Contracting, Strangers and Insolvency of the Employer

But the amount is calculated differently. The compensation is calculated with reference to the wages of the employee under the employer by whom he is immediately employed, that is the contractor's wages, not the principal employer's rates. A student who applies the principal employer's wage scale gets the figure wrong.

Section 85(2), indemnity. An employer liable under the section is entitled to be indemnified by the contractor, or by any other person from whom the employee could have recovered the compensation. And where a contractor who is himself an employer is liable to pay or to indemnify, he is entitled to be indemnified by any person standing to him in the relation of a contractor from whom the employee could have recovered. All questions as to the right to and the amount of such indemnity are, in default of agreement, settled by the competent authority.

So the indemnity runs down the chain: principal employer to contractor to sub-contractor. Each is liable to the worker and each may pass it on.

Section 85(3), the worker's choice. Nothing in the section prevents an employee from recovering the compensation from the contractor instead of the employer. The worker is not compelled to sue the principal employer; he has both.

Section 85(4), the territorial limit. Learn this. The section shall not apply in any case where the accident occurred elsewhere than on, in or about the premises on which the employer has undertaken or usually undertakes to execute the work, or which are otherwise under his control or management.

That sub-section is the boundary of the whole section and it is the part most often missed. The principal employer's liability for a contractor's worker is place based. If the accident happened away from the premises where he undertakes or usually undertakes the work, and away from premises under his control or management, section 85 does not reach him at all, and the worker is left with his claim against the contractor.

Three conditions, then, before section 85 bites:

1. the contract was made in the course of or for the purposes of the employer's trade or business;
2. the work is ordinarily part of that trade or business; and
3. the accident occurred on, in or about the premises where the employer undertakes or usually undertakes the work, or premises under his control or management.

Section 86: remedies against a stranger

Where an employee has recovered compensation for an injury caused in circumstances creating a legal liability in some person other than the person who paid the compensation to pay damages for it, then:

• the person by whom the compensation was paid; and
• any person who has been called on to pay an indemnity under section 85,

shall be entitled to be indemnified by the person so liable to pay damages.

In plain terms: if an outsider's negligence caused the injury, the employer who paid compensation may recover it from that outsider. This is the Code's version of subrogation, and it means the no fault scheme does not let a genuine wrongdoer escape.

Note who benefits. Not only the payer, but also anyone who has been called on to indemnify him under section 85. So a contractor who reimbursed the principal employer can go on to the stranger.

Section 87: insolvency of the employer

Section 87(1), the transfer of rights. Where an employer has a contract with insurers in respect of any liability under the Chapter, then if:

• the employer becomes insolvent; or
• makes a composition or scheme of arrangement with his creditors; or
• being a company, has commenced to be wound up,

the rights of the employer against the insurers as respects that liability are transferred to and vest in the employee, notwithstanding anything in any insolvency or winding up law. On the transfer the insurers have the same rights, remedies and liabilities as if they were the employer, but shall not be under any greater liability to the employee than they would have been under the employer.

This is the section to cite whenever a problem has an insured employer going broke. The worker does not queue with the creditors for the insurance money; the claim against the insurer becomes his.

Section 87(2), the shortfall. If the insurers' liability to the employee is less than the employer's liability to him, the burden of proof lies on the employee for the balance in the insolvency proceedings or liquidation.

Section 87(3), a defective policy. Where the contract with the insurers is void or voidable because the employer did not comply with its terms or conditions, other than a stipulation for payment of premium, sub-section (1) applies as if the contract were not void or voidable, and the insurers may prove in the insolvency for the amount paid to the employee.

The proviso takes that away where the employee fails to give notice to the insurers of the accident and of any resulting disablement as soon as practicable after he becomes aware of the institution of the insolvency or liquidation proceedings.

Note the carve-out inside the carve-out. The employer's breach of policy conditions does not defeat the worker, unless the breach was non-payment of premium, in which case sub-section (3) does not save him at all. And the worker must give the insurers notice once he knows of the insolvency.

Section 87(4), priority. The amount due in respect of any compensation, the liability for which accrued before the date of the order of adjudication or the commencement of the winding up, is deemed to be included among the debts which under the Insolvency and Bankruptcy Code 2016 or the Companies Act 2013 are to be paid in priority to all other debts in the distribution of assets.

