There is nothing wrong in putting a penal provision in the contract. But when it is linked a legal provision under any specific Act, the question will arise as to whether the principal employer has the right to demand it or not.
The principal employer is liable to ensure that the contributions in respect of workers deployed in his plant are paid in time by the contractor. If the contractor fails to pay it, the Principal employer should act proactively and pay the contributions and then recover it from the Contractor. If that has happened then the Principal employer can demand charges as he wishes. But if he had not paid the amount before the date and then demands penal charges, it will not be fair. Principal employer has no right to recover any penal charges for non compliance of a provision of PF Act but he can make the contractor liable to pay any amount as penal charge on an amount paid by the Principal employer on a cut off date. As such you can say that the contractor should pay the contributions on 15th of every month and produce the challan in proof of it failing which the Principal employer will pay it and recover the sum paid along with a penal charge of 5% of the amount so paid.
From India, Kannur
4250The principal employer is liable to ensure that the contributions in respect of workers deployed in his plant are paid in time by the contractor. If the contractor fails to pay it, the Principal employer should act proactively and pay the contributions and then recover it from the Contractor. If that has happened then the Principal employer can demand charges as he wishes. But if he had not paid the amount before the date and then demands penal charges, it will not be fair. Principal employer has no right to recover any penal charges for non compliance of a provision of PF Act but he can make the contractor liable to pay any amount as penal charge on an amount paid by the Principal employer on a cut off date. As such you can say that the contractor should pay the contributions on 15th of every month and produce the challan in proof of it failing which the Principal employer will pay it and recover the sum paid along with a penal charge of 5% of the amount so paid.
From India, Kannur
Madhu Sir,
Once the clause is in a contract, it is enforceable as per law. The question of morality does not arise in this case. If the contractor does not agree, he should not sign the agreement and if he does, he accepts the condition and should work within the parameters. If he fails, he will be liable to pay the penalty.
There must be a logic in the clause, one of which is probably that if they don't pay, the risk of the company rises and stays for 3 years. So a penalty clause will make them obey and do things on time.
If someone says that this is misuse of the imbalance in power between company and contractor, then that is there in every field, from supply of raw materials to purchase of power. You need to live within that imbalance or you find a different field of work.
From India, Mumbai
Once the clause is in a contract, it is enforceable as per law. The question of morality does not arise in this case. If the contractor does not agree, he should not sign the agreement and if he does, he accepts the condition and should work within the parameters. If he fails, he will be liable to pay the penalty.
There must be a logic in the clause, one of which is probably that if they don't pay, the risk of the company rises and stays for 3 years. So a penalty clause will make them obey and do things on time.
If someone says that this is misuse of the imbalance in power between company and contractor, then that is there in every field, from supply of raw materials to purchase of power. You need to live within that imbalance or you find a different field of work.
From India, Mumbai
I agree and that is why I have very specifically said that penalty clause begins to operate only when you pay it on behalf of the other party. You cannot punish the other party for an offense or non compliance as per a particular Act which is common to all and for which there are specific rules framed. First you pay the amount and then recover the amount paid along with whatever interest or penalty that you want to impose from the defaulter.
From India, Kannur
From India, Kannur
Dear Mr.Babu Alexander,
Your reply to Dr.Sivakumar's response is just indicative of the difficulties experienced by a contractor due to certain restrictions incidental to the fulfillment of his contract and therefore, it is purely from the contractor's perspective. Once when you admit that there is no illegality in such restrictions, the arguments from the point of the doctrine of double jeopardy and lack of consideration in a clause of the contract compelling due statutory compliance on the part of the contractor pale into insignificance.
Levy of interest on belated remittance of PF contributions by the employer is an administrative act only. Therefore, it seems to me far-fetched and out of context as well to apply the doctrine of double jeopardy in the case. A clause in the contract enabling the principal employer to impose certain penalty on the adminstrative charges payable to the contractor is only to require the contractor to remit the amounts of contribution to EPF, ESI etc on time from the charges already received by him. I am not able to find any illegality in such a clause for the consideration in such a case is only statutory compliance.
Moreover, I am sure that your long and rich experience in the field would recognise the problems created by the practice of sub-contracting by contractors in certain activities like construction. Hence such a clause has to be appreciated in the interest of the ultimate beneficiary of the CLTAAct,1970 viz., the poor contract labor.
From India, Salem
Your reply to Dr.Sivakumar's response is just indicative of the difficulties experienced by a contractor due to certain restrictions incidental to the fulfillment of his contract and therefore, it is purely from the contractor's perspective. Once when you admit that there is no illegality in such restrictions, the arguments from the point of the doctrine of double jeopardy and lack of consideration in a clause of the contract compelling due statutory compliance on the part of the contractor pale into insignificance.
Levy of interest on belated remittance of PF contributions by the employer is an administrative act only. Therefore, it seems to me far-fetched and out of context as well to apply the doctrine of double jeopardy in the case. A clause in the contract enabling the principal employer to impose certain penalty on the adminstrative charges payable to the contractor is only to require the contractor to remit the amounts of contribution to EPF, ESI etc on time from the charges already received by him. I am not able to find any illegality in such a clause for the consideration in such a case is only statutory compliance.
Moreover, I am sure that your long and rich experience in the field would recognise the problems created by the practice of sub-contracting by contractors in certain activities like construction. Hence such a clause has to be appreciated in the interest of the ultimate beneficiary of the CLTAAct,1970 viz., the poor contract labor.
