Employment and pensions

Engaging temporary contract workers in India

Published on 28th Jun 2021

Temporary staffing arrangements are an attractive option for foreign companies seeking to operate in India, especially where the business needs require flexibility and the foreign company does not have an establishment or presence in India


Foreign companies must be mindful of certain legal risks of engaging temporary contract workers (TCW ) in India. This Insight briefly examines the key aspects which a foreign company must consider when assessing the use and engagement of TCW in India.

Assess your business needs and duration of engagement

TCW are normally considered for short term positions where the work requirements are either ad-hoc or require specialist expertise for short durations.

Where the staffing requirements are for day to day operations, routine work or long term work, then other alternatives should be considered (as feasible) such as, fixed term employment, or engaging services of TCW through third party contractors.

Choose roles and responsibilities of TCW carefully

If the TCW fulfil roles and responsibilities which are normally also fulfilled by employees of the foreign company, this could trigger the risk of TCW being treated (by claims from TCW) as employees of the foreign company entitled to the same employment and statutory benefits as regular employees of the foreign company.

The roles and responsibilities of TCW could also bear upon the tax liabilities in India of the foreign company.

Work authorisation

All TCW should be authorised to work in India.

Foreign TCW being deployed in India will require employment visas to work in India, and register with the local Foreigner Regional Registration Office (FRRO).

Permanent establishment

The activities of TCW in India for the foreign company may amount to a “permanent establishment” of the foreign company in India and income of the foreign company attributable to the activities of the TCW may be subjected to Indian income tax and tax compliances.

Engagement model

TCW could be engaged directly on individual contracts which should be structured carefully. Indian goods and service taxes (GST) may be leviable on the fees payable to the TCW.

Alternatively, the TCW could be engaged through a licenced third party contractor who will perform work for the foreign company through TCW. This arrangement may have additional costs associated in the form of a management fee charged by the third party contractor and also GST depending on how the contract with the third party contractor is structured.

Other compliance issues

Where many TCW are engaged in India by the foreign company, this may also trigger the requirement to register the foreign company with the Indian labour authorities, obtain registrations and maintain compliances.

The foreign company may also be required to comply with Indian foreign exchange laws such as obtaining prior approvals from authorised banks and deduct and deposit tax with Indian tax authorities and make periodic filings.

Risks of engaging temporary contract workers in India


TCW could be misclassified as direct employees of the foreign company (as principal employer) by a claim made by TCW against the foreign company or upon independent labour authority finding.
This would entitle TCW to all benefits and privileges as regular employees of the foreign company, despite not being on the rolls of the foreign company.

To mitigate this risk, the foreign company (as principal employer) should not be seen to control (directly/indirectly) the work performed by TCW. The TCW should be seen to be performing work in an independent capacity for the foreign company.

The risk of misclassification is also lower where TCW are not exclusively working for the foreign company and the contract between the foreign company and TCW is for a fixed duration (and is not renewed periodically).

The contract of TCW with the foreign company should be carefully drafted to show, among other things, that work is performed in an independent capacity for the foreign company.

Use of third party contractors to engage TCW

Where TCW are engaged through a third party contractor, the liability for statutory non-compliances by third party contractor, such as non-payment of statutory dues and wages to TCW will be borne by the foreign company (as principal employer).

To mitigate this risk, conduct due diligence at the time of on-boarding third party contractors to ensure they are compliant with applicable laws and hold required licences. Details of past compliances should be sought and checked to uncover any past non-compliances and sanctions.

The services agreement with the third party contractor should include warranty and indemnity provisions requiring compliance with Indian laws, and other mechanisms to speedily recover costs, such as performance bonds, liquidated damages, quick dispute resolution, as appropriate.

Use the services agreement as a conduit to get the right TCW but do not participate directly in selection and management of TCW.

The foreign company should exercise its rights under the services agreement to monitor the third party contractor’s compliance with applicable labour laws such as payment of wages, statutory dues, and institution of anti-sexual harassment policies.

Key take-away

Engagement of TCW in India by a foreign company is possible, but must be structured appropriately to mitigate and minimise the risks.

Author: Arjun Paleri (BTG Legal)

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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