Section 87(5), valuing a half-monthly payment. Where the compensation is a half-monthly payment, the amount due is taken to be the lump sum for which it could be redeemed under section 80, and a certificate of the competent authority as to that sum is conclusive proof of it.

Section 87(6), the interaction. Sub-section (4) applies to any amount for which an insurer is entitled to prove under sub-section (3); otherwise it does not apply where the insolvent or company being wound up had an insurance contract of the kind in sub-section (1).

The logic is that the worker cannot have both. If there is an insurance policy, section 87(1) gives him the insurer. The priority in the distribution is for the case where there is not.

Section 87(7), the exception. The section does not apply where a company is wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company. That is not a failure and there is nothing to protect the worker from.

A worked example

Sunrise Textiles runs a dyeing mill. It contracts with Kohli Contractors to operate the dye house inside the mill, work which is ordinarily part of Sunrise's business. Iqbal, employed by Kohli at wages of 14,000 rupees a month, is injured in the dye house. Sunrise pays its own operators 22,000 rupees.

Is Sunrise liable? Yes. The contract was made in the course of its trade, the work is ordinarily part of that trade, and the accident occurred on its premises: section 85(1), read with the limit in section 85(4).

On which wages is the compensation calculated? On Iqbal's own wages under Kohli, that is 14,000 rupees. Section 85(1) requires the amount to be calculated with reference to the wages of the employee under the employer by whom he is immediately employed. Sunrise's own rate of 22,000 is irrelevant.

Must Iqbal sue Sunrise? No. Section 85(3) preserves his right to recover from Kohli instead.

Can Sunrise get the money back? Yes. Section 85(2) entitles it to be indemnified by Kohli, and if Kohli had sub-contracted, by the sub-contractor standing to him in the relation of a contractor. A dispute about the right or the amount is settled by the competent authority in default of agreement.

Change the place. Iqbal is injured while driving a load of dye to a customer's factory forty kilometres away, on a public road.

Is Sunrise liable now? No. Section 85(4) excludes the section where the accident occurred elsewhere than on, in or about the premises on which the employer undertakes or usually undertakes the work, or which are otherwise under his control or management. Iqbal's claim lies against Kohli alone.

Change the cause. Back in the dye house, the injury was caused by a defective machine supplied by Vega Engineering, whose negligence is provable.

Can Sunrise recover from Vega? Yes. Section 86 entitles the person who paid the compensation, and any person called on to indemnify him under section 85, to be indemnified by the person legally liable to pay damages.

Change the outcome. Sunrise is insured for this liability and goes into liquidation before paying.

What happens to Iqbal? Under section 87(1) Sunrise's rights against the insurers vest in Iqbal, notwithstanding any insolvency or winding up law, and the insurers stand in Sunrise's shoes, though under no greater liability to him than they were under Sunrise.

The policy is voidable because Sunrise never filed the returns the policy required. Section 87(3) applies sub-section (1) as if the contract were not voidable, and lets the insurers prove in the liquidation for what they pay. But Iqbal must give the insurers notice of the accident and disablement as soon as practicable after he learns of the liquidation, or the proviso withdraws that protection.

Had the defect been non-payment of premium, section 87(3) would not save him at all, because it excepts a stipulation for the payment of premium.

Suppose Sunrise was uninsured. Then section 87(4) gives the compensation priority in the distribution of assets under the Insolvency and Bankruptcy Code 2016 or the Companies Act 2013, and if the award is a half-monthly payment its value is the redemption lump sum under section 80, certified conclusively by the competent authority: section 87(5).

Suppose Sunrise had wound up voluntarily merely to amalgamate with another mill. Section 87 does not apply: section 87(7).

What this does NOT mean

Section 85 does not make the principal employer liable for every contractor's worker. Three conditions must be met, and section 85(4) confines it to accidents on or about premises where he undertakes or usually undertakes the work, or under his control or management.

It does not use the principal employer's wages. The calculation is on the wages of the employer by whom the worker is immediately employed.

It does not take away the worker's claim against the contractor. Section 85(3) preserves it expressly.

Section 86 does not give the worker a second recovery. It gives the payer an indemnity against the stranger.

Section 87(3) does not save a policy lapsed for non-payment of premium. That is the one condition it excepts.

