon these 4 things.

These four aspects at that time did not identify any conventions that had to be signed. Countries
only had to agree to discuss these issues. Still DCs were very apprehensive. They put a particular
condition that these labour standards should not be used for protectionist policies.

Later, 8 conventions were identified in which ILO would provide technical assistance and help
countries in implementing them.
Two criticisms:

i. You are accepting the neo-classical argument that social-economic rights are weaker
than civil and political rights. But these things cannot be delinked.
ii. In terms of implementation – while conventions with respect to child labour and
discrimination have been implemented, collective bargaining and freedom of
association have not been. This is the situation in India and various other countries.
iii. With respect to the process of review/appraisal, there is very little ILO can do if a
state refuses to ratify the convention or to follow the standards.

Since 2002, ILO has also identified ‘decent work’ i.e., work which will fulfil certain standards.

In India, the courts have started saying that although DPSPs are non-justiciable, we will link
them with fundamental rights and start enforcing them.

CONSTITUTIONAL FRAMEWORK IN WHICH LABOUR LAW OPERATES

After Emergency, scope of Article 21 was enhanced, and 14, 19 and 21 triangle was established.
Linkage between social and economic aspects was starting to break.

High Courts and Supreme Court have engaged in a purposive interpretation. As legislations
cannot foresee what can happen, we need purposive interpretation so that we are not limiting the
scope. This was suggested by Davidoff also. The intention is to bring more and more people
within the scope of the constitution.

In India, this starts right at the level of preamble – justice, social, economic and political;
equality, of status and of opportunity (important when we talk about discrimination); there is also
an element of socialism. We believe that workers and employers need to work together. Beyond
this, Part III talks about fundamental rights which includes equality before law, prohibition of
discrimination (equal remuneration act, discrimination at workplace), equality of opportunity in
public employment (now in private also it is being done), abolition of untouchability. These form
one aspect of labour law – if one is doing the same work, he should not be paid less than or
discriminated against his counterpart doing the same work.

Under article 19, freedom of speech and expression, to form association and unions, and to
practice any profession or carry on any occupation, trade or business. In India, it has been a
protectionist regime. To close a business requires permission of the government if the business is
in an important area. Although it is a concomitant that having right to open and carry on a
business also involves the right to close it.

Also, there is conflict between 19(1)(a) and (c) on one side and 19(1)(g) on the other. It can be
incongruent in the sense that as employees have freedom of speech and expression, and freedom
to form associations and unions, it can hinder the employers’ freedom to carry on any profession
or trade.

Article 21’s scope has been expanded greatly. Various conditions of labour have been included
in its ambit such as minimum wages or conditions of work.

Article 23 prohibits traffic in human beings and forced labour. But this does not prevent the state
from imposing compulsory service for public purposes.

In India, there are bandhua majdoors. People unable to pay loans can be made to work in
farms/factories without pay. When there are big construction projects, usually workers are
arranged though middlemen. Government stipulates minimum wages and construction company
pays it to middleman. But the middleman takes his cut and gives the workers less than the
minimum wages. Courts have taken a purposive interpretation in this regard and held that this is
also form of forced labour.

Under article 24, no child below 14 shall be employed to work in any factory or mine, or
engaged in any other hazardous employment. What is hazardous work is left to the discretion of
the court and hasn’t been stipulated.

Article 37 states that DPSPs shall not be enforceable, but it is the duty of State to apply these
principles. Article 38 imposes responsibility on State to strive to promote the welfare of the
people by securing and protecting a social order in which justice, social, economic, and political,
shall inform all institutions of national life. 38(2) states that State shall strive to minimise the
inequalities in income, and endeavour to eliminate inequalities in status, facilities and
opportunities, not only amongst individuals but also amongst groups of people residing in
different areas or engaged in different vocations.
Article 39(a) refers to minimum wages as it stipulates that all citizens equally have right to
adequate means of livelihood. (d) refers to equal pay for equal work. (e) is an extension of
prohibition of forced labour. Article 41 relates to the right to work. Article 42 provides for just
and humane conditions for work. This is implemented in Factories Act, Maternity Benefit Act,
etc. Article 43 talks about living wages which are more than the bare minimum required for
survival i.e., more than minimum wages. But this has not been implemented in India.

LABOUR LAW IN INDIA

India has 44 labour law legislations. States have amended some of them, and states also have
their own legislations. Thus, a very long list of labour legislations. This comes from VII
Schedule. Union list – Item 13 and 55. Item 35 relates to enforcement of international
conventions. Item 55 refers to safety of labour at mines and oil fields. Item 61 refers to industrial
disputes between union employees.

In State List, item 19 – relief for disabled and unemployed.

Concurrent list, Item 20. Also, item 22 – trade unions, industrial and labour disputes. Item 23 –
social security. Item 24 – welfare of labour including social security benefits. In these items,
Centre comes up with legislations and then states make amendments to it.

INTERPRETATION OF LABOUR LAW BY COURTS

PUDR v. Union of India (Asian Games Case), 1982 – some construction had to be done in
relation to Asian Games. A lot of work was given out to contractors. They engaged workers and
started work. PUDR engaged three scientists in order to see the compliance with labour laws.
They prepared a report. It was found that workers were not paid minimum wages, there was
discrimination between wages of men and women, children were engaged in work, benefits to be
given under certain legislations like migrant workers, etc. were not being given. PUDR wrote a
letter to Justice Bhagwati. He treated it as a PIL and issues notice to all the authorities.

At this point, a number of objections were raised. Bhagwati makes a very passionate statement
on why PIL is important – to achieve social justice and say that we are a democratic and
progressive society. For this to be done, rights must be enforced. He is also very critical of the
de-linking between socio-economic order and civil and political rights. If we have to make civil
and political rights meaningful, they have to be linked with socio-economic rights.

Report was based on the findings of three scientists, and on this basis, PUDR wrote a latter and
submitted to J. Bhagwati. He considered it a PIL. The issues involved were violations of 4 labour
law legislations:

i. Equal remuneration act – women were paid unequally.

ii. Minumum wages act – workers were paid 9.25 Rs. By the government, but the
middleman was taking away around 1 Rs. And therefore amount paid was below the
minimum wages.
iii. Child labour act – Underage workers were involved in construction
iv. Some Acts like Contract Labour, Maternity Benefit, etc. require certain facilities to be
provided in terms of proper living space, bathrooms, clean drinking water, etc. which
are not being met.

Preliminary arguments taken by UoI, Delhi Government and Delhi Development Authority:

i. The employees were not employees of the government, but of the contractor, and
hence the violation was done by the contractor.
ii. Article 32 – standing of PUDR to raise concerns. PUDR was not one who was
actually affected. While article 32 requires the persons actually affected to come to
court. Here, they haven’t filed the case, neither have they come to court. Only a third
party is coming.
iii. Assuming that the violations are correct, they are statutory violations, and not related
to fundamental rights, therefore, PIL cannot sustain. So adequate remedy would be to
follow the procedure under the concerned legislation.

In the first 5-6 paras, the Court strongly comes down on certain points and explains the linkage.
He makes a very impassioned argument. The protection of civil and political rights enshrined in
the constitution and the obligation of the government to protect the same. PIL as a mechanism
can be used to ensure civil and political rights to people. He is justifying the existence of PIL.
The rich can easily approach the Court and get remedies. There is a bifurcation between rich and
poor. Unless we allow for PIL, a lot of injustices would not be brought to notice. People are
saying that PILs are burdening the SC, and many are illegitimate. But Bhagwati claims most of
them are genuine.

He then establishes a link between civil and political rights and the improvement of socio-
economic rights and conditions. Unless we improve the socio-economic countries, the civil and
political rights cannot be guaranteed. He stresses on the indivisibility of human rights. Therefore,
the scope of fundamental rights need to be enlarged in scope and read with DPSPs.

With respect to maintainability, he says it is maintainable as the procedural requirements need to

be relaxed keeping in mind the socio-economic conditions.

The Court does not agree that no fundamental rights are being violated. First complaint is with
respect to payment of minimum wages. Second is with respect to payment of different wages to
women and men. Court says this is clearly violative of article 14 as equal remuneration act
derives its validity from article 14.

With respect to children under age of 14 working, the government said this is not a statutory
violation as according to notification under Schedule, construction was not considered a
dangerous activity. The Court didn’t agree with this and asked construction to be included in the
notification to the schedule. Moreover, we have article 24, no child below 14 shall be employed
to work in any factory or mine, or engaged in any other hazardous employment. This article,
along with untouchability, are enforceable against the world at large. Thus, it can apply against
private persons. And no statutory backing is needed to claim violation of the same. It is a
violation of Article 24.

With respect to living conditions, court refers Maneka Gandhi case and observes that improper
conditions of work violate article 21.

In case of payment of minimum wages, Court observes that it is a violation by virtue of article 23
of Constitution. It lays down a prohibition on trafficking, begar and other forms of forced labour.
The court said this is where the minimum wages will lie. The reason behind article 23 being put
as FR and not as DPSP was that law makers wanted it to be actionable per se keeping in mind the
condition of India at that time. In begar, if a person is made to work without giving remuneration
for it, it amounts to begar. If the intention of constitution makers was to give it an expansive
scope, it means any form of labour in which force is involved would be hit by article 23 as it
would be an affront to human dignity and basic human values. ILO Convention 29 also aims to
prohibit use of forced labour. Thus, paying inadequate wages can be considered to be forced
labour.

Government argued that only when no remuneration is paid, it would be forced labour. But court
said this would mean reading the provision in a very narrow manner. As otherwise paying even
Rs. 1 would prevent the work from being forced labour. The Court discussed US SC judgment in
Baily v. Alabama where it was observed that the fact that the debtor contracted to perform labour
which is sought to be compelled does not withdraw the attempted enforcement from the
condemnation from the statute. Thus, agreeing to work out of indebtedness is also forced labour.

Also, in a contract of employment, if it is breached, you can ask for damages and compensation
for the same, but the person breaching cannot be asked to work and perform the contract. Thus,
persons cannot be compelled to work against their will. This force is usually in form of physical
or legal force. But there, force is in the form of the economic circumstances of the person. Due to
hopeless situation, hunger and poverty, a person is forced to accept work lower than minimum
wages. This would also be considered a violation of Article 23 of constitution.

Article 17, 23, and 24 are not just enforceable against the state, but against the world at large,
and hence PIL will lie.

A comparison was drawn as UDHR, which only uses the word ‘slavery’, but in Indian context,
the makers used wider terms of human trafficking and forced labour, giving it a greater scope.
Force is also not just physical or legal, but economic also. Moreover, even if the wages are
inadequate, it would be forced labour.

Here, though the work is to be done by the government, we have three governmental authorities
– UoI, government of Delhi and Delhi Development authority. Government gave the job to
contractors, and contractors engaged middlemen to bring workers. As the middleman takes his
cut, only the remainder goes to the workers. With respect to child labour, Court said we cannot
understand that how construction is not a hazardous activity. As it involves working in heights,
moreover there is dust and other particles involved. So the argument that legislative framework
does not list it as hazardous is not permissible.
When it comes to actual implementation of the legislation, there are different stances taken by
the different governmental authorities. Delhi government did not accept that minimum wages
were not paid. UoI accepts that we are not paying minimum wages, but says that commissioners
are appointed and fines are being imposed on the persons. But the Court observed that the people
are happy paying fines as the amount is such that the person would earn profit if he paid the fine
and still continued paying lower than minimum wages.

Government also claimed that as the rules in regard to the legislation with respect to
identification, etc. have not yet been notified, the legislation cannot be implemented. But the
court was not satisfied with this.

Lastly, government said that this was not our obligation. It was the obligation of contractors. The
Court said that obligation is imposed on government by the various legislations. The intention of
legislations is that if the third person (contractor) is not paying the required wages or benefits,
then the principal employer is required to pay it. Then later on, the principal can recover it from
the contractor. Thus, government has to take responsibility and ensure that provisions of contract
are enforced. Court also laid down some rues for the government to follow in case of
enforcement of contracts in the future.

Even after such clear and unequivocal stance of the Court, the governments did not follow it. A
lot of PILs were filed saying that the conditions of migrant workers were pathetic. Bandhua
Mukti Morcha v. Union of India happened 1 year after PUDR. A mining operation was given to
contractor in Haryana, and he employed migrant workers. The petitioner, who was a social
scientist, undertook a survey of some of the quarries in the Faridabad District and found that a
large number of migrant workers were living in terrible conditions. They were mostly bonded
labours and not allowed to leave the premise. They suffered injuries, TB, etc. and no medical
care was provided to them. Contractor did not follow any safety rules as per Mines Act. They
were not provided any accommodation, they had scanty clothing, impure drinking water, no
schooling or childcare, all hazardous of nature and pollution and ill-treatment. The ‘thekedars’
took 30% of wages away illegally.

The Court is very unhappy with the fact that when this report came, government refused to
acknowledge the existence of bonded labour. As it is government’s constitutional duty to remove
this. The government should be happy that this is brought to light so that the government can do
its duty. Responses from certain governments in this case was that we may have some cases of
forced labour and we will rehabilitate them, but we have no instances of bonded labour.
Government also noted that Bonded Labour System Act, 1976. Here, the meaning of bonded
labour was very narrow, and also government had to only free them and not rehabilitate them.

Government also claimed that no fundamental right of the petitioner or workmen is violated.
This is rejected by the Court saying that we have discussed the same in previous cases and writ
petition would be allowed. People are living in inhumane conditions and bondage which is
clearly a violation of article 21 and DPSPs. Governments cannot take a hyper-technical argument
to avoid responsibility.

In this manner, Constitution gives us a stronger mandate to protect the workers from such
exploitation taking place.

