Contract Labour codes compliance for foreign-owned companies is now a board-level topic. India’s four Labour Codes came into force on 21 November 2025. The Occupational Safety, Health and Working Conditions (Central) Rules, 2026 followed on 8 May 2026 and made the contract labour provisions operational. Many overseas parents still assume that a staffing vendor carries all the risk. Under the new framework, that assumption can lead to penalties, wage liability and reputational damage.
This guide is for foreign companies, global startups, MNC subsidiaries, NRIs and overseas investors that hire through contractors in India. It explains what changed, who is responsible and how to build a compliant process. Legal teams at Startup Solicitors LLP regularly see the same pattern in cross-border clients: strong corporate structuring, but weak contractor governance.
Understanding Contract Labour Compliance in the Indian Context
Contract labour means workers engaged through a contractor to work in or for an establishment. The establishment is called the principal employer. A foreign-owned Indian subsidiary running a factory, warehouse, call centre or Global Capability Centre (GCC) is usually the principal employer.
Three shifts matter most in 2026:
- The Contract Labour (Regulation and Abolition) Act, 1970 has been replaced by the OSH Code, 2020.
- Applicability now begins at 50 or more contract workers, up from 20.
- Contract labour is restricted in core activities, with limited exceptions.
For international readers, the nearest comparison is joint-employer or co-employment liability. A client company can be held responsible for the vendor’s workforce practices.
Legal Framework and Regulations in India
| Law / Rule | Relevance to contract workers |
|---|---|
| OSH Code, 2020 and Central Rules, 2026 | Contractor licensing, safety, welfare, core-activity restriction |
| Code on Wages, 2019 | Minimum wages, timely payment, equal remuneration |
| Code on Social Security, 2020 | Provident fund, ESI, gratuity, creche rules |
| Industrial Relations Code, 2020 | Disputes, layoffs, retrenchment notices |
| State rules | Procedures and thresholds that still vary by state |
Contractors and principal employers deal with the labour authorities through the Shram Suvidha portal. Because state rules are still uneven, a multi-state operation needs a state-wise compliance map.
Foreign ownership adds a corporate layer. Your Indian entity must be properly incorporated and FEMA-compliant before it hires anyone. This is why company formation in India and labour compliance should be planned together. Entity choices include a private limited company, an LLP or a branch or liaison office. Corporate filings and director records sit with the Ministry of Corporate Affairs. Foreign investors should also review RBI and FEMA compliance.
Step-by-Step Process Explained
- Confirm your entity and registration. Complete company setup in India first. An establishment with 10 or more workers, contract workers included, generally needs registration under the OSH Code.
- Classify every role. Separate employees from contract workers. List each activity as core or non-core.
- Test the 50-worker threshold. Count contract workers at the establishment across all vendors. Five vendors supplying ten workers each cross the line even though no single vendor does.
- Check the core-activity restriction. Contract labour in core activities is permitted only in narrow cases, such as sudden work spikes or intermittent work. Document your justification.
- Engage only licensed contractors. Verify the licence, its validity and the scope of work before signing. Using an unlicensed contractor creates direct exposure for you.
- Draft a compliant contract. Include wage payment timelines, statutory deductions, indemnities, audit rights and termination terms. Our corporate law and legal advisory page covers contract structuring.
- Secure wages and social security. Contractors must pay at least the wages prescribed under the Code on Wages. Check provident fund and ESI remittances monthly. Our payroll management service supports this.
- Provide welfare and safety facilities. At your premises, you are responsible for items such as toilets, washrooms and drinking water. Contractors must report work orders to the authorities within 15 days of receipt.
- Keep tax records aligned. Contractor payments attract TDS. Align with TDS return filing and the Income Tax Department requirements.
- Run quarterly audits. Use due diligence and compliance audits to test registers, challans and licences.
Stakeholder-specific notes
- Indian residents: Focus on licence verification and state-level registrations.
- NRIs: If you hold Indian operations remotely, appoint a resident compliance officer and keep a local signatory. A resident director may be required.
- Foreign companies: Check that expatriate roles have the correct employment visa and FRRO registration.
- Global startups: Start with a lean contractor model but track the 50-worker trigger as you scale. Startup India registration details are on the DPIIT site.
- Overseas investors: Add labour-compliance checks to M&A diligence. Mergers and acquisitions support can cover this.
Key Challenges and Practical Issues
- Sham contracting: If a contractor is only a paper intermediary, authorities may treat the workers as your employees.
- Equal conditions: Contract workers doing the same or similar work as your own staff are entitled to comparable holidays, hours and conditions.
- Wage default risk: If the contractor fails to pay, the principal employer may have to pay and then recover the amount from the contractor.
- Documentation gaps: Missing registers, expired licences and unverified challans are the most common findings.
- State variation: Procedures and forms differ across states, and the rules are still settling.
- Cross-border mismatch: Parent-company policies written for other jurisdictions often ignore Indian statutory deductions.
Strategic Insights and Expert Recommendations
- Build a vendor risk score. Rate each contractor on licence validity, remittance history and audit cooperation.
- Keep payment control. Where permitted, pay statutory dues against proof of deposit. Hold a security deposit or retention.
- Separate core from non-core early. Restructure core roles into direct employment before inspections force the issue.
- Standardise across states. One master policy with state annexures is cheaper than separate frameworks.
- Treat timing as strategy. Labour-cost planning affects the entry decision, so see the best time to set up an India subsidiary in 2026.
- Protect governance. Board-level reporting through corporate governance compliance keeps the parent informed.
Frequently Asked Questions
1. What is the contract labour threshold in India in 2026?
The OSH Code applies its contract labour chapter to establishments and contractors engaging 50 or more contract workers on any day in the preceding twelve months. The earlier threshold under the repealed 1970 Act was 20 workers. State rules may still add procedural requirements.
2. Is a foreign-owned company liable for its contractor’s workers?
Yes, in several respects. The principal employer must provide welfare facilities at its premises and may have to pay wages if the contractor defaults. It can then recover the amount from the contractor. Strong contracts, deposits and audits reduce this exposure.
3. Can contract workers be used for core activities?
Generally no. The OSH Code restricts contract labour in core activities, with limited exceptions such as sudden increases in work or intermittent tasks. Foreign-owned companies should document the business reason for any exception and review it regularly with legal counsel.
4. Do I need a separate registration to hire contract workers?
Principal employers generally use the single establishment registration under the OSH Code instead of a separate contract labour registration. Contractors need their own licence once they meet the threshold. Always verify current procedure with the Central Rules and the relevant state authority.
5. Can NRIs or overseas investors manage this remotely?
Yes, but they need local support. Appoint a resident director or compliance officer, use licensed contractors and run periodic audits. Remote owners usually face problems when no one in India tracks challans, registers and licence renewals.
Conclusion
Labour codes compliance for foreign-owned companies comes down to a few disciplines: classify roles, count contract workers, use licensed contractors, control wage payments and audit regularly. Companies that build these habits during company formation in India avoid the costly corrections that follow inspections. Startup Solicitors LLP works with foreign and NRI-owned businesses on entity structuring and compliance design. You can reach the team through the contact page if you want a structured review of your contractor model.