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Indian Labor Law: How To Tackle Employee Misclassification


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Updated on:
March 15, 2024
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Updated on :

March 15, 2024
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Indian Labor Law: How To Tackle Employee Misclassification


In the last few years, Remote work has exploded beyond anybody’s imagination. With this upsurge, many people have delved into acquiring skills that enable them to provide services for multiple organizations on their terms (freelancing). This upsurge has also led to creating a new career path that Quartz has referred to as 'Portfolioism.' As a consequence of these various work classifications, more and more organizations fail to classify their workers correctly.

Fundamentally two types of workers exist within an organization. Firstly, Typical full-time workers and then independent contractors such as 'Freelancers,' 'consultants,' 'portfolios' etc. The lines of differences in this employee classification are sometimes blurred and worry government policymakers and law enforcers. On more than one occasion, several organizations have misclassified their workers. This practice is known as Employee misclassification.

This classification is to incorrectly and illegally label workers as independent contractors, whereas they are employees. Employee misclassification is a judgment prescribed by the government that the organization's workers have been labeled incorrectly under the law. Particularly to the government, the incorrect classification of workers is of keen interest. Unfortunately, the government lose out on millions of unpaid taxes from these organizations due to employee misclassification.

Classification of Employees in India

According to the Industrial Disputes Act enacted in 1947, the law classifies Indian workers into two categories: Workmen and Employees. The Workmen are generally the skilled or unskilled operational laborers, while the Employees are the supervisors/controllers of the workforce in an organization.

In some cases, in India, the use of Contract workers is prohibited as mandated by regulations imposed by the country’s employment laws. Thus, employers need a Special 'principal employer' license to employ contract workers.

However, due to the revolutions in Information technology, in Indian regions like Bangalore, Chennai, and Mumbai, outsourcing contractual jobs to independent workers is at an all-time high. Even though this has shown to be a noteworthy innovation in the employment field, many uncertainties guide the efficiency of using independent contractors. One of the major complexities is the instability of political processes in India.

Due to India's political landscape complications, the laws guiding independent contractors utilization must be copiously researched and strictly adhered to. Failure to do this means that the organization has contravened the Indian employment laws and therefore faces penalties.

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Independent Contractors vs. Employees

The disparity between an independent contractor and a full-time employee goes beyond just a difference in the title. It is, however, difficult to identify these differences, which is why processes for accurately classifying workers are an essential part of an organization’s framework; For law enforcement agencies, taxation is the most critical distinguishable feature.

In the cases of Employees, Employers withhold and remit taxes on behalf of their employees. In contrast, independent contractors pay their taxes and usually withhold Value Added Taxes (VAT) and remit the same on behalf of their clients.

For the employees, job security and benefits are vital. Being classified as an employee or an independent contractor would majorly determine access to reliable pay, protection of rights under employee labor laws and benefits.

As a result of the dichotomy between these two different work types, sometimes, employers are found guilty of deliberately misclassifying workers. The law refers to this act as Sham contracting.

Admittedly, from an economic angle, there are innumerable reasons that justify the utilization of independent contractors. Still, in the long run, it will be discovered that there are crucial drawbacks to using independent contractors, with the government’s classification decision being one of the foremost reasons.

Authorities' decision validates the classification of the workers

One of the fundamental tenets of government is to protect its citizens. The government protects its citizens by ensuring that the organizations do not strip its citizens of their rights to certain employment benefits. Thus, every worker is classified initially as an employee in an organization in India unless proven otherwise.

To establish or determine the actual classification of workers under contract by organizations, the authorities have laid down processes and intricate questions to assess the validity of an organization’s classification claims.

In India, the courts prescribe two tests, which determine whether workers are either employees or independent contractors. These two tests are known as the control test and Integration tests.

The Control test: The prima facie test aims to discover if the employment relationship between the employer and the worker is a master-servant relationship. It also aims to determine if the employer controls the nature of the work done and how the employee carries their duties.

The Integration test: On the other hand, this test plays a crucial role in determining if the worker enjoys absolute independence from the organization or whether the employee is fully integrated and cared for by the employer.

Although these tests exist in determining the validity of worker classification, the Supreme Court in India has a myriad of other factors (or questions) to determine the validity of an employee’s classification. Some of the questions put forward by the Supreme Court include

  • Who pays the worker?
  • What is the length of the service delivery by the employee?
  • Who is the appointing authority?
  • Who has the sole power to dismiss?
  • What is the extent of control and supervision?
  • What is the nature of the job?
  • Who provides the equipment for work? Etc.

Admittedly, these questions and the two tests provide a factual determination on the classification of the worker. However, a default in one or two of the questions will establish that the organization is guilty of misclassifying the employee.

Liability to injurious claims by the Independent Contractor

Full-time employees of an organization are entitled to innumerable benefits such as a pension, health benefits, holiday pay, etc. Alongside the multiple benefits accrued to the employee by law, the employees’ compensation insurance covers employees injured while working.

Due to this benefit, there is zero chance of being sued due to the injury gotten while working. Also, if an independent contractor gets injured while working, they have every right to take the situation to the courts. If the injury results from the employer’s carelessness, they will have to pay for damages.

Less control over workforce and work inconsistency

By strict supervision and guidance of his workforce, the employer can ensure that the employees deliver top-quality work in the organization. The ability to efficiently manage the work output is almost impossible with an independent contractor. The highest demand an employer can make is to request the degree of quality needed. The freedom an independent contract enjoys cuts across its work autonomy, which may lead to subpar jobs. Unfortunately, an employer's interference over the quality of work demanded may be seen as an enforcement of control, which places the employer at risk of paying the benefits fit for an employee.

Also, the utilization of various independent contractors to perform specific tasks for the organization is bound to result in work inconsistency and varying quality output. Any organization that desires a consistent work quality will be better off having an employee than an independent contractor.


In India, the penalty for misclassification of workers results in the organization paying hefty fines. But beyond the financial penalties and possible prison time for the managers of the organizations, the damages to the company’s reputation may be difficult to repair.

To avoid these occurrences, investing wholly into an organization's workforce is a must. A commitment to recruiting the best hands as full-time employees is a positive statement, especially to investors and companies looking to acquire services.

About the author

Sandeep Patel is a Content Marketing Manager and Strategist. Over the last five years, he has created and managed content for global brands and fintech startups. He is passionate about remote work and using tech for a better work-life balance.

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