How India’s New Labour Codes Transform Contract Labour Engagement?

India’s labour landscape is undergoing one of its biggest shifts in decades. Among the changes brought in through the four new Labour Codes, the impact on contract labour engagement stands out as a game-changer for employers, contractors, and HR teams.

The Contract Labour (Regulation & Abolition) Act, 1970 was originally designed to regulate the contract labour system and abolish it wherever possible. Over time, contract staffing became a core part of how industries operated. However, with the introduction of the Occupational Safety, Health and Working Conditions (OSH) Code, 2020, the government is clearly moving toward reducing the dependency on contract labour, especially in core activities.

Below is a simple, sharp breakdown of how the new Codes reshape the rules.

1. A Higher Threshold — But Stricter Controls

Under the old CLRA Act, the law applied to establishments or contractors employing 20 or more contract workers, with states having their own flexibility.

Under the OSH Code, this threshold is raised to 50 or more. This means fewer small establishments fall under licensing requirements — a business-friendly move.

But the big shift lies elsewhere: Even though fewer units are covered, the responsibilities of principal employers have increased dramatically.

2. “Employer” Redefined — Principal Employers Now Fully Accountable

One of the most significant changes across the new labour codes is the redefined definition of “employer.”

Earlier, principal employers were responsible only for limited compliance obligations (like in Gratuity, Bonus, Standing Orders, and select ID Act requirements).

Now, under the Codes, the principal employer is equally responsible for all compliance requirements related to contract labour. This includes:

Ensuring all statutory benefits are provided
Verifying contractor compliance
Bearing responsibility when contractors fail
Facing direct industrial disputes raised by contract workers
Following proper lay-off/retrenchment processes even for outsourced labour
Recognising protected workmen among contract labour

In short, contract workers now enjoy employment protections much closer to regular, on-roll workers — and the principal employer cannot distance themselves from the obligations.

This raises an important question for companies:

If the compliance burden and employment risks remain the same, what’s the continued value in using contract labour for regular work?

3. A Clear Ban on Contract Labour in Core Activities

This is arguably the most disruptive reform.

Today, only Andhra Pradesh has explicitly banned the use of contract labour in core activities under Section 10 of CLRA. Some other states issue activity-specific notifications, but nothing comprehensive.

The OSH Code changes that.

Under Section 57 of the OSH Code, contract labour is fully prohibited in “core activities.”

The code defines a core activity as any function for which the establishment exists — essentially anything that directly contributes to the main output.

However, a list of exemptions is provided, covering typical support functions:

Security
Sanitation and housekeeping
Catering and canteen services
Loading/unloading
Gardening
Courier services
Transport
Construction/maintenance
Intermittent work
Guest house/hospital/club services

These exceptions offer limited flexibility — far less than employers enjoyed earlier.

The intention is clear: core work should be done by regular employees, not by outsourced labour.

4. Limited Exceptions — But No Real Relief in Practice

Section 57 allows contract labour in core areas in three specific cases:

When the activity is ordinarily outsourced
When the activity does not require a full-time worker
When there is a sudden spike in workload needing urgent completion

Even with these exceptions, the practical freedom to deploy contract labour in central business functions is significantly reduced. The appropriate government also has the authority to decide what is or isn’t a core activity — adding another layer of scrutiny.

5. New Payment Rules for Contractors

The Code on Wages (Central Rules) introduces a critical operational change:

Principal employers must now clear contractor bills before the due date.

This moves away from the old “pay after verification” model and forces organisations to streamline contractor billing and payment cycles.

6. Business-Friendly Changes Exist — But Do Not Offset the Compliance Burden

The Codes do introduce certain ease-of-business measures:

One single registration for establishments under the OSH Code
License validity for contractors extended up to five years
A single contractor license usable across multiple locations
Higher applicability threshold (50 workers)

These help companies reduce administrative overhead — but they do not dilute the significantly expanded responsibilities of principal employers.

7. Welfare, Health & Safety: Principal Employer is Now Fully Responsible

Sections 23 and 24 of the OSH Code shift complete responsibility for health, safety, and welfare facilities to the principal employer, even for contractor employees.

This includes:

Cleanliness, ventilation, temperature control
Safe working environment free of dust and harmful fumes
Drinking water, lighting, sanitation
Washrooms, locker rooms, crèche
First-aid and medical facilities
Waste management
Canteen facilities for 100+ workers (including contract workers)

If contractors fail to provide these, the burden does not shift secondarily — it falls primarily on the principal employer.

Additionally, safety committees in mines must include representatives from contract labour.

Conclusion: A New Era of Accountability for Principal Employers

The new labour codes mark a decisive shift in how the Indian industry will approach contract staffing.

Key takeaways:

Principal employers now carry full compliance responsibility
Contract workers gain stronger rights, dispute mechanisms, and protections
Core activities can no longer be outsourced except in narrow conditions
Welfare and safety obligations fall squarely on the host company
Licensing becomes easier, but accountability becomes far heavier

This means organisations must rethink their workforce models, evaluate which roles can genuinely be outsourced, and redesign contracts, compliance frameworks, and internal monitoring systems.

While the Codes aim to streamline processes and improve worker welfare, they also require principal employers to dramatically strengthen their governance around contract labour.

As India transitions to this new framework, businesses that adapt early — with clear policies, compliant structures, and transparent contractor management — will navigate the change with confidence.