Key Takeaways

  • The four Labour Codes were made effective from 21 November 2025, and the Contract Labour (Regulation and Abolition) Act 1970 is among the laws the OSH Code repeals.
  • Under Section 55 of the OSH Code 2020, the contractor pays contract labour, but the principal employer must make good unpaid or short paid wages and may recover them from the contractor.
  • The Code on Social Security 2020 lets an employer recover PF and ESI contributions paid for contract workers from the contractor, by deduction or as a debt.
  • A facility services agreement cannot remove statutory exposure. It can only make that exposure visible early and recoverable quickly.
  • Monthly proof of wage, PF and ESI payment, tied to invoice release, did more work in this matter than any indemnity clause.

Table of Contents

  1. Executive Summary
  2. Client Overview
  3. Business Challenges
  4. Business Objectives
  5. Solution Strategy
  6. Technologies and Tools Used
  7. Implementation Process
  8. Business Results
  9. Lessons Learned
  10. Frequently Asked Questions
  11. Conclusion

Executive Summary

A Bengaluru technology company asked a business contract lawyer one narrow question. Did its facility services agreement still work after the Labour Codes? It did not, and the gap sat in the money flow.

The company outsources housekeeping, security and cafeteria services to a single facility management contractor. The agreement was drafted years ago, under the old contract labour regime.

The government made the four Labour Codes effective from 21 November 2025. They are the Code on Wages 2019, the Industrial Relations Code 2020, the Code on Social Security 2020, and the Occupational Safety, Health and Working Conditions Code 2020.

The old agreement referred to repealed statutes. It promised compliance in one sentence and asked for no evidence of it. Nothing linked the contractor's invoices to proof that workers had actually been paid.

That matters because the law looks past the contractor. Under Section 55 of the OSH Code, if the contractor fails to pay contract labour on time, the principal employer must pay and then recover.

We rebuilt the agreement around that reality. Scope and service levels, a compliance warranty, monthly proof of wage, PF and ESI payment, audit and step in rights, set off, indemnity, welfare access, and an orderly exit.

The work took roughly ten weeks, including negotiation with the contractor. The outcome is described qualitatively below, since results like these depend on facts and on how authorities apply the Codes.

Was your outsourcing agreement written before the Labour Codes took effect? Explore our services agreement drafting work, or speak with the team via the contact page.

Client Overview

The client is a mid sized technology company with its main office in Bengaluru. Its own workforce is salaried, and almost every support function in the building is outsourced.

Housekeeping, security and the staff cafeteria run through one facility management contractor. The contractor deploys its own workers on site, across shifts, and supervises them through its own site manager.

Procurement owns the commercial relationship. Administration owns daily operations. Neither team had ever owned labour compliance for the contractor's workforce, which is a common split in technology companies.

The agreement had been renewed on the same paper several times. Each renewal changed the rates and the headcount annex. None revisited the legal clauses.

The company's finance team paid monthly invoices against attendance summaries. Those summaries showed who came to work. They did not show whether anyone was paid, or whether PF and ESI contributions were deposited.

Nobody had complained. That is usually how these files look before something goes wrong, and it is why the review was commissioned during a quiet renewal cycle rather than after a dispute.

Do you know whether your contractor's workers were paid last month? Read more on what a master services agreement should cover, or reach TGC Legal through the contact page.

Business Challenges

The company came with one concern about outdated references. The review found four problems, and the references were the least of them.

Is a company liable for its contractor's unpaid wages?

Yes, in the situation the law describes. Section 55 of the OSH Code makes the contractor responsible for paying wages to each contract worker within the prescribed period.

If the contractor fails to pay, or pays short, Section 55(3) makes the principal employer liable to pay the wages in full or the unpaid balance. The principal employer may then recover that amount from the contractor, by deduction from sums payable under any contract or as a debt.

So the company's exposure did not depend on the agreement at all. The agreement could only decide how quickly the company would learn of a default, and how easily it could recover.

Who pays PF and ESI for contract workers?

The Code on Social Security 2020 places this firmly on the employer side. Section 31(1) requires the employer to pay both ESI contributions for every employee, whether employed directly or through a contractor.

Section 31(6) then lets that employer recover the amount from the contractor. For provident fund, Section 17 allows an employer who pays contributions for workers employed through a contractor to recover them by deduction or as a debt.

The old agreement mentioned none of this. It said the contractor would comply with all laws, and stopped there.