Vishakha v. State of Rajasthan

It is about sexual harassment at workplace. Secondly, how Court deals with it in the absence of a
legislative framework. The mandate for this was taken from article 14 and 21 of the constitution.
Court said that sexual harassment is a violation of article 14, 15 and 21 and also 19(1)(g) – as
woman has fear, her freedom to carry on trade or profession is hindered.

Court discusses article 51 – in the absence of domestic law, we can rely on international law.
Any international convention which is in harmony with the spirit of the constitution should be
read with the constitution to give effect to its intent and meaning.

Beijing Statement of Principles memtioned the objectives of the judiciary:

i. To ensure all persons are able to live securely under rule of law.
ii. To promote observance and attainment of human rights.
iii. To administer law impartially among all citizens.

CEDAW was discussed which imposed obligations on the state. Under Article 11, right to work
as an inalienable right, and right to protection of health and safety in working conditions. Article
24 says that states undertake to adopt all measures at the national level aimed at achieving the
full realization of the rights recognized in the convention.
Based on this, Court framed guidelines and also appointed a Commission on Women. Court
observed that meaning and content of FRs are of sufficient amplitude to encompass all facets of
gender equality. Court framed guidelines for the effective enforcement of basic human right of
gender equality and to guarantee against sexual harassment and abuse at workplace. The
guidelines would be treated as law declared by the Court under article 141 of the Constitution,
until a legislation is enacted for the same purpose.

Thus, the SC has read the law in a purposive manner, and is also doing the gap-filling exercise.

Excel wear v. Union of India, 1978 –

It goes in the opposite direction. The arguments raised here are similar to what are raised now
with respect to ease of doing business, etc. Court emphasized that the employers are
overburdened.

Three petitions are clubbed together. Excel wear employed 400 workmen. Due to strikes, etc., it
was impossible to carry on business, therefore wanted to close down factory. Under section 25-O
of Industrial Disputes Act, 1947, permission of government to close is required, and government
can just refuse. Section 25-R also discussed, which gives penal provision in case factory shut
down. Constitutional validity of these sections is challenged.

IDA also has some protective provisions in form of insertion of Chapter 5 A and B. The case is
just after the period of Emergency. These chapters are reflective of it. Employers were trying to
just shut down industries and reducing employment. Therefore, by imposition of restriction,
compensation had to be given to workers in case of close down of business. There was increase
in these restrictions against shut down. In order to shut down the business, a notice period of 90
days had to be given. If retrench worker or lay off, the provision was of 90 day notice, and
government had to reply in this period. If no reply, it was deemed approved. In case refusal by
government, reasons had to be given.

But in section 25-O, it required 90 day notice period with full details of reasons for closing
down. Government, if satisfied that reasons for intended closure were not adequate or sufficient,
or prejudicial to public interest, then the government can refuse the closure. But problem is that
government is not required to give any explanation. Secondly, what to do post 90 days if
government reply does not come was not clear from the language. Thirdly, supposing that
permission rejected, there was no appellate or review mechanism in place. Also, criminal
sanction can be imposed as per section 25-R, which was beyond civil penalty.

In the three instances of petitions in this case, situation was clear – state of worker protests,
employers feared for their lives, production was low and demand for products was also low. So
the companies applied for closure. For first two companies – Excel and Acne, government
replied that intended closure is prejudicial to public interest, as presumably, lot of people will be
unemployed. While in case of third company Upper, the government said reasons are not
adequate and sufficient, and it is also prejudicial to public interest.

The employers questioned what is the exact meaning of prejudicial to public interest, or what is
adequate and sufficient reason. Also, everyone agrees that reasons are correct, and business
should be closed, but they are still not allowed to close down.

Argument is violation of 19(1)(g) – right to start a business also includes right to close business.
While labour unions argued that there is no right to close business.

i. Some said that there is a right to close business, but there are various instances how
the legislation can be justified. It can be as reasonable restrictions on article 19.
ii. Also, certain DPSPs are there which need to be ensured.
iii. Thirdly, article 19 must be read down in such a manner that the constitutionality of
the sections is saved. As closure of businesses should not be allowed easily, given its
repercussions on the workers.
iv. Fourthly, the interpretation of word ‘socialism’. Since the word socialism is used, the
interests of workers should be protected. Since closure is a problematic thing, it needs
to be limited in the interest of workers.

Case of Hatisingh v. Union of India, it was said that right to start business also includes right to
close down the undertakings. From this, the employers get their argument. Another point
discussed by Court is the importance of retrenchment compensation in case of closure for the
workmen. As workers are rendered unemployed due to closure, their misery must be redressed.
This was discussed in India Hume Pipe Co. Ltd. v. The Workmen. It was discussed that the object
of retrenchment compensation is to give partial protection to the employee to enable him to tide
over the period of unemployment.
Court comes to the argument of right to close business. Court says that we have extreme
arguments – right to close business as a FR like right to start business, and on other hand, there
being no right to close business. The Court says both are incorrect. It observes that right to close
business is a FR, but not on the same level as right to start or not start a business. Once a
business is started, restrictions may be placed on right to close down, so right to close business is
on a slightly lower pedestal. Thus, reasonability standard of restrictions on closure may be
stricter. While on the other hand, it cannot be said that there is no right to close business.

Court rejects the argument of socialism. It says that the term has been introduced, but it is not in
the way we think of it. Gajendragadkar J.’s paragraph is cited which talks about pragmatic and
doctrinaire approach. The doctrinaire approach prohibits private ownership and does not allow
business to shut down while pragmatic approach allows it. Thus, we do not have socialism in
doctrinaire approach in India. We have a pragmatic approach which looks at the realities of how
business is conducted. A balanced approach needs to be taken and shut down of business should
be allowed if there are appropriate reasons.

CONTRACTUAL ASPECT OF LABOUR LAW

Till now, we discussed two sources of labour law – international, and constitutional. There is
also legislative source of labour law.

Lastly, there is the contractual source of labour law. When we deal with employment, there is a
contract of employment. The general features of such a contract can be:

i. Two parties – the employer and employee.

ii. Position – It generally starts with the position in which the person is to be appointed.
For instance, a manager, researcher, etc. A schedule detailing the terms, duties to be
performed, etc. can be added. But sometimes, roles, location, etc. can be left vague.
This can be by way of a clause that the employer can change the role and location in
his discretion based on the performance.
iii. Term and probation period – it can be said that first 90 days would be probation
period during which the employer can terminate the employment without reasons.
This probation period can be extended also. Once this period ends, the employer will
determine to confirm the employment in his discretion.
iv. Performance of duties – it can be laid down that the employee will perform duties to
the best of his abilities. Some responsibilities can be laid down like monitoring
performance of subordinates, adhering to instructions of superiors, filling out certain
documents. But generally, it is kept vague. For instance, in a cricket contract, it can
be said that he will be fulfilling all media obligations. An employee is generally asked
to listen to the instructions of manager, etc. Except a few specific clauses, the terms
are broad and generic as the circumstances in future are not known.
v. Compensation – his remuneration in the form of salary will be stipulated. A clause
may be there with respect to salary – whether before tax or after tax. For instance, in
cricket contract, it can be provided that all travel and residential expenses will be
provided for by the franchise.
vi. Obligations of the employee – it may include clauses that the employee shall not
engage in theft, fraud, misappropriation or any other illegal act. There may also be a
clause as to ensure a proper working environment.
vii. Assignment – any work done by employee belongs to the employer, and all rights in
the work are assigned to the employer, and the employee cannot claim any right in it.
viii. Leave policy
ix. Non-compete clause – the employee will not work for any other company during the
term of employment, and till say 1 year after the end of employment. If a person is
looking to leave the company, there may be competition elements. So courts have
looked into it.
x. Confidentiality clauses – as the employee has access to confidential information
about company affairs. So first, he will hand over such information to the company
before leaving, and he will not disclose it to any other person. Even if access to such
information is provided, it can be said that such access should be limited to only those
who absolutely need it. Even after termination of employment, he shall not use or
disclose such information in any manner.
xi. Remedies – it is a very standard boilerplate stuff.
xii. Amendment and termination – usually, there will be an agreement saying that either
party can terminate the contract by giving a notice of say 1 or 2 months. If there is
report of gross misconduct or violation of workplace policy, termination can be there
 without notice or compensation. Compensation payment can also be there from the
employee – if the employee wants to leave before say 1 year, he will have to pay
compensation. This is because the company has incurred a lot of time and cost in his
training, etc. Such clause may not even be enforceable, but it still provides a
deterrent. There may also be a paid leave clause for long period. During that period,
the employee is prohibited from joining any other company.
xiii. Restrictive covenant – non-solicit clause. This is to prevent the employee from taking
away the clients when he leaves the job. It can say that for a period of three years
after termination, the person cannot approach the clients of the company.
xiv. Non-assignment – as it is a personal contract, the employee cannot assign it to any
other person. But the company can assign the right to any of its subsidiaries, etc.
xv. Dispute settlement / Applicable law and jurisdiction – nowadays, parties mostly
prefer arbitration as the primary mode.

Paramount Coaching Centre v. Rakesh Ranjan Jha

Plaintiff is the coaching centre. It is seeking injunction against the defendant which is the
teacher, to prohibit him from teaching in any other institute. The defendant had been teaching in
the institute since 2014. He entered into a contract stipulating that he could only teach at this
coaching centre. It was supposed to be a 3 year contract. But the person left the job and joined
another coaching centre.

In 2017, an MoU was entered into parties:

i. He will be entitled to a sum of Rs. 450 per month per hour. He will work to the best
of his abilities, etc.
ii. There would be increments in salary over a period of time.
iii. Clause 6 was a restrictive covenant – the teacher shall not do any private tuition to
any student, not be interested in other coaching institutes, unless permitted expressly
by the coaching institute. He shall also not be concerned in plots in conspiracies
against the coaching institute in any manner till this agreement exists.
iv. Also restrictive covenant – as MoU will continue for a period of 3 years and he is not
to leave institution minimum for a period of 3 years.
v. Mou is executed without any pressure, force or coercion.
Generally, first there is a verbal agreement. Then there is a term sheet listing the terms. Then
after negotiations, a proper contract will be there. But in many cases, term sheet itself becomes
the only binding agreement. So here, MoU can be considered as a binding contract.

The teacher entered into contract initially in 2014, and again this MoU in 2017.

The plaintiff one day saw a facebook post which stated that he has joined a competing institute
opened by former director. This led to the case. Plaintiff claimed violation of the terms.

Defendant’s version – I joined in 2012, left and then joined again. In 2014, I was forced to sign
certain blank pages which then became the 2014 MoU. He was asked that if he doesn’t agree to
terms, he would not be paid and not be allowed to teach. He then said he was not properly paid,
humiliated, etc. 9 lakhs was due to him. The money paid as sister’s wedding was not any gift, but
in settlement of this loan. Later on, as he came to know that former director had opened an
institute, he joined it. He claimed that the MoU of 2017 itself is void.

Plaintiff claimed that you cannot say that signing blank pages makes the contract void. Since he
signed the documents, he cannot be allowed to renege on it.

Secondly, with respect to section 27 of ICA. Case of Niranjan Shankar Golikari v. Century
Spinning and Manufacturing Co. said that negative covenant prohibiting working in another rival
institution is not violative of restraint on trade. Similarly, in Gujarat Bottling Co. Ltd. v. Coca
Cola, it was said that a negative stipulation in the contract which is operational during the
subsistence of agreement cannot be regarded as one in the restraint of trade.

Also, it was claimed that the plaintiff has not proved that there was unconscionable bargain and
unreasonable and unfair terms. While plaintiff claimed that it was unconscionable because he
was not given teaching hours, and was paid much lower than what was stipulated. He also made
3 other arguments:

i. Undue influence – you forced me to sign the paper being an employer and I had no
choice but to do it.
ii. Also, specific performance of a personal contract is unenforceable – as it comes under
forced labour.
iii. Also, section 27 does not allow prohibiting from joining another institute of choice.
Court:

Institute has asked for an ad-interim injunction. It is true that the institute cannot ask that the
teacher should teach in our institute as specific performance cannot be enforced. But the institute
is only asking that he be prevented from joining the other institute.

Court discussed Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd.
Court observed “The result of the above discussion is that considerations against restrictive
covenants are different in cases where the restriction is to apply during the period after the
termination of the contract than those in cases where it is to operate during the period of the
contract. Negative covenants operative during the period of the contract of employment
when the employee is bound to serve his employer exclusively are generally not regarded as
restraint of trade and therefore do not fall under Section 27 of the Contract Act. A negative
covenant that the employee would not engage himself in a trade or business or would not get
himself employed by any other master for whom he would perform similar or substantially
similar duties is not therefore a restraint of trade unless the contract as aforesaid is
unconscionable or excessively harsh or unreasonable or one-sided. Both the trial court and the
High Court have found, and in our view, rightly, that the negative covenant in the present case
restricted as it is to the period of employment and to work similar or substantially similar to the
one carried on by the appellant when he was in the employ of the respondent Company was
reasonable and necessary for the protection of the company's interests and not such as the court
would refuse to enforce. There is therefore no validity in the contention that the negative
covenant contained in clause 17 amounted to a restraint of trade and therefore against public
policy.”

In the same case, with respect to how the injunction should be granted. It was argued that clause
17 of that agreement was too wide and therefore the court cannot sever the good from the bad.
But court observed that when granting an injunction arising under section 27, Court will see
whether the clause is restrictive as to time, nature, area, etc. so that the employee is not
driven to idleness in the need to protect the employer’s interest.

The Court observed that this case did not fall in that category. This is because the clause does not
restrain the defendant from carrying out the profession after the expiry of the period of
agreement.
The Court then discussed Arvinder Singh v. Lal Path Lab Pvt. Ltd. There was a business
acquisition agreement, and non-compete clause under the agreement between the lab and Mr.
Singh. The seller shall not engage directly or indirectly, in any business which competes with the
business.