Section 87(4) and section 87(1) do not stack. By section 87(6) the priority does not apply where there was an insurance contract of the kind in sub-section (1), except for what the insurer proves under sub-section (3).

Limits and criticism

Section 85(4) is a large gap. A contractor's worker injured off site, in transport or at a customer's premises, has no claim against the principal employer at all, and transport and delivery are exactly where much contract labour now works.

Section 85(1) calculates on the contractor's wages, which are usually the lower of the two, so the worker doing the same job gets less than the principal employer's own employee would.

Section 87(2) puts the burden on the employee for any shortfall between the insurer's liability and the employer's, at the moment he is least able to discharge it.

Section 87 protects only the insured employer's worker in full. Where there is no policy, the worker has a priority in a distribution, which is worth whatever the estate is worth.

Quick revision

• Section 85(1): the principal employer is liable to a contractor's employee where the contract was made in the course of or for the purposes of his trade or business and the work is ordinarily part of it, as if the worker were immediately employed by him; but the amount is calculated on the wages under the immediate employer.
• Section 85(2): indemnity down the chain, principal employer from contractor, contractor from sub-contractor; disputes to the competent authority in default of agreement.
• Section 85(3): the employee may recover from the contractor instead.
• Section 85(4): the section does not apply where the accident occurred elsewhere than on, in or about the premises where the employer undertakes or usually undertakes the work, or which are under his control or management.
• Section 86: the payer of compensation, and anyone called on to indemnify him under section 85, is indemnified by a stranger legally liable in damages.
• Section 87(1): on insolvency, composition, scheme of arrangement or winding up, the employer's rights against his insurers vest in the employee, the insurers being under no greater liability than they were to the employer.
• Section 87(2): the employee bears the burden for any balance. Section 87(3): a void or voidable policy still passes, except where the defect is non-payment of premium, and the insurers may prove; the proviso requires the employee to notify the insurers once he knows of the insolvency.
• Section 87(4): priority of pre-insolvency compensation under the Insolvency and Bankruptcy Code 2016 or the Companies Act 2013. Section 87(5): a half-monthly payment is valued at its section 80 redemption lump sum, certified conclusively.
• Section 87(6): the priority does not apply where there is an insurance contract, except for the insurer's proof. Section 87(7): the section does not apply to a voluntary winding up merely for reconstruction or amalgamation.

Test yourself

1. State the three conditions before a principal employer is liable under section 85. The contract must have been made in the course of or for the purposes of his trade or business; the work must be one which is ordinarily part of that trade or business; and by section 85(4) the accident must have occurred on, in or about the premises on which he has undertaken or usually undertakes to execute the work, or which are otherwise under his control or management.

2. Whose wages are used to calculate the compensation in such a case? Those of the employee under the employer by whom he is immediately employed, that is the contractor, not the principal employer: section 85(1).

3. A contractor's worker is injured on a public road while delivering the principal employer's goods. Is the principal employer liable under section 85? No. Section 85(4) excludes the section where the accident occurred elsewhere than on, in or about the premises on which the employer undertakes or usually undertakes the work, or which are under his control or management.

4. An employer pays compensation for an injury caused by a third party's negligence. What is his remedy? Under section 86 he is entitled to be indemnified by the person legally liable to pay damages, as is any person called on to pay an indemnity under section 85.

5. An insured employer goes into liquidation before paying compensation. What happens to the worker's position? Under section 87(1) the employer's rights against the insurers in respect of that liability are transferred to and vest in the employee, notwithstanding any insolvency or winding up law, and the insurers have the same rights, remedies and liabilities as if they were the employer, but are under no greater liability to the employee than they would have been under the employer.

6. The employer's policy was voidable because he broke its conditions. Does that defeat the worker? Not unless the condition broken was the payment of premium. Section 87(3) applies sub-section (1) as if the contract were not void or voidable, and lets the insurers prove in the insolvency for what they pay, provided the employee gives the insurers notice of the accident and any resulting disablement as soon as practicable after he learns of the proceedings.

7. How is a half-monthly payment valued for the purposes of the priority in section 87(4)? As the lump sum for which it could be redeemed under section 80, and a certificate of the competent authority as to that sum is conclusive proof: section 87(5).