Why did the old compliance clause fail?

Because a promise without evidence is only useful after the damage. A general undertaking to comply with all applicable laws gives the company a claim once a default is discovered.

It does nothing to surface the default early. There was no monthly proof of payment, no right to inspect registers, and no consequence for late wage disbursement short of termination.

The clause also named the Contract Labour (Regulation and Abolition) Act 1970. That Act is among the laws listed for repeal in Section 143 of the OSH Code, so the agreement was anchored to a framework that had moved.

What changes for outsourced housekeeping and security under the OSH Code?

Several things, most of them practical. Chapter XI of the OSH Code deals with contract labour, and Section 45 applies that Part where fifty or more contract labour are engaged, as defined.

Section 47 requires a contractor to whom the Part applies to hold a licence. Section 54 deems employment through an unlicensed contractor, where a licence is required, to be in contravention of the Code.

Section 53 makes the principal employer responsible for providing welfare facilities to contract labour. For a company that hosts a cafeteria and restrooms, that obligation sits inside its own building.

Is your facility contract tied to proof of payment, or only to attendance? Explore our employment documentation work, or speak with the team via the contact page.

Business Objectives

We agreed the objectives with the head of administration and the procurement lead in a single working session. One assumption was set aside early.

Can a services contract shift statutory liability to the contractor?

No, and the company needed to hear that first. Statutory duties owed to workers do not disappear because two businesses agree otherwise between themselves.

What a services contract can do is allocate the cost. It can require the contractor to bear the loss, give the company rights to recover quickly, and make defaults visible before they grow.

So the objective changed. Instead of trying to contract out of exposure, the company would manage it, with evidence arriving every month and money held back when evidence did not arrive.

What did success look like for procurement and administration?

For procurement, a renewal on paper that reflected current law, with service levels that measured what the business actually cared about. Clean floors at opening, staffed gates, meals served on time.

For administration, fewer surprises. A single place to see whether wages, PF and ESI were paid, and a clear right to act if they were not.

Both teams wanted the contractor to stay. The relationship was good, and service quality was not the problem. That shaped the tone of every clause we drafted.

When should you involve a business contract lawyer in an outsourcing renewal?

Before the rates are agreed. Once commercial terms are settled, every legal change looks like a cost the contractor will push back on.

Here the review began a few months ahead of renewal. That gave room to discuss monthly evidence, audit rights and set off as part of one package, rather than as late additions.

It also meant the contractor's own advisers could review the draft calmly. A rushed negotiation tends to produce a weaker compliance schedule, because nobody wants to hold up a signature over a register.

Is your outsourcing renewal due this year? Read our note on contract governance in business transactions, or reach TGC Legal through the contact page.

Solution Strategy

The strategy was simple to state. Keep the commercial relationship, rebuild the paper so that compliance becomes visible every month, and make recovery automatic when it is not.

We split the agreement into a master services agreement with three service schedules, one each for housekeeping, security and cafeteria. A single compliance schedule sat across all three.

That structure let operations change a headcount annex without reopening the legal terms, which had been the habit for years.

How should scope and service levels be written for facility services?

By outcome, with a measurement method attached. A housekeeping schedule that lists tasks is easy to comply with on paper and hard to enforce in practice.

Each schedule now states what must be true and when. Washrooms checked and logged on a stated cycle. Gates staffed through every shift with a handover log. Meals ready within the agreed service window.

Service credits apply where a level is missed. We drafted them as a reduction in the value of service delivered for that month, not as a fine, and we kept them proportionate.

That choice was deliberate. Under Section 74 of the Indian Contract Act 1872, a named sum on breach yields only reasonable compensation not exceeding that sum. The Supreme Court applied that ceiling in Kailash Nath Associates against Delhi Development Authority in 2015.

What belongs in a labour compliance warranty?

Specific promises, each one testable. The contractor warrants that it holds and will maintain any licence required under Section 47 of the OSH Code, and will produce it on request.

It warrants payment of wages within the period prescribed, by bank transfer or electronic mode, as Section 55(2) contemplates. It warrants deposit of PF and ESI contributions on time, and correct registration of every worker deployed.

It also warrants that no fee or commission is charged to workers, reflecting Section 49 of the OSH Code. Each warranty is tied to a document the company can ask for.

How does monthly proof of wage, PF and ESI payment work?