The injunction was granted by the single judge that the appellant is restrained from carrying on
practice/business/profession as a Pathologist or as a Radiologist in the city of Udaipur in any
manner whatsoever including by providing consultancy services or by associating with any other
person or body providing such services. The basis was that profession and business can be
equated in terms of what they are. But the division bench of the court went on to say that if we
are to grant such a wide injunction, the person will be prohibited to carry on their profession as
pathologist or radiologist, and then the law will drive him to idleness. Therefore, he can offer his
services in a professional manner, but cannot form a venture which has the attributes of a
business.

Now in the present case, with respect to clause 6, Court said that the negative covenant does not
extend beyond the period of agreement and further it does not restrain the defendant from
carrying out his lawful profession as a teacher. What is restricted is that during the subsistence of
the agreement between the parties, the defendant would not impart private tuitions to any student
whether of the plaintiffs coaching institute or any other coaching institute. Thus, other than a
coaching institute, the defendant would be within his legal right to carry on his professional
activities even during the subsistence of the period of agreement.

Undue influence cannot be presumed only on the ground that you had no other option. Also,
there was an option to not join the employment.

VFS Global Services Private Limited v. Suprit Roy

A person working in Visa Facilitation services [VFS]. Some clauses with respect to employment
– clause 6, non-compete. And one clause added earlier – garden leave clause which was as
follows:

The Company reserves the right to require you to remain away from work/employment for a
period of 3 (three) months after termination or resignation of your services with the company.
You shall agree to comply with all conditions that may be laid down by the Company at the time
of such resignation or termination. The Garden Leave period shall commence after you have
served the notice period and have ceased to be on the rolls on the Company.

You shall be bound and undertake that you will not directly or indirectly, whether through
partnership or as a shareholder, joint venture partner, collaborator, employee, consultant or agent
or in any other manner whatsoever, whether for profit or otherwise carry on any business, which
competes directly or indirectly with the whole or any part of the business of visa processing
services or having/conducting business similar to the business conducted by the company for a
period of 3(three) months after serving the notice period and ceasing to be an employee of the
Company.

You shall also be bound to comply with the conditions of Non Compete and Non Solicitation as
set out in the terms and conditions. The Company shall pay you compensation which shall be
equal to 3 (three) month's remuneration last drawn by you at the time of your termination or
resignation. Please note that the company shall apply this clause at its sole discretion and you
shall not claim it as a right.

Thus, concern with respect to driving person to idleness in terms of post-contractual obligations
seem to be taken care of as 3 months remuneration same as salary at the time of resignation will
be given to him.

The employee gives a notice saying he will be resigning. VFS filed case:

i. Preventing from joining competing business.

ii. Disclosure of confidential information.
iii. Non-solicitation of clients.

We are concerned with the first point. If he is prevented from joining another company after the
terms of the contract, then it would be violative of section 27 of ICA. But employer argues that
we took care of it by giving 3 months remuneration. Court discussed Niranjan Shankar Golikari
with respect to distintion between pre-termination clauses and post-termination clauses. Gujarat
Bottling Company v. Cocacola was also discussed.

In para 10, Court said that garden leave clause is intended to operate after the contract of
employment is terminated. The payment of three months compensation does not amount to
extension of the contract. The court also refused to grant interlocutory injunction and said that to
obstruct an employee who has left the service from obtaining gainful employment elsewhere is
not fair or proper.

Is there a distinction in the approach of Courts in Paramount Coaching and VFS?

The reliefs are different – in Paramount, the contract was considered not unconscionable, while
in VFS, it was considered harsh. Thus, the relief of injunction was granted to the institute in
Paramount, but it was denied in VFS.

The case of K.D. Campus Pvt. Ltd. v. Metis Eduventures Pvt. Limited India and Ors.
distinguished Paramount coaching case and gave a different ruling altogether. The facts are very
similar to Paramount. Coaching institute has asked for an ad interim injunction restraining the
employee from joining competitive institution. In such cases, including paramount, such
injunctions were granted.

Unlike paramount coaching, the person challenged the ad interim injunction. Plaintiff takes plea
that case is similar to paramount. Clause was that teacher shall not do private tuition to any
student, nor will he be interested in any other educational coaching institute till this agreement
exists.

There are multiple defendants. Primary pleas are that contract has come to a close, we have given
notices, etc. so any clause that operates post-termination is void as per section 27, except in case
the goodwill of the business is sold. Second exception is where proprietary information like
confidential information or trade secrets involved. But this is not the case here.

An argument from plaintiff is that unless the contract is mutually terminated, we are entitled to
injunction under section 27. Since the contract is not mutually terminated, the term of contract
has not ended.

The Court goes to Lal Path Labs case. In that case, they had sold the business and lal path lab
had acquired the goodwill, therefore limitation was imposed by the ones purchasing the business.
But if prohibited from carrying out their profession altogether, it would be hit by section 27. The
Court noted the Paramount case but did not apply its reasoning. It said that Court in paramount
wrongly applied the reasoning of Lal Path labs. Paramount seems to be saying that term of the
contract does not come to an end unless both parties accept it.

The Court now discussed what is the term of the contract and when it ends – if an employee
unilaterally ends the contract through resignation, does the contract stand terminated? Court
looks at J. Bhagwati’s observation in Executive Committee of Vaish Degree College, Shamli v.
Lakshmi Narain.

"..... If an employer repudiates the contract of employment by dismissing his employee, can the
employee refuse to accept the dismissal as terminating the contract and seek to treat the contract
as still subsisting? The answer to this question given by general contract principles would seem
to be that the repudiation is of no effect unless accepted, in other words, the contracting party
faced with a wrongful repudiation may opt to refuse to accept the repudiation and may hold the
repudiation to a continuance of his contractual obligation. But does this rule apply to wrongful
repudiation of the contract of employment? The trend of the decisions seems to be that it does
not. It seems to be generally recognized that wrongful repudiation of the contract of
employment by the employer effectively terminates the employment: the termination being
wrongful, entitles the employee to claim damages, but the employee cannot refuse to accept
the repudiation and seek to treat the contract of employment as continuing. What is the
principle behind this departure from the general rule of law of contract? The reason seems to be
that a contract of employment is not ordinarily one which is specifically enforced. If it cannot be
specifically enforced, it would be futile to contend that the unaccepted repudiation is of no effect
and the contract continues to subsist between the parties. The law in such a case, therefore,
adopts a more realistic posture and holds that the repudiation effectively terminates the contract
and the employee can only claim damages for wrongful breach of the contract...."

The Court says that the moment contract is repudiated unilaterally, it comes to an end. The only
remedy remaining with employer is the damages for breach of contract. It is only during the
period for which the employee continues to serve the employer and receives emoluments from
the employer can the employer enforce the negative covenant unless it is shown that the
enforcement of negative covenant beyond the period of wrongful repudiation of the contract is
necessary to protect the interest of the employer (proprietary interest). However, such restraint
can be to protect any proprietary right of the employer and not to prevent competition.
The plaintiff in the present case has indeed not shown any proprietary right which may be
infringed by the defendants No. 2 to 8 joining employment elsewhere or by indulging in the
activity of teaching. Moreover, the defendants No. 2 to 6 who are teachers cannot be expected to
teach any subject other than that in which they are qualified to teach and it is also not the plea
that they are capable of getting employment elsewhere in any other capacity. We are today living
in an age where employment avenues are scarce and if the defendants No. 2 to 8 are restrained as
sought, they would necessarily be driven to idleness and a state of penury.

Thus, the Court held that since the restriction extends after the termination of contract, it is not
allowed and no injunction can be granted.

Why opposing conclusions in Paramount and KD Campus – facts and clauses are similar, but
diametrically opposite viewpoints. In KD, Court said negative covenant can only operate during
the subsistence of the contract. It can extend beyond the period of contract only to protect a
proprietary right (where business is sold with goodwill). But here, the negative covenant was
sought to be extended beyond the period of contract just to prevent teacher from joining another
job. In Paramount, the Court wrongly interpreted Arvinder Singh v. Lal Pathlabs. Here, the
business had been sold, so the restriction was on carrying on business, and not profession. But
the Court in Paramount placed restriction on profession which was wrong.

Section 27 of ICA – every agreement by which any one is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent, void. Exception 1 is saving of
agreement not to carry on business of which goodwill is sold.

In Arvinder Singh, clause 10.4.1 non-compete – from the completion date, the sellers shall not
carry on any business, in any way, shape or form, which competes directly or indirectly with the
whole or any part of business sold to Dr. Lal pathlabs. They also signed a retainership agreement
for 3 years. And for 5 years after the retainer agreement ends, they cannot join any other
employment or undertake any other activity that is of similar nature so as to give any sort of
competition to the business of the company.

One doctor left before the term of agreement, and another left after completion. Then both of
them joined another business as doctors. The share purchaser sought to enforce these agreements
– share purchase agreement and retainer agreements. They rely on section 27 exception 1 – you
cannot carry on any business. But since doctors undertake profession, can this apply? As
profession is different from trade and business – learned degree, grant by association, etc. Single
judge said that this clause is drafted in an old manner, and how businesses have developed over
the last few years. You are now required to have such expertise as a professional, even for a
business. Now if you say to a businessman that you cannot start another business after selling off
your old business, section 27 exception is attracted. But if a professional starts and then sells of a
business, and then is still allowed to carry on his individual profession, saying this would be an
affront to justice. If this situation were to arise that professional could carry on his activity where
businessman could not, this would be unfair. Now businessman, employee and professionals all
are required to have a certain level of skill and expertise and years of training. So it would be an
affront to tradepersons to say that section 27 is not applied to professionals carrying on their
professions outside the business. Therefore, judge applied ejusdem generis and read profession
with trade and business, and said that they are prohibited from carrying on profession in Udaipur.

But Division Bench differed. It said although the scene has changed, distinction still remains
between business and profession. It highlighted several distinctions. You cannot equate
profession, trade and business as being the same when legislature has clearly made such
distinction. What the legislature tried to prohibit was commercial activity, and is not stopping
from carrying on the profession. Thus, doctors can render their professional services in the city
of Udaipur. Only when a person has an organizational structure where workmen are employed,
lab technicians, paramedics, etc. i.e., a hierarchal structure where work is assigned to people, will
he be stopped from carrying on this activity.

So paramount failed to appreciate these circumstances.

Paras 40-62 of Lal Path Labs for distinction between trade and business and professional and
how to account for professionals carrying on commercial activity. Arvind Medicare v. Dr. Neeru
Mehra also on this.

Test – readings 12 onwards (July 27 onwards till July 30th readings).

Arvind Medicare v. Dr. Neeru Mehra [Del HC]

It is similar to restrictive covenants. But there is a twist. The doctor is engaged in a hospital and
there is a service contract to serve from 2019-2022 in the hospital. A clause says that if you
terminate the contract prior to term, you cannot serve for another 1 year from the date of
termination of contract in any facility around a 5 km radius of the hospital (clause 10) The
person terminates the contract. She gives resignation notice, but it is not accepted by hospital as
per rolls of hospital. According to hospital, there is no termination of contract.

Clauses 8, 9 and 10. In clause 9, it is mentioned that during the subsistence, she cannot work
anywhere else except her residence clinic.

The restrictions seem to be narrowly drafted. She can practice profession if outside the 5km
radius. Also, she can do so at her residence clinic.

Hospital claims contract is not terminated. Matter goes to commercial court and commercial
court dismisses the matter. It shows that the restriction of working only from home clinic does
not seem reasonable as she has been working since 28 years and if not allowed to work, she
would suffer loss of goodwill. Moreover, clause 10(b) is void as it puts restriction on her work
which is hit by section 27. So lower court refuses to grant injunction.

Matter came to HC. Aspect of specific performance. Claim hinges on the fact that contract is still
subsisting, and if not, then still contract is reasonable. If contract were valid, the restriction of
10(b) would have still been applicable. HC rejects this. It says that it is still hit by section 27. As
long as she gives 3 months remuneration, she can terminate contract. Thus, contract has been
terminated.

With respect to the plea that her name has not been struck down from the rolls of the hospital,
court relies on clause 8 – since she is absent for 7 consecutive days, then contract is terminated
by virtue of that only. The doctor can therefore not be asked for specific performance. Also,
restriction of not practicing medicine in 5 km radius around hospital is not valid as it is against
section 27.

Court said section 27 does not only contemplate cases of absolute restriction, but also partial
restriction on the practice of profession.

Section 27 does not allow you to prevent or curb competition. All it allows to be protected is
proprietary right. If confidential information/trade secret (if so, then at the time of leaving, a
contract can be signed in this regard), or goodwill, is involved, then only section 27 will not
interfere. A business cannot, even partially, prevent a person from joining its competitor. In the
present case, even if she starts a business, she cannot be stopped as business has not been sold.

If a business really wants to prohibit a person from joining competing business, it may include
gardening leave clause. For instance, a clause can mention that we have the right to retain you
for a period of say 1 year, and for that period, we will be remunerating you. But here as well, the
Court will look into the facts and see whether the clause is unconscionable or not.

Kailash Kumar v. Syndicate Bank Ltd.

It is with respect to training/employment bonds. As employer has spent a lot of time training the
employee, it will take a lot of time, energy and effort to replace him. So in case the person quits
the job, he will have to pay Rs. 2 lakhs. Clause 23 and 24 – you shall not leave or discontinue
your service without notice of 3 months. If you intend to leave during probationary period, then
in addition to notice, you shall reimburse the bond amount of Rs. 2 lakhs to the bank for the
notional training expenses and any other expenses the Bank has incurred on your behalf.

