The Object of the Contract Labour Regulation and Abolition) Act, 1970 is to prevent exploitation of contract labour and also to introduce better conditions of work. A workman is deemed to be employed as Contract Labour when he is hired in connection with the work of an establishment by or through a Contractor. Contract workmen are indirect employees. Contract Labour differs from Direct Labour in terms of employment relationship with the establishment and method of wage payment. Contract Labour, by and large is not borne on pay roll nor is paid directly. The Contract Workmen are hired, supervised and remunerated by the Contractor, who in turn, is remunerated by the Establishment hiring the services of the Contracto.

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Applying tests laid down by precedents for determining whether a contract labourer is a direct employee, the Supreme Court has set aside the award of a Labour Court which had directed reinstatement of retrenched workers. The bench of Justices R F Nariman and Vineet Saran was dealing with an appeal filed by Bharat Heavy Electronics Ltd, which contended that the workers were not its direct employees but were contract labourers, and hence were not "employees" within the meaning of the UP Industrial Disputes Act. To decide the appeal, the bench referred to the test laid down by SC in General Manager, (OSD), Bengal Nagpur Cotton Mills, Rajnandgaon v. Bharat Lala and Another (2011) 1 SCC 635, which is as follows : Two of the well-recognized tests to find out whether the contract labourers are the direct employees of the principal employer are: (i) whether the principal employer pays the salary instead of the contractor; and (ii) whether the principal employer controls and supervises the work of the employee. The expression "control and supervision" in the context of contract labour was explained by this Court in International Airport Authority of India v. International Air Cargo Workers' Union as follows : "If the contract is for supply of labour, necessarily, the labour supplied by the contractor will work under the directions, supervision and control of the principal employer but that would not make the worker a direct employee of the principal employer, if the salary is paid by a contractor, if the right to regulate the employment is with the contractor, and the ultimate supervision and control lies with the contractor. The principal employer only controls and directs the work to be done by a contract labour, when such labour is assigned/allotted/sent to him. But it is the contractor as employer, who chooses whether the worker is to be assigned/allotted to the principal employer or used otherwise. In short, worker being the employee of the contractor, the ultimate supervision and control lies with the contractor as he decides where the employee will work and how long he will work and subject to what conditions. Only when the contractor assigns/sends the worker to work under the principal employer, the worker works under the supervision and control of the principal employer but that is secondary control. The primary control is with the contractor"" Applying the test, the bench held that the workers were not direct employees. It was held that test No. 1 is not met as the contractor pays the workmen their wages. Secondly, the principal employer cannot be said to control and supervise the work of the employee merely because he directs the workmen of the contractor 'what to do' after the contractor assigns/ allots the employee to the principal employer. Supervision and control of the principal employer is secondary in nature, as such control is exercised only after such workman has been assigned to the principal employer to do a particular work. On behalf of workmen, it was argued that although the contractors were changed many times, the labourers remained the same. However, the Court found that there was no evidence to effect that contractors were frequently changed. The Labour Court's award and the High Court's approval of the same were termed "perverse" and set aside.