From India, Salem
Dear Madhu
At the risk of taking the discussion on to a tangent, I contend that this is not a government body that needs to follow the rules of propriety. Once the clause is there, unless there is a specific wording saying it will only be if the amount is paid by principal employer, well, the penalty can be revoked as soon as the contractor has violated the terms.
There is no need for sympathy, proprietors or equity. These are my terms, you violate them, liquidated damages specified in the contract will apply.
From India, Mumbai
At the risk of taking the discussion on to a tangent, I contend that this is not a government body that needs to follow the rules of propriety. Once the clause is there, unless there is a specific wording saying it will only be if the amount is paid by principal employer, well, the penalty can be revoked as soon as the contractor has violated the terms.
There is no need for sympathy, proprietors or equity. These are my terms, you violate them, liquidated damages specified in the contract will apply.
From India, Mumbai
Dear Mr. Umakanthan.M and Mr. Madhu.T.K
Thanks for your valid information sharing
Fully accepting / agree with your point, and alleged misuse by some of the contractors and the sufferings faced by the poor contractor workmen.
However I still having a doubt on the rights and obligations on the other side of the coin. Why the Contractor is subjected to penal deduction in the hands of Principle Employer, when the Contractor has to face, different /punishment, when a contractor has got an independent code number, and when his or her liabilities get increased vis-à-vis the employees?
I agree and appreciate the concern the PE has, that having paid the management contribution to the Contractor along with his bill / payment of consideration, for the service rendered. The same concern, is taken care under the Act and Rules by levying interest and penal charges for the belated payment from the due date, the contributions becomes payable.
Further the late payment of contributions is denied any exemption under Section 43B of the Income Tax Act.
I understand after the Supreme Court verdict, when the onus to make provident fund is not on the principal employer nor will a principal employer be held liable in case of noncompliance, of late the Inspection by the Enforcement authority to the Contractor, is based on the actual amount received as wages, the percentage to be calculated under the Act, less contribution already paid and the difference is assessed ( unless some justified reasons as exempted employees) as arrears of contributions payable as I understand.
There are still more and more control measures being enforced by the recent change in section 142 of the Code of Social Security 2020. The same has made it mandatory to link Aadhaar card with the Employees Provident Fund (EPF) account.
Once the linking is established, the employer will need to remit PF contributions for the past periods, and this could trigger interest and penalties on the employer,"
When so much control and enforcement measures are being imposed, I feel no service provider; can have the access or an opportunity, of using /rotating the contributions received, for other business funds. Further no Principle Employer will leave the contractor in respect of production of documents in respect of contributions paid and the resultant challan, whether paid in time or paid late, by imposing a threat of non release of bill amount.
Another view is, that after the CGST Amendment Act, 2018, the concept of Service Recipient, the Service Provider and the consideration for the Service rendered, has evolved different scope and meaning to the Service Consideration, which has become a total package.
From India, Madras
Thanks for your valid information sharing
Fully accepting / agree with your point, and alleged misuse by some of the contractors and the sufferings faced by the poor contractor workmen.
However I still having a doubt on the rights and obligations on the other side of the coin. Why the Contractor is subjected to penal deduction in the hands of Principle Employer, when the Contractor has to face, different /punishment, when a contractor has got an independent code number, and when his or her liabilities get increased vis-à-vis the employees?
I agree and appreciate the concern the PE has, that having paid the management contribution to the Contractor along with his bill / payment of consideration, for the service rendered. The same concern, is taken care under the Act and Rules by levying interest and penal charges for the belated payment from the due date, the contributions becomes payable.
Further the late payment of contributions is denied any exemption under Section 43B of the Income Tax Act.
I understand after the Supreme Court verdict, when the onus to make provident fund is not on the principal employer nor will a principal employer be held liable in case of noncompliance, of late the Inspection by the Enforcement authority to the Contractor, is based on the actual amount received as wages, the percentage to be calculated under the Act, less contribution already paid and the difference is assessed ( unless some justified reasons as exempted employees) as arrears of contributions payable as I understand.
There are still more and more control measures being enforced by the recent change in section 142 of the Code of Social Security 2020. The same has made it mandatory to link Aadhaar card with the Employees Provident Fund (EPF) account.
Once the linking is established, the employer will need to remit PF contributions for the past periods, and this could trigger interest and penalties on the employer,"
When so much control and enforcement measures are being imposed, I feel no service provider; can have the access or an opportunity, of using /rotating the contributions received, for other business funds. Further no Principle Employer will leave the contractor in respect of production of documents in respect of contributions paid and the resultant challan, whether paid in time or paid late, by imposing a threat of non release of bill amount.
Another view is, that after the CGST Amendment Act, 2018, the concept of Service Recipient, the Service Provider and the consideration for the Service rendered, has evolved different scope and meaning to the Service Consideration, which has become a total package.
From India, Madras
Mr. Babu
Any part to an agreement can put whatever terms he wants and offer what price he wishes for a product or service and it is for the other party to accept or reject it. Once accepted, it has to be adhered to whether it is fair or unfair.
The only exception is that an illegal term can not be put.
So if the contractor signs the agreement, he must pay on time or pay the penalty to the Principal Employer. If he does not want to agree to the clause, he is free to refuse it and not enter into the contract.
From India, Mumbai
Any part to an agreement can put whatever terms he wants and offer what price he wishes for a product or service and it is for the other party to accept or reject it. Once accepted, it has to be adhered to whether it is fair or unfair.
The only exception is that an illegal term can not be put.
So if the contractor signs the agreement, he must pay on time or pay the penalty to the Principal Employer. If he does not want to agree to the clause, he is free to refuse it and not enter into the contract.
From India, Mumbai
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