The principle of liquidated damages would say that the amount mentioned in contract would be
the maximum amount allowed. When case goes to Court, the party will have to show that
damages similar to the amount mentioned have been suffered by it. Otherwise the Court will
grant reasonable damages. If say the period of bond mentioned is 5 years, and person has served
4 years, then he resigns. Amount mentioned in clause is say 2 lakhs, so employee can claim that
the amount incurred by company has been recouped though the 4 years of service. Then Court
will grant only reasonable damages and not those mentioned in the contract.

Also, the Courts will see that whether any actual training, etc. has been provided or not.

Thus – training has to actually be provided, and whatever amount is mentioned, the Court will
see its reasonability. Also, the amount mentioned should not be by way of penalty. If the
employee has worked for some years, court would reduce the amount to be paid.

In the present case, person is quitting immediately after joining, and bank is asking for Rs. 2
lakhs. Court said that there was no occasion for you to provide any training to him. Even if some
cost and time is incurred in hiring another person, that is not so significant to ask for 2 lakhs.
Para 8 – amount is in lieu of the training of employee and not for the amount incurred by
company in the process of appointment of the petitioner, or of any person to fill up the vacancy
created. Therefore, person is not required to pay 2 lakhs. Court did not go into the aspect whether
the stipulation was unconscionable or not. But Court also held that since he did not give 3
months’ notice, he has to give 3 months’ salary in lieu of the notice, as mentioned in clause 24.

LEGISLATION BASED SOURCES OF LABOUR LAW

Various Acts are there in India. Judges have done a gap-filling exercise which has been
contentious as a lot of different holdings have been there.

We have discussed constitutional sources, international sources, contractual sources. Most of the
contracts drafted would not be governed by the various laws as a lot of freedom is given in
drafting. But legislations have stepped in to determine the external boundaries which the parties
cannot exceed while exercising their freedom of contract. Labour laws have existed since a long
time in some shape, way or form. The first labour law statutes that we can see arose directly in
consequence with Black death plague in UK and continental Europe. A significant portion – 50%
of population either died or suffered from this plague. This led to labour shortage. The persons
owning lands had lands needing to be worked upon, but either there was labour shortage, or
when the labour was available, he was asking for such high wages that the land-owning classes
were not agreeable with it. Therefore, two laws in UK – Ordinance of Labourers, 1349, and a
Statute two years later developing on it. The ordinance asked the labourer working in field to
work – everyone who is above a particular age (15/16) was forced to work for whatever wages
provided. It also prohibited landowners from enticing or taking away workers working in others’
field.

Thus, people were preventing from asking excessive wages. Also, relationship of master and
servant was created. This also led to growth of present social security law to some extent. But the
legislation did not work out. It also led to revolts as wages were fixed on very low levels. It also
led to distinction between the masters and servants. After 800 years of evolution, it developed
into an employer-employee relationship.

Thus, it cannot be said that free market and freedom of contract prevailed. There were always
some interventions.
Statute of Artificers, 1552. It gave some protective rights. In UK and continental Europe, two
classes were emerging – landowning and working classes. There were also ‘guilds’ – association
of persons. The guild movement had become strong. Masters associating with each other
forming solidarity. Apprentices would come under them, and later take up position of masters.
There were also journeymen who would take the knowledge and then travel to different places
and work with the masters. The apprentices would also work with the masters and not under the
masters. For instance, in a painting, master would draw the outlines, and then apprentice would
complete.

Thus, relation was not of master-servant or employer-employee. They were seniors and juniors,
but they worked together. The persons were independent contractors – they could pick and
choose who to work for, what work to do, etc.

Other form of work was agriculture. There were landowning classes. These classes either had
their own servants, or they would hire persons to work on their fields annually. These persons
were provided wages, place to stay, grains, etc. They would work for entire year, and then they
could either leave, or if their services were satisfactory, they could be asked to work for another
year.

There were other kinds of employees also – servants who worked until they were married, etc.

The Statute of Artificers solifidifed how these relationships work. For guilds, it laid down that
for an apprentice, he had to practice and work for at least 7 years apprenticeship before he could
be called a master or journey and become a member of the guild. Also, this was only reserved for
those having money or property to give in order to become apprentice. If not, then you would be
employed in husbandry or agriculture.

The law also provided for fixation of wages. It also stipulated how an employee could go from
one place to another to seek any other kind of work. These forms of labour relations led to
evolution of employment relations.

Guilds gave way to industries. Guilds could not work unless they had apprenticeships, as a
certain skill was required. When industries started, a lot of new industries came up – mining,
production, etc. which guilds were not doing. The control of masters over trade weakened. Thus,
master-servant relation changed from employer-employee relations. Laws came to prevent
combinations – preventing collectivization of workers to ask for higher wages. Combinations of
workmen were prohibited and they were charged with conspiracy and it was made a criminal
offence against the employer.

Industrialization came. Common law so far was not happy with interventions which took away
certain rights from employers. Especially in US, US Courts would strike down a number of
legislations. In UK, labour unions were getting stronger. The legislators and employers realized
that collectivization is not such a bad thing. Some concerns were that peace and security may be
affected. Also, we realized that employees needed more protections relating to minimum wages,
and protection of certain specific groups like women. This led to labour laws.

In India, a study shows that employer-employee relationship existed even before. Our
relationship with the West helped in relationship with the sailors. Sailors would need help in
unloading or reloading goods. Also, in case of deaths during voyage, sailors from India sailed
with them. In such case, employer-employee relationship came. The captain of ship would not
approach Indians directly. He would approach some specific locals having influence, and that
person would provide the sailors. These people were known as Seranis. This relation grew more
as British rule grew. Collectivization also takes place. The British as well as Indians worry about
the conditions of workers, which led to labour laws in India.

Post-independence, we enacted a number of legislations to the point that there are 40 Central
legislations at present which govern labour in some way or form. We can collectivize these
legislations in the content that they have and the problems they seek to prevent. Three important
laws for our purposes:

i. The Trade Unions Act, 1926.

ii. The Industrial Employment (Standing Orders) Act, 1946.
iii. The Industrial Disputes Act, 1947.

These provide for collectivization of workers, and provide a framework where collective
bargaining can take place. They can ask for various things. It also provides the framework in
which the disputes are to be resolved. From a macro level, these laws are to provide for
conditions for negotiations of employees with workers. They provide certain benefits,
exemptions, for workers.
Another group of legislations is related to wages. Another set in by way of social security –
unemployment benefits, social benefits, payments during childbirth, etc. another set can be in
terms of protecting the special sections like women, children – maternity benefit, equal
remuneration, prevention of sexual harassment at workplace.

Thus, a complicated scenario emerges with respect to the number of legislations and the areas
they govern. As the coverage of legislations is often not universal, one set of legislations may
protect one set of people, and another set protecting another group. This labyrinth of legislations
led to the formation of the 4 Labour Codes in an attempt to simplify labour laws and its actual
implementation. This idea was given by National Commission for Labour which was established
in 1999 and gave its report in 2002 – it said labour laws need to be simplified for greater
coverage, ease of compliance and helping in business. There are state amendments to various
legislations also.

How labour law is structured is that they focus on a specific venue – factory, industry,
workplace. And they focus on a specific relationship with workers, and the contract of
employment.

90% if India’s labour workforce does not fall in the formal employment relationship.

In the Minimum Wages Act, section 2(j) defines employee. It means any person who is
employed for hire or reward to do any work, skilled or unskilled, manual or clerical, in a
scheduled employment in respect of which minimum wages have been fixed.

Factories Act defines worker as a person, employed directly or by or through any agency with or
without knowledge of the principal employer, whether for remuneration or not, in any
manufacturing process.

Also, under Industrial Disputes Act, definition of workmen means any person employed in any
industry to to any manual, unskilled, skilled, technical, operational, clerical or supervisory work
for hire or reward, whether the terms of employment be express or implied.

In all these definitions, there is one common legal relationship – there is a contract of
employment, which is going to be distinct from an independent contractor, or a person who only
workers on limited things and has more freedom.
Distinction between independent contractor [IC] and employee has been discussed a lot. This is
because to get any benefits under labour law, you need to first prove that you are an employee. In
case of IC, it is assumed that they have the power and freedom to negotiate a contract which
ensures benefits for them. Their contract does not suffer from the vices which an employment
contract does.

Earlier, there was a close relationship between employer and employer, and the employers knew
the employees working under them. But now, the investor investing does not know the people
working under him. Also, different stages of manufacturing is carried out in different places or
countries. There is also concept of outworker, or worker working for an agency. Only when the
primary test of being an employee is fulfilled, the provisions of legislation and the protections
come into picture.

Within labour law also, the content of definitions is so different that we need to have different
definitions for different Acts.

TESTS TO BE APPLIED TO DETERMINE EMPLOYMENT RELATIONSHIP

These tests have evolved in the last half century.

Shivnandan Sharma v. The Punjab National Bank, 1955 SC

Three parties involved – Bank, treasurers and independent cashier given by the treasurers. In the
Una Branch, the cashier was working. Branch closed and cashier was taken out of payroll. He
filed case asking to be restated as he is employee of the Bank. The Tribunal presumed
employment relation. In appeal, the appellate Tribunal held that he was an employee of the
treasurer and not the Bank.

The bank has several branches. To run the cash department, they have involved a treasurer. The
treasurers have to appoint their nominees to the cash department, as decided between the bank
and treasures through a contract.

The dispute is arising out of the contract, and the relationship is to be determined by the contract.
Looking at the contract – it provided for the duties of the treasurers and the cash department.
They had to serve the bank at the head offices. Some clauses regarding remuneration to be paid
by the Bank to the treasures, and then treasurers would pay the nominees in the cash department.
The treasurers shall be responsible for the safety of all money, etc. received by them. Cashiers
were also entitled to provident fund, allowances, etc. from the bank and not from the treasurers.

Also, pool of names was to be suggested by treasurers but the Bank had the final say as to whom
to appoint as cashier.

The issue before the court is whether the cashier is employee of the bank, and hence entitled to
benefits. Ways to prove this:

 The contract between the treasurer and cashier is a sham contract, and the actual
relationship is between the bank and cashier only.
 The treasurer is only there to guide.
 The relationship between treasurer and bank is that of employee and employers.
Treasurer is the employee of bank and being an employee, it is authorized to employee
cashiers. So employer is the bank only.

Para 11 - From the terms of the agreement aforesaid set out above almost verbatim omitting such
clauses and words as are not relevant to this case, it will appear that the Treasurers are under the
employment of the Bank on a monthly basis for an indefinite term, that is to say, until such time
as either party to the agreement terminated it in accordance with the terms quoted above. They
are under the complete control and direction of the Bank through its manager or other
functionaries. The Treasurers have to take their orders from day to day as regards the cash
balance or other cognate matters relating to the safe custody of cash, valuable documents, etc.
belonging to the Bank or its constituents.

Test of control and direction – the employer not only tells the employee what work is to be
done, but also how the work is to be done. Employer knows how the work is to take place and
how things are to function. By virtue of this knowledge, the employer can tell the employee in
what way and at what time the work is to be done. If the work is not done in proper manner, by
virtue of the contract, the employees can be punished or terminated.

Applying this, the Court observed that the treasurers were told how things were to be done, and
were not given freedom to do things their own way. As opposed to this, in case of an IC, the
employer does not have the power to tell how the work is to be done.
The primary test to be applied to distinguish between employee and IC is the test of control and
supervision/direction. This test is taken from the law of torts. “A master is one who not only
prescribes to the workman the end of his work, but directs or at any moment may direct the
means also, or, ‘retains the power of controlling the work”, a servant is a person subject to the
command of his master as to the manner in which he shall do his work. An independent
contractor is one who undertakes to produce a given result but so that in the actual execution of
the work is not under the order or control of the person for whom he does it, and may use his
own discretion in things not specified beforehand.”

The test is the existence of a right of control over the agent in respect of the manner in which his
work is to be done. A servant is an agent who works under the supervision and direction of his
employer. An IC is one who is his own master. He is engaged to do certain work, but to exercise
his own discretion as to the mode and time of doing it. He is bound by the contract but not by his
employer’s orders.

In the present case, the Court considers the fact that the bank had full control over appointment
and dismissal of cashiers through the treasurers. It also draws an analogy between a government
department. Employees of government department are still employees of government, despite
them being under employment of a department, and not the Ministry itself.

Here, the first test – relationship between the treasurer and the bank has been satisfied.

Now, the court says that there is relationship between bank and cashier through the treasurer.
The Court discusses dual control – day to day orders of nominees did not come from treasurers.
Due to the nature of work and contract, they had to take orders from bank itself. Looking at the
facts, Court observed that both the treasurers and nominees are servants of bank as both take
orders from the bank.

Also, if a master authorizes his servants to hire more servants (nominees), the nominees will be
servants of bank only, and not the treasurers. This is because the master has given the authority
to the treasurers to do so.

Dharangadhara Chemicals Works Ltd. v. State of Saurashtra, 1956 SC

The work involved was manufacturing salt on land. The salt was manufactured by using agarias.
Work was seasonal as it was done in rainy season. To supervise, the salt superintendent was
appointment. He checked the quality, etc. of the salt, and only when he approved, the company
purchased the salt that was according to the standards. The question was whether agarias were
workmen or ICs.

With respected to remuneration, initially, agarias were given money to carry out the process.
Then once salt was manufactured, the final payment was made.

As regards their manner of work, agarias used to work with their families on the pattas allotted
to them. There were no fixed working hours, and no provision as to leaves or holidays. Also,
they could leave the work whenever they wanted. If they wanted to get other labourers, they
could also come and work alongside the agarias.

With respect to the final product, if salt met standards, it was purchased by the chemicals ltd.
And the salt which did not meet the standards also belonged to the company only, and not the
agarias.

Salt superintendent was to test the salt crystals and the final salt. They also had to step in in the
initial step as well – examining the density of water in the sink wells.