Each invoice must now arrive with a compliance pack. Bank transfer confirmation of wages paid, the PF and ESI challans or payment confirmations for the month, and the wage register extract for workers on site.

Finance releases payment only after administration confirms the pack is complete. A missing item does not cancel the invoice. It pauses release of that invoice until the item arrives.

Section 55(2) already requires the contractor to inform the principal employer electronically of wages paid. The agreement simply turned that statutory information into a condition of payment.

Why are audit, step in and set off rights needed together?

Because each covers a different failure. Audit rights let the company inspect registers and payment records on notice, and interview the contractor's site manager about deployment.

Step in rights let the company pay workers directly if wages remain unpaid after a short cure period. That mirrors what Section 55(3) would require of it anyway.

Set off lets the company deduct any amount it has paid, under statute or the agreement, from sums due to the contractor. Section 55(3) and the Code on Social Security already recognise deduction as a route. The contract made the mechanics clear.

Would your current agreement let you pay workers directly and recover the cost the same month? Explore our other commercial drafting, or speak with the team via the contact page.

Technologies and Tools Used

Little of this needed new software. Most of the work was about routing existing records to the right desk at the right time.

What records should a principal employer collect each month?

Four kinds, kept together. Proof of wage disbursement for every worker deployed on site. PF and ESI payment confirmations for the same month. A deployment list matching names to shifts.

And a declaration from the contractor confirming that no worker was paid below the applicable wage and that no deduction was made outside what the law permits.

The Code on Wages 2019 includes a contractor within its definition of employer in Section 2(l). Its Section 17 sets payment time limits, including payment before the seventh day of the following month for monthly wages, unless the appropriate Government provides otherwise.

How was the compliance pack tracked?

Through a shared folder and a one page checklist per month. Administration ticks each item and records the date it arrived. Finance cannot release payment against an unticked month.

The company considered a vendor compliance tool and decided against it for one contractor. A tool would make sense if the outsourcing grows across several sites.

What mattered was ownership. One named person in administration is responsible for the pack each month, with a deputy for leave. Before this, the task belonged to everyone and therefore to nobody.

Which statutory references did the agreement adopt?

We replaced every reference to repealed statutes with the corresponding Code, and added a general clause covering rules made under them.

That general clause matters more than usual right now. The PIB release announcing the Codes stated that, during transition, relevant provisions of the existing labour Acts and their rules would continue in force.

State rules under the Codes were still being framed when we drafted. Karnataka's rules under each Code should be checked for current status before any clause is relied on, and the agreement obliges both sides to adapt as rules are notified.

Implementation Process

The engagement ran for about ten weeks, from the first document review to signature. Most of that time was negotiation, and most of the negotiation was about evidence.

How long does a facility services agreement review take?

The legal review itself took around two weeks. That included reading the existing agreement, its annexes, the last few invoices and a sample of attendance summaries.

Drafting the new master agreement and schedules took a further two weeks. The remaining time went into meetings with the contractor and its own advisers.

In our experience the review is rarely the slow part. Agreeing what documents a contractor will produce every month, and in what form, takes longer than drafting the clause that asks for them.

How did the contractor respond to the new terms?

Cautiously at first, then constructively. The contractor's main concern was cash flow, since withholding an invoice for a missing document could strain its payroll.

We addressed that directly. Release is paused only for the invoice in question, and only until the missing item arrives. Undisputed service charges are never withheld over a paperwork gap in a different month.

The contractor also asked for a cure period before step in. We agreed a short one, because the company's own statutory exposure under Section 55(3) does not wait indefinitely.

How were welfare facilities for contract workers handled?

By naming them. Section 53 of the OSH Code requires the principal employer to provide the welfare facilities specified in Sections 23 and 24 to contract labour employed in the establishment.

Contract workers had been using the cafeteria and restrooms informally. The new schedule states that access, sets out locker and changing space, and assigns upkeep between the company and the contractor.

Writing it down did two things. It confirmed the company was meeting its own obligation, and it stopped site disagreements about who maintains what.

What happens at termination or contractor transition?

Termination is where facility contracts often fail workers. The rebuilt exit clause requires the contractor to settle all wages and dues to its workers before final payment is released.

Under Section 17(2) of the Code on Wages, wages on resignation, removal or retrenchment must be paid within two working days. The agreement asks for proof that final settlements were made within the law.

The transition schedule covers handover of registers, cooperation with an incoming contractor, and a final compliance pack. Final invoices are held until that pack is complete.

