Former Contract Workers Get Hiring Preference, SC Says

In a significant judgment aimed at balancing the rights of management with the livelihood of contract workers, the Supreme Court of India has held that when an employer decides to hire regular employees for roles previously filled by contract labour, they must give first preference to the erstwhile contract workers.

A bench comprising Justice Pankaj Mithal and Justice S.V.N. Bhatti clarified that while contract workers do not have an automatic right to be absorbed as regular employees, the "principal employer" (the company) cannot simply ignore them and hire fresh candidates from the open market for the same work.

The case, M/S Premium Transmission Private Limited v. Kishan Subhash Rathod and Others, reached the Apex Court after the Industrial Court and the Bombay High Court (Aurangabad Bench) granted interim relief to 118 contract workers. These workers had claimed that their service conditions were illegally altered while an industrial dispute was still pending—a violation of Section 33(1) of the Industrial Disputes Act (ID Act).

The lower courts had ordered the company to provide work to these individuals and pay them regular wages during the pendency of the main dispute. However, the Supreme Court set aside these orders, calling them "unsustainable" at an interim stage.

While the Court ruled against the immediate regularisation of these workers, it reaffirmed the landmark principles established in the Steel Authority of India (SAIL) case (2001). Justice Bhatti, writing the judgment, outlined how re-employment should work if a labour contract is discontinued:

1. First Right of Refusal: If a company intends to hire regular staff for work that was previously done by contract labour, they must give preference to the former contract workers who were performing those tasks.
2. No Fresh Hiring Ignoring Old Hands: The company is legally bound to consider the experienced contract workers before looking for fresh talent in the open market.
3. Relaxing Standards: To make this "preference" meaningful, the Court suggested that companies should consider relaxing age limits and academic qualifications, especially for non-technical posts, to accommodate those who already have hands-on experience in the factory.

The Court explained that workers only become direct employees of a company automatically in specific "Sham Contract" scenarios.

1. The "Sham" Test: If it is proved that the contract between the company and the contractor was a mere "ruse" or "camouflage" to hide a real master-servant relationship, the contract is treated as a legal fiction.
2. The Result: In such cases, the "contract labourers" are treated as direct employees from day one and are entitled to regularisation and back wages.

However, the Court emphasized that whether a contract is "sham" or "genuine" is a matter of fact. This requires evidence on who supervised the work, who paid the wages, and who supplied the tools. Such complex questions can only be decided by an Industrial Tribunal after a full trial, not by a High Court in a Writ Petition or through an interim order.

The management, represented by Senior Advocate C.U. Singh, argued that Section 33(1) of the ID Act—which prevents employers from changing service conditions during a pending dispute—only applies when there is an admitted "employer-employee" relationship.

The Supreme Court agreed with this logic. It held that since the company disputed that these workers were their "workmen" (arguing they were employees of the contractor), the Industrial Court could not use Section 33(1) to grant them regular wages at the start of the case. Doing so, the Court noted, would be like "giving the final relief before the trial even begins."

The judgment provided a deep dive into how the definition of a "workman" differs between the Industrial Disputes Act (ID Act) and the Contract Labour (Regulation and Abolition) Act (CLRA):

1. ID Act: Focuses on a direct relationship (Master and Servant). It includes people who have been dismissed or retrenched to ensure they can still fight their cases.
2. CLRA: Recognizes a three-way relationship (Company – Contractor – Worker). It specifically excludes "out-workers" (those working from home) and does not automatically include terminated employees in its definition for regulatory purposes.

The Supreme Court concluded that the interim orders passed by the Industrial Court and the High Court had bypassed the necessary legal tests. By directing the company to provide work and wages immediately, the lower courts had effectively decided the main dispute without a trial.

While setting aside the orders, the Supreme Court did not leave the workers without a remedy. It granted the workers "liberty" to go back to the Industrial Court and file a fresh application for interim measures. However, this time, they must do so strictly within the framework of the SAIL judgment—focusing on proving if the contract was a sham or seeking the "right to preference" in future hiring.

Case Details:

1. Title: M/S Premium Transmission Private Limited v. Kishan Subhash Rathod and Others
2. Case No: Civil Appeal arising out of S.L.P. (Civil) No. 12192 of 2023
3. Bench: Justice Pankaj Mithal and Justice S.V.N. Bhatti
4. Date of Judgment: January 27, 2026