The question is to determine whether agarias are workmen or not. In order to determine this, we
need to see whether there is a contract of employment between the parties.

Court:

At the initial stage, it was found that there is a contract. But subsequently, it was overturned. So
matter before the SC. The test to be applied is of control and supervision in the manner in
which the work is to be done. Also, there is a distinction between contract of service (contract of
employment) and contract for service (i.e., IC). Court discusses new cases which have come up –
Stevenson, Jordan and Harrison Ltd. v. Macdonald and Evans, Cassidy v. Ministry of Health.
The threshold of the manner of work is to be seen in context of the kind of work. The Courts in
these cases brought the understanding of ordinary person i.e., the meaning which an ordinary
person would give under the words. The Courts said that the test of control in respect of the
manner in which the work is to be done is not universally correct.
We need to see why what the ordinary person thinks is even coming into picture. The control and
supervision says that master would not only tell the work, but also determine the manner in
which the work is to be done. But in some kinds of employment, the nature or complexity of
work is such that the master cannot tell the manner, and the manner is in the discretion of
worker. But this does not mean that there is no relation of master and servant. Thus, we have to
see whether an ordinary person thinks about the work – whether it is a contract of service of not.

Another test brough by Court in para 11 is that under a contract of service, a person’s work is
done as an integral part of the business, whereas under a contract for service, his work is not
integrated into it but is only an accessory to the business. This is the integration test. In a way, it
can be said that if there is an aspect of permanency and regularity, the person can be said to be an
integral part of business. While if a person works only on temporary basis, then he can be
considered as not being an integral part of business.

Court also looks at the case of Short v. J& W Henderson Ltd. here, there are four indicia of a
contract of service:

i. The master’s power of selection of his servant.

ii. The payment of wages or other remuneration.
iii. The master’s right to control the method of doing work, and
iv. The master’s right of suspension or dismissal.

The Court alters this test also to some extent. It says that these powers may not be endless or
absolute. This is because of various legislations and rules laid down which limit the freedom and
powers of the master.

With respect to degree of control or supervision, there is no particular threshold, and it has to be
looked on a case-to-case basis. Thus, the test of control and supervision depending on the facts
and circumstances of each case is to be applied.

The Court, looking at the facts of the case, looks at clause 6 of the agreement – we bind
ourselves to work as per the advice and instructions of the officers. From this, it seems there is a
contract of employment.
There were two arguments – agarias are doing peace work, and they are engaging other
labourers, thereby making them ICs.

The Court said that doing peace work doesn’t mean that person is IC. The test is not to see the
mode of doing work, but the control aspect. Secondly, with respect to engaging other people to
do their work for them, this is usually done by ICs. But here, it does not apply as the agarias are
working alongside the other labourers they engage. As the agarias are bound by the
instructions and directions of the company, they are employees.

Shri Chintaman Rao v. State of MP, 1958 SC

There was a bidi factory. They were engaged with persons known as sattedars. The factory
owners would provide sattedars with tobacco and bidi leaves. They may roll the beedis
themselves, or engage others or outsource further. Thus, it was their responsibility how they
wanted to get the beedis rolled. Once rolled, they would bring to factory. The selected or
approved bidis are separately packed in bundles of 10 and 25 and taken to tandul and left there.
If rejected, the sattedars would be asked to roll again and bring back. The management paid the
sattedars the cost of manufacture of bidis after deducting the cost of raw materials supplied to
them.

The sattedars were not required to work in factories. They could take them home and give them
to anyone to be rolled. One day, there was inspection in factory. There were coolies who were
engaged by the sattedars. The question that arose is whether sattedars are workers under factories
act.

The court applied the test of control and supervision. Although it related to industrial disputes
act, it could also be applied to factories act. But applying the test – as not required to work in
factory, could take materials home, he could get anyone to work on it. Therefore, sattedars
were ICs and not workmen. The fact that they were required to bring the rolled bidis to
factories and the management could reject if not properly rolled would be there in any contract,
and cannot be considered as contract of employment. Similarly, coolies were also not workmen
of the factory as they were engaged by the sattedars who were ICs.

Thus, the aspect of what determines supervision and control becomes judge specific.
Birdhichand Sharma v. First Civil Judge Nagpur, 1960 SC

Bidi factory in Nagpur. Workers applied for leave for 15 days. The appellant did not pay wages
for those days. The workers applied to the Payment of Wages Authority claiming that they were
entitled to 15 days leave in the year under section 79 and 80 of Factories Act. While the
appellant said that the workers were mot workers within the meaning of Factories Act.

The conditions of work were – work at the factory and are not at liberty to work at their homes.
Also, they were required to work for certain hours. They could go away for some time in
between, but their attendance was noted at every time. If absent for 8 days continuously, the
name would be removed from register. Owner had the right to reject the bidis which were not
found suitable, then bidis had to be re-rolled.

The Court rejected the contention that facts are similar to Chintaman Rao. In that case, there was
no requirement to work from factory, and no instance of name being struck off from register,
also they could engage other persons to do their work. But here, there is a significant amount
of control. The Court said nature of control varies from industry to industry. Since bidi
rolling is a simple task, supervision would not be required at all times and all stages of the task.
Supervision is only required at the end stage of quality check. Also, it is not the manner in which
supervision is exercised that is important, rather it is the right to supervise if one wants is
important. Since the employer retains that right at all times, it signifies control. It does not
matter whether he chooses to exercise that right or not.

Therefore, the workers were held to be ‘workers’ within the meaning of Factories Act and
therefore entitled to wages for the leave period.

In case of Shankar Balaji Waje v. State of Maharashtra also, judge interpretation of the test
was there. The fact scenario is similar to Birdhichand with a slight distinction – worker was free
to go the factory at any time during working hours and leave the factory at any time he liked; he
could also be absent from the work any day he liked and for 10 days without even informing the
appellant. It is how the judges are interpreting the factual scenario is important. Also, dissent is
important – economic reality is that person is economically dependant on the employer for work.
Even if the worker does not come to work for a few days, he is still economically dependent on
the employer.
Shankar is the appellant and the owner of bidi manufacturing factory. A worker Pandurang was
working for him. An inspector went to visit the factory. He found that the worker took leave for
4 days but was not paid. Shankar claimed that he was not entitled to paid leave as he was not a
worker.

The majority held that he was not a worker – as workers could come and go as they wanted,
they could take leave of 10 days. Also, no minimum number of bidis had to be rolled. Thus,
applying the control and supervision test, no control could be exercised.

While J. Subbarao was not happy with this. He said that since the appellant had the power to
reject the bidis not conforming to a certain standard, the element of control can be seen. Even
though the workers are not required to work throughout the working hours, but practically, it was
not possible for them to roll bidis outside the factory. Also, they had to roll bidis for a
considerable amount of time because their wages depended on the number of bidis rolled by
them.

But it can be said that the control has to be exercised on not just the end result, but also the
manner in which the work is to be done. But at the same time, as per Birdichand, what is
important is that the employers retains the right to exercise control. It is not necessary that
supervision has to be exercised at all times. Supervision can just come in at the end of the day
when the final product is made. As the nature of bidi rolling is such that not much control can be
exercised in the manner, it can be said that control exercised at the stage of final product suffices.

At the same time, the economic reality is faced by the workers – they will have to roll bidis if
they have to earn livelihood. Although economic reality is not per se looked at while determining
the control aspect, it plays a crucial role in some cases to determine whether an employer-
employee relation exists.

D.C. Dewan Mohideen Sahib and Sons v. The Industrial Tribunal, Madras, 1964 SC

The question is whether the persons are employees. They are bidi workers. A factory is in
business of selling bidis. They have ICs who take leaves and tobacco from factory, they take to
their own factories, and there they have workmen who take it home, cut it, bring it to contractors
factory where they fill it with tobacco, and then IC takes it to the original factory. No attendance
register, no fixed working hours, and no need to work everyday. Contractors are required to work
on piece rate basis – they are paid after deducting the raw materials cost. There is also a contract
between the proprietor and the contractors (intermediary):

i. The proprietor should supply the tobacco and bidi leaves.

ii. Intermediary should engage premises of his own and obtain license.
iii. Intermediary should meet all incidental charges for rolling including cost of thread
and remuneration paid to bidi rollers.
iv. At no time more than 9 bidi rollers should work in the premises of the intermediary.
v. For every unit of 1000 bidis rolled and delivered by the intermediary to the
proprietor, the latter should pay the stipulated amount, after deducting the cost of the
tobacco and the bidi leaves supplied by the proprietor.
vi. Intermediary should not enter into similar engagement with any other business.
vii. Price of raw materials and price to be paid for every unit of 1000 bidis rolled and
delivered were to be fixed at the discretion of the proprietor.

The 9 number is important as the moment threshold of 10 is triggered, most of the industrial
legislations would become applicable, and attention of various authorities would be directed to
you. A lot of benefits, amenities, etc. will have to be provided to workers then. Thus, 9 is there to
avoid triggering those requirements.

Another important factor is that the price of the goods that are supplied, and also the price of the
bidis that are given back (raw materials and finished product), is not fluctuating (point v), no
matter what the situation or economic reality may be. This is not practical in business sense. Two
businessmen working independently would never agree to such a condition.

The appellants wanted to prove that there was a sale of leaves and tobacco by them to the
contractors and then resale of bidis to the appellants. But the tribunal noted that this is just a
sham contract entered into. Beyond this, 2 more facts are pointed out:

i. If bidis were not rolled, raw materials had to be returned to the factory owners, and
the contractors were forbidden from selling to any one else. This shows that there was
no sale of raw materials followed by resale of finished products.
 ii. The contractors were indigent, and did not have the capacity to open a factory by
themselves. In all respects, they were under the control of the appellants. This again
shows that contract was a camouflage.

Thus, in reality, the factories were merely branches for providing the bidis, and to engage
workmen without triggering the labour law legislations. System has been evolved to avoid
regulation under the Factories Act.

Supreme Court:

The issue to be decided was whether the workmen who work under the ICs were workmen of the
appellants or not. The SC also agreed with the view of the tribunal and observed that the so-
called ICs were merely agents or branch managers of the appellants.

The contractors are impecunious persons who could hardly afford to have factories of their own.
Some of them are even ex-employees of the appellants. The contract is practically one sided in
that the proprietor can at his choice supply the raw materials or refuse to do so, the so-called
contractor having no right to insist upon the supply of raw materials to him. The so-called
independent contractor is even bound not to employ more than nine persons in his so-called
factory. The sale of raw materials to the so-called independent contractor and resale by him of
the manufactured bidis is also a mere camouflage, the nature of which is apparent from the fact
that the so-called contractor never paid for the materials. All that happens is that when the
manufactured bidis are delivered by him to the appellants, amounts due for the so-called sale of
raw materials is deducted from the so-called price fixed for the bidis. In effect all that happened
is that the so-called independent contractor is supplied with tobacco and leaves and is paid
certain amounts for the wages of the workers employed and for his own trouble. We can
therefore see no difficulty in holding that the so-called contractor is merely an employee or an
agent of the appellants as held by the appeal court and as such employee or agent he employs
workers to roll bidis on behalf of the appellants. The work is distributed between a number of so-
called independent contractors who are told not to employ more than nine persons at one place to
avoid regulations under the Factories Act.

The workers engaged by the so-called contractors are also workmen of the appellant. There is in
fact control exercised by the agents over the bidi workers. This is because the work of rolling
the bidis can only be done in the factory of the agent. Also, there are absence of full terms of the
agreement, and in such a case, the Court observed that it cannot be said that there was no
supervision at all. Whenever there was any dispute, or question regarding wages, the appellants
made the decision. This negates the appellants argument that there was no privity between the
appellants and workers.

Thus, intermediaries were merely branch managers appointed by the management and the
relationship of employer-employee subsisted between the appellants and the bidi rollers.

Silver Jubilee Tailoring House & Ors. v. Chief Inspector of Shops and Establishments & Ors.,
1973 SC

It is a tailoring house. Tailors are working in the premises of the proprietors and tailoring
machines also belong to proprietors. Wages depend on skill and kind of work, and are not
uniform. The work can be rejected if it is not up to the standards. There is provision of leave.
Tailors are required to work from their workplace, and if they want to work at home, prior
permission is required. Question arises whether they are employees of the proprietor.

Points in favour of relationship of employment:

 Control and supervision test – it was present as they could reject any work. As value of
tailoring house depends on the standard of work, so work not meeting quality standards
could be rejected.
 As work is stitching business, which is skill based, no requirement is there to direct the
manner in which work is done.

Points against relationship of employment:

 They have no obligation to inform the employer if the tailors are going to be absent from
work. While this is a common requirement to inform the employer before taking leave.
 Contract of work was not exclusive – tailors could also work for any other person while
working for silver jubilee. However, how the test of exclusivity plays out is questionable
as a person can have multiple employers.

Court discusses the evolution of control and supervision, and what are the factors to be
considered to determine control.
The contention by the employer is that the only test relevant to determine employment
relationship is of control and supervision.

Court said that we have noticed a shift in Dharangadhara that control and supervision is not the
end all test.

Court looks at the landmark decisions. First, the Court refers Cassidy v. Ministry of Health, 1951
case, where it was observed that control test cannot be applied in all cases. Court observed that
in certain skilled employment, test of control over the manner of work would be unrealistic.

Then Court looked at Montreal v. Montreal Locomotive Works where the Court said that in more
complex situations, the simple test of control cannot be applied. We have to apply a mix of tests
involving – control, ownership of the tools, chance of profit, risk of loss and the control in itself
is not conclusive. We have to examine the whole of the various elements which constitute the
relationship between the parties. Regarding chance of profit and risk of loss, it means that if there
are such chances, person would not be an employee, as if he is an employee, he will get fixed
wages. An employee does not bring any capital/investment with him. Even if company makes
huge profits, it does not matter to employee apart from some bonus he may receive. While in
case of IC, the profits will accrue to the IC. In the same manner, the risk of loss will not have to
be borne by an employee. All he is concerned with is salary. While if an IC is starting a business,
he will have to put own capital, so in case of loss, he will bear the risk. In this manner, we can
distinguish between an employee and IC. For most cases, commissioned workers are also
considered as employees.