Could your team assemble last month's wage and PF evidence in a day? Read about five checks before a commercial agreement is signed, or speak with the team via the contact page.

Business Results

Results are described qualitatively. Labour compliance outcomes depend on the facts on record and on how authorities apply the Codes, so attaching figures would be invention.

These observations relate to this agreement and this company. They are not a forecast for any other outsourcing arrangement.

What changed in day to day compliance visibility?

The company now sees proof of payment every month instead of assuming it. Administration knows within the invoice cycle whether wages, PF and ESI were paid for the workers on its premises.

Early packs were incomplete, which was expected. The contractor's payroll team had never assembled evidence in this form before.

Within a few cycles the packs arrived complete and on time. The friction moved from argument to routine, which is where compliance belongs.

Finance also reported fewer queries on invoices. Once the evidence travels with the bill, there is less to chase.

How did the principal employer exposure position improve?

The statutory exposure itself did not change. Section 55(3) and the social security provisions still apply exactly as before.

What changed is timing and recovery. A default would now surface within the same month, and the company holds a clear contractual route to pay workers and deduct the amount from the next invoice.

That turns a potential claim into a bookkeeping step. It does not remove risk, and nobody should describe it that way. It does make the risk smaller and more manageable.

The indemnity remains as a backstop for anything set off cannot cover, such as costs arising after the contract has ended.

What did the contractor gain from the rebuilt agreement?

Clarity, mainly. The contractor now knows exactly what the company will ask for and when. Its site manager no longer fields informal requests for documents from three different teams.

The service credit regime is narrower and fairer than the old termination threat. A missed level now produces a proportionate adjustment rather than a dispute about the whole relationship.

The contractor also asked to use the compliance schedule with other clients. We took that as a sign the terms were workable rather than one sided.

What risks were avoided by acting before a dispute?

A wage default discovered only when a worker complains, months after the money should have been paid. By then the company's statutory liability would already exist.

A renewal signed on outdated paper, citing repealed statutes and offering no evidence of compliance. That would have carried the same blind spot forward for another term.

And a contested exit if the company ever changed contractors. The transition schedule now ensures final settlements are made before the outgoing contractor is paid in full.

None of these avoided costs appears in any ledger. That is exactly why they tend to be noticed only after they arrive.

Would a wage default in your building surface this month or next year? Explore our services agreement drafting work, or speak with the team via the contact page.

Lessons Learned

Two lessons changed how we open outsourcing files. The others confirmed what the Codes already say plainly.

What worked better than expected?

Tying evidence to invoice release. We expected heavy resistance from the contractor and received a practical counterproposal instead.

Once the pause was limited to one invoice and one missing item, the contractor saw it as manageable. Its own payroll team welcomed a fixed list of what to send.

We now draft the compliance pack first, before any warranty language. If the evidence is defined well, the warranties become shorter and easier to enforce.

That reverses the usual order of drafting. It is also the change clients understand fastest.

What was the unexpected discovery?

Nobody inside the company owned contract labour compliance. Procurement assumed administration watched it. Administration assumed the contractor handled it.

That gap mattered more than any clause. The law places duties on the principal employer, and a company cannot meet duties it has not assigned to anyone internally.

The fix was a named owner and a deputy, written into the internal process note that sits beside the agreement.

We now ask who owns contractor compliance in the first meeting of any outsourcing review. The answer is often silence.

What was hardest during negotiation?

Agreeing the cure period before step in. The contractor wanted time. The company wanted protection. Both positions were reasonable.

We settled on a short period with written notice, and step in limited to unpaid wages and dues. The company does not take over the contractor's workforce or supervision.

Explaining Section 55(3) helped. Once the contractor understood that the company would be liable regardless, a short cure period looked fair rather than aggressive.

The lesson is to explain the statute before negotiating the clause. People accept a term more readily when they can see the reason for it.

What would we recommend to another company outsourcing facility services?

Read your agreement for references to repealed statutes. If it still cites the 1970 contract labour law, it predates the Codes and needs review.

Ask for monthly proof of wage, PF and ESI payment, and connect it to invoice release. Write set off and step in rights that match what the Codes already contemplate.

Name an internal owner. Check that your contractor holds any licence it needs under Section 47. And check your state's rules under each Code before relying on any timeline.

One more point. Use the quiet months before renewal. The same changes are far harder to agree during a dispute.

