Can Contract Workers Claim Regularisation? 2026 Legal Guide

The Short Answer

No, continuous service alone does not grant contract workers an automatic right to regularisation or absorption onto the principal employer’s payroll. However, if the employment contract is proven to be a “sham and camouflage” designed to evade statutory obligations, or if workers are unlawfully deployed in perennial “core activities” under Section 57 of the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code), industrial tribunals possess the jurisdiction to pierce the corporate veil and order direct absorption with full back wages.

The General Rule: No Automatic Absorption

Historically, Indian labour law settled the position that the mere passage of time or the completion of long, continuous service does not create a direct employer-employee relationship.

In Steel Authority of India Ltd. v. National Union Waterfront Workers (2001) and Secretary, State of Karnataka v. Umadevi (2006), the Supreme Court established that contract workers hold no statutory right to automatic absorption. A principal employer engages the contractor’s services, not the individual worker.

The Supreme Court reinforced this rule in its December 2025 decision in Municipal Council, Nandyal Municipality v. K. Jayaram (2026 SC 38). Setting aside a High Court order that had granted parity to contract workers who had been engaged over several years, the Court ruled that contractual workers hired through third-party contractors cannot claim parity or regularisation merely based on the duration of their service, as no direct employer-employee relationship exists.

The “Sham and Camouflage” Exception (The Control Test)

While automatic absorption is barred, courts routinely order regularisation if the employment structure is a facade. To determine if a contract is a “sham and camouflage,” tribunals apply the control and supervision test. If the principal employer dictates the worker’s daily tasks, sanctions their leave, and initiates disciplinary action, the contractor is deemed a mere wage-disbursing agent.

The Supreme Court examined this procedural dynamic in Premium Transmission Private Limited v. State of Maharashtra (January 2026). The Court held that workers can directly refer sham contract disputes to industrial adjudication without placing a prior formal written demand before the employer. However, the Court delivered a critical procedural protection for employers: it set aside interim relief that had directed the management to provide work and pay wages pending adjudication. The Court ruled that such interim relief is premature before the Industrial Court conclusively determines whether the contract is a sham and whether a direct employer-employee relationship actually exists.

The Documentation-First Shift: CBSE v. Raj Kumar Mishra

Employers relying solely on the control test face new vulnerabilities. In The Joint Secretary, CBSE v. Raj Kumar Mishra (March 2025), the Supreme Court fundamentally shifted the evidentiary focus from operational control to contractual documentation.

The Court held that supervisory oversight or direction from the principal entity does not, by itself, convert contract labour into direct employees. Instead, documentary proof is decisive. Where appointment letters, salary slips, statutory filings, and HR files clearly originate from the contractor—and payments flow exclusively through the contractor—the classification of workers as contract labour is legally valid. Properly structured outsourcing contracts stand firm when the documentary trail explicitly identifies the contractor as the employer.

The 2026 Statutory Framework: Section 57 and “Core Activities”

The consolidation of central labour laws into the four Labour Codes—implemented on November 21, 2025, with Central Rules notified on May 8, 2026—altered the regulatory landscape for contract labour.

Section 57(1) of the OSH Code prohibits the employment of contract labour in the “core activities” of any establishment. The Code defines core activities expansively to include any activity essential or necessary to the primary operational functions for which the establishment was set up. However, the OSH Code explicitly excludes specified support services from this definition, including sanitation, security, canteen operations, loading and unloading, construction and maintenance, gardening, housekeeping, transport, and any intermittent activity. Contract labour can be lawfully engaged in these excluded support services without violating Section 57(1).

For core activities, the statute provides three narrow exceptions where contract labour may operate:

• The normal functioning of the establishment is such that the activity is ordinarily executed through a contractor.
• The activities do not require full-time workers for the major portion of the working hours in a day, or for longer periods.
• There is a sudden, temporary increase in the volume of work in the core activity requiring completion within a specified time.

The Mahanadi Coalfields Doctrine: Perennial Work

Deploying contract workers to fulfill continuous, permanent operational requirements renders the commercial contract legally indefensible against regularisation claims. In Mahanadi Coalfields Ltd. v. Brajrajnagar Coal Mines Workers’ Union (2024), the Supreme Court upheld the regularisation and payment of back wages to contract workers engaged in removing spillages at railway sidings.

The Court’s holding was fact-specific: the management’s own evidence established that the remaining 13 workers performed the exact same regular and perennial work as 19 co-workers who had already been regularised. Where workers are similarly situated to regularised colleagues and perform identical perennial work, their exclusion as contract labour is arbitrary and unjustified.

Explicit Statutory Penalties for Non-Compliance

Operating a sham contract or violating the Section 57 prohibition exposes the principal employer to severe legal and financial liabilities:

• Direct Regularisation and Back Wages: Industrial tribunals will pierce the corporate veil, declare the contract workers as direct employees, and order the principal employer to pay full back wages and parity benefits matching the permanent workforce.
• Code on Wages Prosecution: Once a tribunal establishes a direct employer-employee relationship, any historical discrepancy between the wages paid by the contractor and the principal employer’s direct wage scale becomes an unlawful deduction or underpayment. This attracts fines of up to ₹50,000 per violation under Section 54(1)(a) of the Code on Wages, 2019, with repeat convictions triggering imprisonment of up to three months under Section 54(1)(b).
• OSH Code Penalties: Violations of the OSH Code’s contract labour provisions attract statutory penalties under the Code’s penalty provisions. Employers must verify the specific fine amount corresponding to the exact provision violated, as severe non-compliance exposes the establishment to the cancellation of its registration.

What Employers Must Do Now

To insulate the organization from regularisation claims and sham contract litigation, corporate HR heads and legal teams must execute the following actions:

• Establish a Documentation-First Structure: Audit all contract labour deployments to ensure every appointment letter, wage slip, and disciplinary record originates exclusively from the contractor. Ensure all commercial payments flow to the contractor entity, never directly to the individual workers, complying with the CBSE v. Raj Kumar Mishra precedent.
• Conduct a Section 57 Core Activity Audit: Map all outsourced roles against the establishment’s registered core activities. Immediately transition contract workers out of perennial, core operational roles unless the deployment strictly satisfies one of the statutory exceptions or falls within the explicitly excluded support services (e.g., housekeeping, security, transport).
• Eliminate Dual Reporting Lines: Ensure principal employer supervisors do not directly allocate daily tasks, sanction leave, or conduct performance appraisals for contract workers. The contractor’s site supervisor must maintain exclusive operational control over the deployed headcount.
• Remove Disciplinary Authority: The principal employer must never issue a show-cause notice, warning letter, or termination order directly to a contract worker. All disciplinary instructions must be directed to the contractor, who executes the action under their own organizational service rules.
• Standardize Independent Equipment: Require the contractor to issue their own branded uniforms, ID cards, and basic tools. Providing contract workers with the principal employer’s proprietary equipment, email addresses, and uniforms strengthens the evidentiary burden of a sham contract.

Are you facing an issue regarding contract worker regularisation claims or sham contract disputes? Miscalculating compliance can lead to severe statutory penalties. Fill out the Claim Your Free Confidential Consultation form on our homepage, and our legal team at Key4Comply will assist you immediately.

Disclaimer: All articles, blogs, guides, and resources published on this website relate to Indian labour laws and compliance frameworks. The content is provided for general informational and educational purposes only and must not be construed as legal advice. Readers should consult our legal team or a qualified advocate for advice on specific workplace disputes or compliance audits.