For instance, in UK and California, Uber drivers are held to be employees and not IC. They have
no income other than the number of rides they can do. But the investment provided in the form
of cab and app is by Uber, and risk of loss of investment is also taken by Uber. Also, supervision
in form of rules is done by Uber. Person might own his own car also, but he is still integrated
with the business of Uber. Ownership of tools is relevant, but in this case, it is not considered
that relevant.

Having fixed wages are not a determining factor of the employer-employee relationship. A
person can be paid piece rates and still be considered an employee. For instance, in the bidi
workers cases, they were paid on the basis of the number of bidis rolled, but were still considered
workers.

In para 8 of Birdichand Sharma, the Court said that the mere fact that the worker is a piece rate
worker would not take him out of the definition of worker under the factories Act. How are
wages to be determined and paid is between the employer and employee. Even factories Act and
minimum wages Act allowed piece rate workers. Usually, in contracts, there are certain fixed
wages, and then bonuses depending on the performance.

In Bank Voor Handel v. Slatford, another test was discussed and the Court quotes Lord Denning
who said the test of being a servant does not rest nowadays on submission to orders. It depends
on whether the person is part and parcel of the organization. It means that it needs to be seen
whether the services being provided are important and integral and essential to the business, or
supplementary or incidental to the business. Thus, organization test. For instance, a Chef in a
restaurant as compared to a plumber. This test is important because nowadays the nature of jobs
and skill requirements are such that it is difficult to control and supervise the manner of work.

In US v. Silk, the Court said that the test to be applied is that we have to look at the facts of the
case, and the common law test of control and supervision is not the case, rather the test of
economic reality. It has several factors – degrees of control, opportunities of profit or loss,
investment in facilities, permanency of relations and skill required in the claimed independent
operations. Here, the workers were working as loaders and truck drivers, and the business was of
selling coal. They worked in the course of the employer’s trade or business, as transporting coal
is an important part of business of selling coal. Also, there were no opportunities of profit and
loss. Hence, they were held to be employees and not ICs.

Permanency of relations sometimes is not relevant in certain cases.

Para 27 –

It is in its application to skilled and particularly professional work that control test in its
traditional form has really broken down. It has been said that in interpreting ‘Control’ as
meaning the power to direct how the servant should do his work, the Court has been applying a
concept suited to a past age.
This distinction (viz., between telling a servant what to do and telling him how to do it) was
based upon the social conditions of an earlier age; it assumed that the employer of labour was
able to direct and instruct the labourer as to the technical methods he should use in performing
his work. In a mainly agricultural society and even in the earlier stages of the Industrial
Revolution the master could be expected to be superior to the servant in the knowledge, skill and
experience which had to be brought to bear upon the choice and handling of the tools. The
control test was well suited to govern relationships like those between a farmer and an
agricultural labourer (prior to agricultural mechanization) a craftsman and a journeyman, a
householder and a domestic servant, and even a factory owner and an unskilled ‘hand’. It reflects
a state of society in which the ownership of the means of production coincided with the
profession of technical knowledge and skill in which that knowledge and skill was largely
acquired by being handed down from one generation to the next by oral tradition and not by
being systematically imparted in institutions of learning from universities down to technical
schools. The control test postulates a combination of managerial and technical functions in the
person of the employer, i.e., what to modern eyes appears as an imperfect division of labour.

After all these cases, the Court says that given how the industry has progressed, it is not
correct to have a single test. The standard control test has broken down, and we have to look
into the facts, and then consider which elements are to be given primacy. The Courts have to do a
balancing. Although test is slipping away from control and supervision, it still remains an
important factor in determining employment relationship.

We can also apply the organization test where it is seen whether the person is working in the
shop of the employer, whether tools are being provided, etc. For an IC, it is expected that they
would themselves be bringing the tools, which an employee expects the employer to provide the
tools.

In para 34, Court referred American Restatement with respect to ownership of instrumentalities.
The ownership of the instrumentalities and tools used in the work is of importance. The fact that
the worker supplies his own tools is some evidence that he is not a servant. On the other hand, if
the worker is using his employer’s tools or instrumentalities, especially if they are of substantial
value, it is normally understood that he will follow the directions of the owner in their use,
indicating that the owner is the master.
Application of the tests:

As part of organization test of Denning – In the present case, the tools i.e., the sewing machines
are provided by the employer. The tailors had to work in the premises, and could take the cloth
with them only if they take permission of the employer. Thus, organization test was fulfilled.

Also, as the employer has the right to reject the end product if it did not conform to the
instruction of the employer, the element of control and supervision is also present. As stitching
is a delicate operation, if an ultimate authority over the worker in the performance of his work
resided in the employer so that he was subject to the latter's direction, that would be sufficient.

The fact that some of the employees take up the work from other tailoring establishments and do
that work also in the shop in which they generally attend for work, as spoken to by the proprietor
in his evidence, would not in any way militate against their being employees of the proprietor of
the shop where they attend for work. A person can be a servant of more than one employer. A
servant need not be under the exclusive control of one master. He can be employed under more
than one employer. What we have to see is when the person is doing the work given by a
particular person, at that point, does a relation of employer-employee relationship exists
between those two parties. Their relation with other parties would not matter.

Even if the workers are not obligated to work for the whole day in the shop, it would not, in any
way, derogate from his being employed in the shop where he is principally employed. According
to the definition in Section 2(14) of the Act, even if a person is not wholly employed, if he is
principally employed in connection with the business of the shop, he will be a “person
employed” within the meaning of the sub-section. Part time work is not determinative factor of
employer-employee relationship. You don’t have to be wholly employed, and a person can also
be partly employed in order to fall within the ambit of the legislation.

Thus, employer-employee relationship was established and appeal was rejected. Ultimately,
the court did rely on control and supervision test to form its decision. However, we need to look
at the facts of each case to determine the test applicable.

Hussainbhai, Calicut v. The Alath Factory Thenzhilali Union, Kozhikode, 1978 SC

The petitioner was a factory owner. He engaged a number of workmen for making ropes. The
petitioner claimed that those workmen were hired by contractors who had executed agreements
with the petitioner to get such work done. As regards conditions of work, the raw materials were
supplied by management, workers worked in factory premises. The equipment also belonged to
the management. If defective articles were produced, then management required them to rectify
the articles.

This seems like a simple case. However, the problem is the existence of an intermediary with
whom the petitioner has signed a contract.

The Court does not agree with the petitioner. The Court said that in industrial jurisprudence, we
have to not just see the text of the contract and the raw social realities have to be taken into
consideration. The argument regarding existence of contract is based on laissez faire. However,
in labour law, we have to lift the veil of the contract, and see the actual conditions and
relations between the proprietors and the workmen. When we look at the reality, this relationship
is actually a relationship of employer and employee, not just because of control and supervision,
but also because of the economic dependence of the workers on the employer.

Para 5 and 6 – The true test may, with brevity, be indicated once again. Where a worker or group
of workers labours to produce goods or services and these goods or services are for the business
of another, that other is, in fact, the employer. He has economic control over the workers'
subsistence, skill, and continued employment. If he, for any reason, chokes off, the worker is,
virtually, laid off. The presence of intermediate contractors with whom alone the workers have
immediate or direct relationship ex contractu is of no consequence when, on lifting the veil or
looking at the conspectus of factors governing employment, we discern the naked truth,
though sniped in different perfect paper arrangement, that the real employer is the Management,
not the immediate contractor. Myriad devices, half hidden in fold after fold of legal form
depending on the degree of concealment needed, the type of industry, the local conditions and
the like, may be resorted to when labour legislation casts welfare obligations on the real
employer, based on Articles 38, 39, 42, 43 and 43A of the Constitution. The court must be astute
to avoid mischief and achieve the purpose of the law and not be misled by legal appearances.

If the livelihood of the workmen substantially depends on labour rendered to produce

goods and services for the benefits and satisfaction of an enterprise, the absence of direct
relationship or the presence of dubious intermediaries or the make-believe trappings of
detachment from the Management cannot snap the real-life bond. The story may vary but
the inference defies ingenuity. The liability cannot be shaken off.

The Court is also driven to this conclusion based on constitutional principles. The Court said that
we must avoid the mischief and achieve the constitutional purpose. The Court also has a duty to
interpret labour law in a manner that constitutional objectives are achieved.

Thus, workers were held to be employees of the proprietor.

In this manner, whenever there is a contract, the Court has to look beyond the text and into the
actual realities so as to ensure that the contract is not a sham one.

Had this been a genuine contract, still, most of the statutes, so as to create responsibility, state
that even if the person is not the employer directly due to contract with IC, but in order to give
certain benefits to workers, the liability would rest with the ultimate beneficiary, i.e., principal
employer, who will be held to be employing workers indirectly, and hence considered an
employer. Thus, by virtue of a statute, an indirect relationship of employment would be created,
and liability would be assigned to the principal employer.

Regarding holding the proprietor liable in case of sham contracts – it is based on the principle of
deeper pockets. As the proprietor has more resources to pay the liability, he is held liable.
Moreover, he being the principal employer, is the one who engaged the ICs into a sham
contractor, and is the ultimate beneficiary. He also has the responsibility to do his due diligence
regarding the IC.

Workmen of Nilgiri Cooperative Market Society Ltd. v. State of Tamil Nadu, 2004 SC

The Nilgiri Cooperative Society was created to protect the small vegetable growers and farmers
from exploitation by the merchants. The membership consists of two categories – class A
members having right to vote, which consist of growers and agricultural societies, and class B
members, having only the right to take part in auctions, consisting of merchants and traders. The
society facilitates the sale of produce of the growers by the establishment of two marketing yards
where the growers and merchants can interact, and auctions are held.
Different jobs are carried out at the yard including unloading of bags from lorries, unpacking of
bags, grading of vegetables, weighing the auctioned vegetables in 45 kgs packs, stitching the
gunny bags and loading them into lorries of merchants.

For these jobs, a number of workers working as graders and porters are present in the yards.
Also, the services of third parties are made available to members. The third-party contractors
would engage workers from the yard, and would be remunerated by the growers or merchants
engaging them. In case the growers are unable to pay the workers, the society makes payment on
their behalf to the contractors.

Regarding conditions of work of the workers, society does not maintain any attendance or
wages register. There are no fixed working hours and third parties are free to engage workers of
their choice. The workers can take up any other jobs and are not obligated to report for work
everyday. The society only exercises supervision to ensure smooth working of transactions in the
yard. The workers work under the supervision of members and merchants, and society is not
concerned with the number of workers engaged and amounts distributed to them.

Para 62 summarizes the points.

The workmen’s union, in 1982, claimed permanency in service and other benefits like drinking
water, maternity benefits, etc. from the society on the ground that they are employees of the
society. The society filed a suit before the Tribunal. The Tribunal held that no relationship of
employment existed between the society and the workmen. This was upheld by the Madras HC.

Court:

Court observed that the control and organization tests are not the only decisive factors, what is
needed is an integration of various tests. Integration test in para 40.

Looking at the facts, the society is a service-oriented society for the benefit of growers, and is
not a trading concern. Also, it is clear that the society does not exercise any control over the
workers, and neither does it provide remuneration to them. The third parties employ and pay
them their salary or wages invariably. They have the right to appoint or not to appoint and the
little amount of supervision made by the officers of the Society are for the purpose of overseeing
the smooth transactions and not for its own benefit. The contract is entered into by different
parties for different purposes. The services of the workmen by the farmers or traders may or may
not be taken. Employment of the workmen for doing a particular piece of work is at the instance
of the producer or the merchants on an ad hoc basis or job to job basis and, thus, the same may
not lead to the conclusion that relationship of employer and employee has come into being.

Para 102.

Hence, the workmen are not the employees of the society, and the appeals are dismissed.

Main tests to be applied:

 Control
 Integration
 Economic dependence
 Tools provided
 Freedom in terms of what they can do with raw materials.

In reality, most of the cases end up applying control and supervision test.

Nilgiri case continued

Society was formed by farmers so that people cannot take advantage of them. They hold
auctions. Farmers, who are the primary members, can come into the yard, leave their produce,
and then it is sorted, graded, etc. The purchasers, who are secondary members, pay the price,
load the produce on trucks and take it away.

There are a number of workers who help the farmers in unloading from trucks, putting them in
the yard where they are graded. They grade based on quality, and pack them in gunny bags of 45
kgs, seal them and load them onto trucks.

The society wants to engage third party contractors so that services can be provided. The workers
raised an industrial dispute that this is not permissible as we are working here. The first question
was whether these persons are employees of the society. The tribunal and HC held that they are
not employees as they are not working for society, but are rather engaged by the members
coming in. Moreover, it is not necessary for farmers and traders to engage them, they can either
do it themselves, or bring own workers. Thirdly, the wages are paid by farmers and traders, and
there is no fixed wage and it is based on discretion of farmers and workers. The society pays
wages on behalf of farmers in exceptional circumstances when farmers do not have the money to
pay them. No attendance register or wage register is maintained, and workers are not given any
fixed working hours and are not required to come daily.

In SC, the appellants claim:

 workers argued that the lower courts failed to take into account the organization test.
 Also, the organization was not exercising control and supervision for itself but for its
members.
 Thirdly, the society carries on business activities.
 Fourthy, the courts have not lifted the veil and looked at the actual situation.

Regarding organization test – it is claimed that workers are economically dependant on the
society for wages. Also, they are given gifts by society. In case of any dispute, the society
resolves them. Work is being carried out in premises belonging to society, wages are paid by
society, and control is exercised by society.