Planning an outsourcing renewal or a change of contractor? Read how we handled a supply contract mediation matter, or speak with the team via the contact page.

Frequently Asked Questions

When did the four Labour Codes come into effect?

The Government of India announced that the Code on Wages 2019, the Industrial Relations Code 2020, the Code on Social Security 2020 and the OSH Code 2020 were made effective from 21 November 2025. During transition, relevant provisions of the earlier labour Acts and their rules continue in force, so state rules should be checked.

Is the principal employer liable if a contractor does not pay wages?

Yes. Under Section 55(3) of the OSH Code 2020, if a contractor fails to pay wages within the prescribed period or pays short, the principal employer must pay the wages in full or the unpaid balance. It may then recover that amount from the contractor by deduction or as a debt.

Who pays ESI and PF for contract workers under the Code on Social Security?

Section 31 of the Code on Social Security 2020 requires the employer to pay ESI contributions for employees engaged directly or through a contractor, and lets it recover them from the contractor. Section 17 allows recovery of provident fund contributions paid for workers engaged through a contractor, by deduction or as a debt.

Does a contractor need a licence under the OSH Code?

Where Part I of Chapter XI applies, Section 47 of the OSH Code 2020 requires the contractor to hold a licence to supply or engage contract labour. Section 45 sets the applicability, broadly establishments and contractors with fifty or more contract labour. Section 54 treats employment through an unlicensed contractor, where a licence is required, as a contravention.

Are housekeeping and security core activities under the OSH Code?

Generally not. The definition of core activity in the OSH Code excludes sanitation work, watch and ward services, canteen and catering, and housekeeping as support services, where the establishment is not set up for that activity. For a technology company, these are usually support functions rather than core activities.

Can an indemnity clause remove principal employer liability?

No. An indemnity allocates cost between the company and its contractor. It does not change duties the Codes place on the principal employer towards workers. Its value lies in recovery after the company has paid, which is why set off and monthly evidence of payment matter as much as the indemnity itself.

What should a monthly compliance pack contain?

Proof of wage disbursement for each worker deployed, PF and ESI payment confirmations for the month, a deployment list matching names to shifts, and a declaration on wages and deductions. Tying release of each invoice to a complete pack makes defaults visible within the same billing cycle.

Are service credits in a facility contract enforceable?

They can be, if drafted carefully. Under Section 73 of the Indian Contract Act 1872 damages follow loss, and under Section 74 a sum named for breach yields only reasonable compensation not exceeding that sum. Credits framed as a proportionate adjustment for reduced service sit more comfortably than fines.

Must a company give contract workers access to its canteen?

Section 53 of the OSH Code requires the principal employer to provide the welfare facilities specified in Sections 23 and 24 to contract labour in its establishment. Section 24 includes canteen facilities where a stated number of workers, including contract labour, are ordinarily employed. The agreement should record how access and upkeep are shared.

When should a facility services agreement be reviewed?

Before renewal, and before commercial rates are agreed. Any agreement that still cites the Contract Labour (Regulation and Abolition) Act 1970 predates the Codes, since Section 143 of the OSH Code lists that Act for repeal. A review during a quiet renewal cycle is far easier than one during a dispute.

Conclusion

A business contract lawyer cannot write a principal employer out of the Labour Codes. What good drafting can do is make the exposure visible every month and the recovery quick when something goes wrong. This Bengaluru technology company had a facility services agreement built for an older regime. It cited repealed law, promised compliance in a sentence, and released invoices against attendance alone. Under Section 55 of the OSH Code, the company would have been liable for unpaid wages anyway. Under the Code on Social Security, its contributions exposure followed the same pattern. The rebuilt agreement keeps the same contractor and the same service, on different paper. Service levels are measured by outcome. Warranties are specific and testable. A monthly compliance pack travels with every invoice. Audit, step in and set off rights match what the Codes already contemplate, and the exit clause protects workers before the contractor is paid out. The structure scales if the company outsources more sites, since the compliance schedule sits across every service. If your agreement predates November 2025, speak with the team via the contact page, or read about a senior exit restructured around notice and garden leave.

Sources

This case study is issued in public interest and for general information only. Client identity and commercially sensitive details are withheld. Outcomes are described qualitatively, without figures, because legal results depend on the evidence on record and on the discretion of the deciding authority. Nothing here is legal advice on any specific matter.