Respondents claim:

 Society is a service society.

 Workers are engaged by growers and merchants hence society is not the employer.
 Lower courts finding of facts should not be challenged.

Court:

The control and organization tests are not the only decisive factors. A number of other
factors like – who is the appointing authority, who is the pay master, who can dismiss, how long
alternative service lasts, the extent of control and supervision, the nature of the job, nature of
establishment, the right to reject.

Thus, an integrated approach is required to see whether employee was fully integrated into the
employer’s concern, or remained apart from and independent of it.
The society than looks at the by-laws of the society. It comes to a conclusion that it is not a
trading society, and does not buy or sell goods except in exceptional circumstances. It is a
service society aimed to protect interests of growers.

Regarding burden of proof, it lies on the workmen to prove that they are the employees of the
society.

Applying the law:

The activity of buying and selling between growers and traders can be done without the workers
also. Thus, their work is not integral to the society. As the members can bring own workers or
can do it themselves.

Regarding control and supervision test, there were two memos – one regarding improper care
taking in grading, weighing and stacking of vegetables, and another regarding underage workers
being engaged. The Court agrees with the finding of tribunal that simply asking the workers to
work properly, and not allowing underage workers, would not itself indicate any control or
supervision, or the fact that the workers are part of the organization.

There is also a marketing supervisor whose job is to ensure smooth functioning in the yards. The
Court says this does not amount to supervision as he only aims at smooth transactions between
the members.

There were token numbers being assigned, but their purpose was only to prevent workers from
police harassment, and did not indicate any control.

Also, there is no binding mandate with workers to engage with independent contractors or
members. No fixed hours, no requirement to come daily, no attendance register, etc. Looking at
all these facts together, the Court held that these workers are not employees.

Workers were working on an ad-hoc basis and society was not a trading society. Thus, workers
were not employees. For the purpose of earning livelihood, a person has to involve himself into
certain kinds of activities where for, he must subject himself to some sort o discipline or control,
which is even otherwise implicit.

The findings arrived at by the learned Tribunal as well as the High Court would clearly go to
show that the concerned workmen are engaged both by the growers as also the traders. Only on
some occasions, payment is made to the concerned workmen through the third parties only in a
case where the grower is not immediately in a position to pay the same as he was yet to receive
the price of the vegetables to be auctioned. We must bear in mind that the Society deals with
small and marginal farmers who themselves look after the Society for obtaining such assistance
as may be necessary from not being exploited by the traders and had been facing the problem of
a forced sale of their produce at the throw away price. The totality of the circumstances as opined
by the Tribunal and affirmed by the High Court would clearly go to show that although certain
activities are carried out in the market yards where for requisite infrastructures are provided, the
Society in general does not have the necessity of employing any workman either for the
purpose of loading, unloading or grading. Ultimately, the remuneration to the concerned
workmen are borne either by the farmers or by the merchants. Presumably the amount paid to the
loaders, unloaders and the graders would vary, as for example whereas there would be cases
where the growers themselves would unload their merchandise either from trucks or carts. In
case growers take the assistance of the concerned persons for unloading after the auction is held
the payment would be made by the traders. In a situation of this nature and particularly having
regard to the fact that the respondent is a cooperative society which only renders services to its
own members and despite the fact that in relation thereto it receives commission at the rate of
one per cent both from the farmers as also the traders; it does not involve in any trading activity.

International Airport Authority of India v. International Air Cargo Workers’ Union, 2009 SC

IAAI is established under statute and has established a cargo complex in Chennai. It granted a
license to a private company Airfreight Pvt. Ltd. in respect of export, import and shipment of
cargo consignments. Under the agreement, they were required to take payment from the owners
of cargo, engage services of required number of workers for handling the cargo, and
remuneration had to paid by the private company to the workers.

IAAI says we should not have any privity of contract or responsibility with respect to the
workers. The only thing required is that you provide the requisite workers, and you fulfil the
statutory requirements.

After some time, IAAI wants to take over the work and wants to give it to a new licensee through
tendering process. The contract between IAAI and the independent contractor was terminated
and workers were not retained, as they were workers of IC and not IAAI. Workers raised a
dispute claiming they were working since 5-10 years, so they wanted to be retained. They made
an appeal. In initial stages in 1985 itself, writ petition is filed.

The IAAI said that considering their hardships, we will accommodate them. You need to form a
cooperative society consisting of workers, we will enter into contract with the society, and give
employment to workers through the workers. Society is formed, and a settlement is reached.

But then a second writ petition is formed. They want the IAAI to hand over the ground handling
work, absorb the employees and leave the work to them. A settlement was reached – para 6. This
agreement was for a duration of 6 months.

Then there was third round of litigation. A detailed agreement was entered into – workers would
not have any direct relation with IAAI. IAAI is trying to say that we have no responsibility or
relationship with individual workers, and all we want to deal with is the society which is formed.
We will make payments to society, and ask the society to provide workers. Except in exceptional
circumstances, there would be no interaction with workers on individual basis.

Another agreement was entered subsequently to this. When the agreement was about to come to
an end, the workers claimed that IAAI should regularize us, and you cannot ask another
contractor to come in and fulfil your duties.

A writ was made (5th round) which was rejected. The IAAI claimed that remedy would lie not
under industrial dispute act, but the contract labour regulation act. The workers filed another writ
against this, and said that the Court prejudged this. It was not seen whether the workers were
workers of the society or IAAI. It was held by the Industrial Tribunal Madras in 1994 that the
agreement between IAAI and society was a sham, and IAAI wanted to prevent permanent
appointment of workers to which they were entitled. After termination of contract with
Airfreight, the employees were directly employed under IAAI, which paid remuneration and
exercised control. Any attempt by IAAI to appoint the workmen as contract labour is illegal. The
tribunal held the contract between the society and IAAI as sham, nominal and camouflage.
(However, later the SC observed that this finding is wrong, and was not even alleged or argued
by the workers union).

The industrial tribunal said that the agreement between the workers and IAAI of providing work
through society was not a valid contract, but a sham contract as IAAI was in a dominant position,
and they were trying to deprive the workers of their right to permanent employment. As the
contract is sham, it is just a ploy to defeat the claim of workers to permanent status. Thirdly, the
moment the Airfreight contract was terminated, the employees became direct employees, and
their status cannot be changed from direct to indirect. Fourthly, even when workmen were
contract labour, IAAI was paying wages directly to them and exercising direct control over them.
Fifthly, and attempt to appoint workmen as contract labour is illegal.

This decision was reversed by the single judge bench of Madras HC, but was again upheld by the
Division Bench.

Contract Labour Regulation Act [CLRA]. Many businesses are outsourced to third party
contractors. The employees need to take licenses and register themselves under the Act that they
are working as contract labour. The government also retains the power to prohibit the doing of
work through contract labour, and rather having a direct relationship with the workers (under
section 10). Based on this, there can be consideration that whether the contract is a sham and that
the government should prohibit contract labour.

The single judge bench of Madras HC agreed that workers are not employees of IAAI. The Court
says that remedy lies under CLRA, and the government should consider whether the deployment
of contract labour in this case should be abolished or not. The Court observed that if the
government issues notification under section 10 of CLRA prohibiting contract labour, all
workers would have to be absorbed in the IAAI (but the validity of this direction was challenged
by the SC).

Bu the division Bench restored the industrial tribunal findings on the ground that finding of facts
of lower courts should not be disturbed.

Hence, the case went to SC.

Workers argued that:

1. we had a direct relationship on casual daily wage basis with IAAI which is sought to be
turned into an indirect relationship by IAAI, which is not allowed by Industrial Disputes
Act section 9A. They were engaged as direct casual labour in IAAI from November,
 1985 to July, 1986. Also, they wanted permanency in services and other benefits given to
regular employees.
2. Also, in other IAAI airports like Mumbai and Calcutta, they do not engage in contract
labour, rather IAAI directly employs the workers.

At no point of time did the workers claim that there was a sham contract.

Supreme Court:

In Steel Authority of India Ltd. v. National Union Warfront Workers case, 2001 SC, it was held
that direct absorption is not provided for under any provision of CLRA in case of notification
being issued under section 10. Thus, even if government prohibits contract labour, the labour
need not be directly absorbed by the principal employer.

In para 20 – when there is no notification under section 10 of CLRA and where it is not proved
that contract was sham or nominal, then the question of directing the principal employer to
absorb or regularize the services of the contract labour does not arise.

Also, the tests that are applied to find out whether a person is an employee or an independent
contractor may not automatically apply in finding out whether the contract labour agreement is a
sham, nominal and is a mere camouflage. For example, if the contract is for supply of labour,
necessarily, the labour supplied by the contractor will work under the directions, supervision and
control of the principal employer but that would not make the worker a direct employee of the
principal employer, if the salary is paid by contractor, if the right to regulate employment is with
the contractor, and the ultimate supervision and control lies with the contractor. The principal
employer only controls and directs the work to be done by a contract labour, when such labour is
assigned/allotted/sent to him. But it is the contractor as employer, who chooses whether the
worker is to be assigned/allotted to the principal employer or used otherwise. In short, worker
being the employee of the contractor, the ultimate supervision and control lies with the
contractor as he decides where the employee will work and how long he will work and subject to
what conditions. Only when the contractor assigns/sends the worker to work under the principal
employer, the worker works under the supervision and control of the principal employer but that
is secondary control. The primary control is with the contractor.
After taking this into consideration, we need to see whether there was a genuine contract or a
sham contract between the contractor and the principal employer.

The agreement between IAAI and Airfreight was a license agreement, and the workers were not
contract labour, rather they were employees of Airfreight, as there was no privity of contract
between workers and IAAI. Thus, the responsibility to provide employment to workers was of
Airfreight. When the agreement was terminated, IAAI had no obligation to engage any of the
workers. Still, it unilaterally proposed the memorandum as a humanitarian purpose for mitigating
the hardship of workers. The memorandum provided for a mechanism whereby workers were to
form a cooperative society, and IAAI would consider accommodating ex-loaders and packers of
Airfreight as far as possible on contract basis. But under no circumstances would this involve
regular absorption of workers under IAAI.

For the period in which the society was formed and contract between the IAAI and society is
settled, the IAAI engaged the workers as casual daily wage workers directly under the IAAI. But
this arrangement would only be interim and ad-hoc, and would not be considered a regular
service.

The workers agreed to this and the HC also recognized this arrangement and writ was dismissed.
There was no compulsion or pressure involved here. In view of the fact that the union was
agreeable for such a course and did not press the relief of absorption or direct employment under
IAAI, it is not possible to hold that the terms of the memorandum were terms of a settlement
arrived at by IAAI from a dominant position, by applying pressure on the workers. This is not a
case of the workers giving up any right or interest, but a case of a benefit or concession
being voluntarily extended by IAAI as a responsible organization, to mitigate hardship.

Secondly, in the period of 1985-1986 when the workmen were engaged as direct casual labour,
the IAAI explicitly noted that this was ad-hoc and interim measure. Thus, argument of section
9A of ID Act of changing the status of workers is not attracted.

Also, the workers never claimed that this was a sham contract, as they knew it was a genuine
contract.

The control and supervision also did not exist, as wages were paid by the society. Penal
action was also not taken by the IAAI, as merely notice of pilferage, etc. was sent to the
society saying that the worker not be sent to work for IAAI. Thus, primary control was always
retained by the society.

In this case, the contract labour were engaged in handling cargo, that is loading, unloading and
movement of cargo in the Cargo Complex of IAAI. Naturally, the work had to be done under the
supervision of the officers of IAAI. Merely because the contract labour work is under the
supervision of the officers of the principal employer, it cannot be taken as evidence of direct
employment under the principal employer. Clause 17 of the Contract Agreement required a
supervisor to be employed by the society also. Exercise of some control over the activities of
contract labour while they discharge their duties as labourers, is inevitable and such
exercise is not sufficient to hold that the contract labour will become the direct employees
of the principal employer.

Also, there was no direct payment of wages or any direct penal action by IAAI against the
contract labour. Therefore, SC held that the findings of industrial tribunal that workers were the
employees of the IAAI and the contract between IAAI and society being sham are entirely
baseless and based on no evidence at all.

Balwant Rai Saluja v. Air India Ltd., 2014 SC

Air India was required to provide for and maintain a canteen for its employees by virtue of a
statutory obligation under section 46 of the Factories Act, 1948. Delhi Factory Rules, 1950
imposed obligations on the occupier regarding maintenance of the canteen. The Hotel
Corporation of India [HCI] is a wholly owned subsidiary of Air India, and Chefair Flight
Catering is a unit of HCI. Chefair unit of HCI operated the canteen where the workers were
engaged on a casual or temporary basis. An industrial dispute was raised wherein the workmen
of canteen claimed regularization of services. The issue that arose was whether the workers
engaged by a contractor to operate and run a statutory canteen on the premises of Air India can
be said to be the employees of Air India.

The SC held that the workers hired by a contractor to work in a statutory canteen under 1948 Act
would be the workers of the factory (Air India here) only for the purposes of the Act, and not for
all other purposes. Thus, rights regarding appointment, promotion, benefits, etc. cannot be
claimed by them. In order to see whether these other rights are present, and to call them
employees of Air India for all purposes, the Court then applied the test of employer-employee
relationship and noted that it must be shown that the employer exercises absolute and effective
control over the workers. Seeing the MOA and AOA of the HCI, it became clear that HCI was
not established solely for the purpose of assisting Air India or for the purpose of running the said
canteen. Air India exercises some level of control, but it is only because of the virtue of HCI
being the wholly owned subsidiary of Air India, and for the purpose of supervising the working
of canteen. As there is no impropriety by Air India resulting in deprivation of legal rights of
workmen, the corporate veil will not be lifted.

The effective control over all aspects like appointment, remuneration, dismissal, etc. lies with the
HCI and it is not merely a veil or camouflage between the Air India and the workers. Hence,
appeal was dismissed.

There are two ways in which employment can happen. One is direct employment, in which case
various tests are applied. In another way, labours are engaged through contractors. Here,
difficulties arise, as Court first need to establish whether contract is genuine or not. In IAAI case,
it was observed that if contract is genuine, labours do not come under the ambit of IDA, rather
they are under ambit of CLRA. They will have to make a plea to the appropriate government for
abolition of contract labour. If certain conditions are fulfilled, the contract labour is terminated.
In most of the cases, the appropriate government itself issues a notification, considering that the
enterprise is outsourcing a lot of work which is integral to its business. Then some Courts held
that in this case, the persons working in the business of the principal employer are automatically
absorbed as employees of principle employer. But then the Court held that automatic absorption
would not take place, as no such implication can be drawn from the CLRA.

Considering the conditions of work, the employers are required to maintain certain facilities for
employees, and one such facility is the canteen, which has to be maintained outside the area of
work (such as a stone quarry), where person can eat in a hygienic environment.

In many cases, the employer outsources such work to contractors. Contractors would engage
workers to work in the canteen. Question arises as to the relationship between the workers
working in canteens and the principal employer. This is important because a lot of these
legislations give certain benefits to employees. If the workers working in canteens are considered
direct employees of the corporation, then the workers would be entitled to various benefits like
promotion, seniority, regularization, etc. This question has been dealt with in different manners
by different cases.

In this case, the decision was given before 3-Judge Bench of SC. The decision is coming in
appeal. The lower court was faced with the question whether workers working in statutory
canteens were employees. The industrial tribunal held them employees. The HC single judge
bench reversed this, and the division Bench agreed with it.

The company providing intermediary services and engaging workers in canteen is a wholly
owned subsidiary [WOS] of the principal employer i.e., Air India. Thus, it is argued by the
workers that there is no independence in this WOS, and it is only created to evade the statutory
responsibility of running the canteen. Secondly, it is argued that canteen services are provided on
the premises of the principal employer. Also, the mandate of running the canteen is not by way
of free will, rather it is a mandate of law. Thus, irrespective of intermediaries, the workers
become employees of principal employer. Also, on piercing the corporate veil, the contractor is
merely a camouflage, hence workers are direct employees of Air India.

They also rely on the decision in SAIL where it was observed that where in discharge of a
statutory obligation of maintaining a canteen in an establishment the principal employer availed
the services of a contractor, the Courts have held that the contract labour would indeed be the
employees of the principal employer.

The respondents claim that SAIL was a completely different matter. There, the Court discussed
the absorption of workers under section 10, and only discussed this in passing. Hence, it
constitutes obiter dicta and would not be binding. Also, they argue that the test is not sufficient
control, rather effective and absolute control, and only on that basis, the employer-employee
relationship can be determined.

The SC agrees with the respondent’s argument concerning SAIL case, as the Court was dealing
with the issue of appropriate government and the absorption of workers. The status of workers
engaged in canteens was not in issue. Hence, it is only obiter dicta.

Regarding the employer-employee relationship, the Court says that the issue before it is when the
company is admittedly required to run the canteen in compliance of the statutory obligation
under Section 46 of the Factories Act, 1948, whether the canteen employees employed by the
contractor are to be treated as the employees of the company only for the purpose of Act 1948 or
for all the other purposes.

This question had come up in the Indian Petrochemicals Corporation Ltd. v. Shramik Sena case
also, where the Court held that the persons engaged in statutory canteen would be considered
workmen under the Factories Act only, and not for all other purposes. Thus, they would not be
entitled to benefits provided to employees in other Acts like provident fund, retirement benefits,
promotion, etc.

The Court also discussed Haldia Refinery Canteen Employees Union and Ors. v. Indian Oil
Corporation Ltd. and Ors. case, where the Court was faced with similar facts. The Court there
observed that a free hand was given to contractor with regard to engagement of workers in the
canteen. The control exercised by the management of principal employer was only of a
supervisory nature, which was not sufficient to hold the workers as the employees of the
principal contractor.

The Court says that in order to ascertain whether workmen of contractor can be treated as
employees of factory, complete administrative control has to be shown, and not just sufficient
control. The Court looks at the MOA of the WOS and finds that assisting Air India is only
mentioned as an ancillary objective. The primary objective is not related to Air India in any way.
Hence, the Court concludes that no piercing of corporate veil is required as the Air India does
not exercise effective and absolute control over the subsidiary. The contract is not a sham or
camouflage.

However, it can be seen that the Court is paying a lot of emphasis on the absolute or complete
administrative control. Also, even though the holding company exercises complete control over
its WOS, the Court is not taking this into consideration.

The approach taken by Court in this case has not been relied upon by many cases. Also, the
Court may have considered the aspect that control over a company is different form control over
the working of employees from the perspective of labour law.

The element of sham that the Court seems to be applying a high threshold, and not interpreting it
as a beneficial legislation.
Sushilaben Indravadan Gandhi v. The New India Assurance Company Ltd. and Ors., 2020
SC.

Under compensation legislations, there are two – Employees State Insurance Act, 1948 and
Employees Compensation Act, 1923. Under these, if the employee is travelling in the course of
employment and meets an accident, the employer is liable to compensate for the same.

In this case, a surgeon was travelling in a minibus owned by a hospital and the bus was travelling
at excessive speed. There was an accident and surgeon suffered injuries and ultimately died. The
hospital had a private car insurance policy with the respondent. The question arose whether the
surgeon was employee of hospital. If the surgeon was employee, then compensation would be
paid by the employer (insured hospital) and not insurance company. The insurance policy also
mentioned that the insurance company shall not be liable where the death or injury arises out of
and in the course of employment of such person by the insured.

The hospital claimed that he was not an employee. The Court had to ascertain whether there was
a contract of service or contract for service.

The hospital argued that this is a contract of service because:

 The intention of parties is to be derived from the wordings of the contract. The title of the
contract itself says that it is a contract for service.
 Instead of being paid regular wages, the surgeon is being paid honorarium. Also, he is
also entitled to certain percentage of profits as per clause III.
 The surgeon was not to be entitled to benefits given to regular employees, as provided in
the leave rules.
 Disputes, if any, arising in the course of the contract, were to be referred to the managing
committee of the institute and its decision would be final. Thus, an arbitral clause was
present in the contract itself, which is unusual for a master-servant relationship.
 In the termination clause, if the hospital or surgeon wished to terminate contract, 3
months notice or the 3 months honorarium amount in lieu of the notice had to be paid.
Thus, either side could terminate by notice and the requirements were the same for them.
There is a key distinction in how a contract is drafted regarding say key sports person or
managerial personnel, and a regular employee. In the former case, the power balance is
 made equal, while in case of a regular employee, the power balance would be more tilted
in the side of the employer. In the present termination clause, the clause is very balanced.
Thus, the imbalance of power and subordination and subjugation does not strike us here.
This can be taken as a clause distinguishing between a contract of service and contract for
service.
 The final clause relating expiration of present employment states that the surgeon would
no longer remain a regular employee and that the earlier appointment order automatically
becomes null and void.

Based on these considerations, hospital claims that surgeon is not an employee of the hospital.

In Malik v. BCCI, it indicates that even if an explicit condition is not there, it is an implicit duty
on the employer to ensure that no breach of trust takes place. Hence, breach of trust clause need
not extend to the surgeon.

The Court discusses various clauses relating to employer-employee relationship. The Court says
that there is no test as such that can be referred.

The Court also notes the new line of English cases, starting from E v. English Province of Our
Lady of Charity and Anr. The Court says that vicarious liability tended to depend on the
difference between the employee and IC. The IC is his own master, while an employee is bound
by his master. In Ready Mixed Concrete Ltd. v. Minister of Pensions and National Insurance, the
Court observed that a contract of service exists if three conditions are fulfilled:

i. The servant agrees that, in consideration of a wage or other remuneration, he will

provide his own work and skill in the performance of some service for his master.
ii. He agrees, expressly or impliedly, that in the performance of that service he will be
subject to the others control in a sufficient degree to make that other master.
iii. The other provisions of the contract are consistent with its being a contract of service.

The Court elaborated that control includes the power of deciding the thing to be done, the way in
which it shall be done, the means to be employed in doing it, the time when and the place where
it shall be done. All these aspects of control must be considered in deciding whether the right
exists in a sufficient degree to make one party the master and the other his servant.
The Court also referred Short v. J & W Henderson Ltd. where 4 indicia were relied on: (a) The
masters power of selection of his servant; (b) the payment of wages or other remuneration; (c)
the masters right to control the method of doing the work; and (d) the masters right of suspension
or dismissal.

However, the Court criticizes these 4 indicia. The Court says that (a) and (d) are relevant in
determining whether there is a contract of any kind between the supposed master and servant,
and not specifically for a contract of service. The same is true of (b), unless one distinguishes
between different methods of payment, payment by results tending to prove independence and
payment by time the relation of master and servant.

Thus, these three factors are no longer that relevant, and what remains is the control aspect.
While control is important, but to what degree we rely on it will depend on case to case.

In Argent v. Minister of Social Security, the Court observed that with the development of law, the
emphasis has shifted and no longer rests so strongly upon the question of control. Thus, one has
to look at the totality of the evidence, at the totality of the facts found and then apply them to the
language of the statute.

In Lee Ting Sang v. Chung Chi Keung case, the fundamental test to be applied is this: is the
person who has engaged himself to perform these services performing them as a person in
business on his own account? If the answer to that question is yes, then the contract is a contract
for services. If the answer is no, then the contract is a contract of service. No exhaustive list has
been compiled and perhaps no exhaustive list can be compiled of the considerations which are
relevant in determining that question, nor can strict rules be laid down as to the relative weight
which the various considerations should carry in particular cases. The most that can be said is
that control will no doubt always have to be considered, although it can no longer be regarded as
the sole determining factor; and that factors which may be of importance are such matters as
whether the man performing the services provides his own equipment, whether he hires his own
helpers, what degree of financial risk he takes, what degree of responsibility for investment and
management he has, and whether and how far he has an opportunity of profiting from sound
management in the performance of his task.
In E v. English Province of Our Lady of Charity and Anr., a question arose as to whether the
Roman Catholic Church would be vicariously liable in a claim brought for damages alleging that
a lady, when she had been resident in a childrens home operated by a Roman Catholic order of
nuns, had been sexually abused by a priest appointed by the diocesan bishop. The Court
observed that when you apply justice and fairness to the fact situation, the Court would be tilted
towards holding the person as employee. It was held – “The result of each of the tests leads me to
the conclusion that Father Baldwin is more like an employee than an independent contractor. He
is in a relationship with his bishop which is close enough and so akin to employer/employee as to
make it just and fair to impose vicarious liability. Justice and fairness is used here as a
salutary check on the conclusion. It is not a standalone test for a conclusion. It is just
because it strikes a proper balance between the unfairness to the employer of imposing strict
liability and the unfairness to the victim of leaving her without a full remedy for the harm caused
by the employer's managing his business in a way which gave rise to that harm even when the
risk of harm is not reasonably foreseeable.”

Concluding, the Court says that control is not the only factor, there has to be an integration of
various tests. There is a three-tier test laid down by some of the English judgments, namely,
whether wage or other remuneration is paid by the employer; whether there is a sufficient degree
of control by the employer and other factors would be a test elastic enough to apply to a large
variety of cases. Also, the tests of ownership of tools, and the test of economic reality and the
test of whether the employer has economic control over the workers subsistence, skill and
continued employment can also be applied when it comes to whether a particular worker works
for himself or for his employer. The test laid down by the Privy Council in Lee Ting Sang v.
Chung Chi-Keung is the person who has engaged himself to perform services performing them
as a person in business on his own account, is also an important test, this time from the point of
view of the person employed, in order to arrive at the correct solution.

Thus, the Court observes that no one test of universal application can ever yield the correct
result. It is a conglomerate of all applicable tests taken on the totality of the fact situation in
a given case that would ultimately yield, particularly in a complex hybrid situation, whether
the contract to be construed is a contract of service or a contract for service. Depending on the
fact situation of each case, all the aforesaid factors would not necessarily be relevant, or, if
relevant, be given the same weight. Ultimately, the Court can only perform a balancing act
weighing all relevant factors which point in one direction as against those which point in the
opposite direction to arrive at the correct conclusion on the facts of each case.

The Court says that the tests we are to apply may not yield an ideal solution in the complex facts
of the cases. In such case, we will have to look at the context of the case. If the context is
arising in the sense of a beneficial legislation, then the contract should be held to be a contract of
service, as in Dharangadhara, Birdhichand, D.C. Dewan, Silver Jubilee, Hussainbhai, Shining
Tailors, P.M. Patel, and Indian Banks. On the other hand, where the context is that of a
legislation other than a beneficial legislation or only in the realm of contract, and the context of
that legislation or contract would point in the direction of the relationship being a contract for
service then, other things being equal, the context may then tilt the balance in favour of the
contract being construed to be one which is for service.

In this manner, the Court makes a shift from the strict control tests and rather proposes a
flexible approach for determination of employment relationship.

Applying these in the facts, the Court considered the terms of contract and held that it was in
fact a contract for services. Hence, the hospital is not liable to compensate as per the Workmen
Compensation Act. Moreover, hospital had paid an additional premium under IMT 5 Personal
Accidental cover to unnamed passengers other than the insured and his paid driver or cleaner,
where compensation had to be paid for bodily injury sustained by any passenger other than the
insured, his paid driver, or person employed by the insured.

Since the surgeon was not employed by the insured, he came within the ambit of ‘unnamed
passenger’ and hence insurance company was liable to pay compensation for his death.