Tests To Determine Employer-Employee Relationship In Cases Under Industrial Disputes Act, Factories Act Etc : Supreme Court Discusses

In a significant judgment clarifying the principles governing the determination of employer–employee relationships, the Supreme Court discussed the ests to be applied while adjudicating disputes under legislations such as the Industrial Disputes Act, 1947 and the Factories Act, 1948.

A Bench of Justice JB Pardiwala and Justice Sandeep Mehta discussed the tests to determine employer-employee relationship to be kept in mind while deciding matters arising from legislations like Industrial Disputes Act, 1947, the Factories Act, 1948 etc.

They are, the Control Test, Organisation (Integration) Test, Multifactor Test, and the Refined Multifactor Test, which have been evolved over various precedents.

The Court explained that the existence of an employer–employee relationship is a mixed question of fact and law and depends on the degree of control, supervision, integration, and economic dependence in each case.  

TESTS TO DETERMINE EMPLOYER EMPLOYEE RELATIONSHIP TO BE KEPT IN MIND WHILE DECIDING MATTERS ARISING FROM LEGISLATIONS LIKE INDUSTRIAL DISPUTES ACT, 1947, THE FACTORIES ACT, 1948 ETC

1. Control Test

The earliest and most traditional method, the control test, examines whether the hirer has control over not only what work is to be done, but also how it is to be done.

Tracing its roots to common law principles of vicarious liability, the Court cited Shivanandan Sharma v. Punjab National Bank Ltd. (AIR 1955 SC 404), where the Bank was held to be the real employer despite the engagement of staff through an intermediary.

The test was further refined in Dharangadhara Chemical Works Ltd. v. State of Saurashtra (1957), where it was held that control must exist both over the nature of the work and the manner in which it is carried out. The Court clarified that the true distinction between a worker and an independent contractor lies in whether the work is performed for oneself or for another, and that the existence of external assistance does not negate an employment relationship.

"The control test postulates that when the hirer has control over the work assigned and the manner in which it is to be done, an employer-employee relationship is established. The control test is derived from common law application in vicarious liability claims," the Court said.

However, over the years, the control test was expanded to mean "due control and supervision." The degree and level of control required would depend on the facts and circumstances of each case.

2. Organisation (Integration) Test

Recognising that the control test alone is insufficient in modern, specialised workplaces, the Court referred to the Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishments (1974) 3 SCC 498, which introduced the integration test.

This approach considers the degree to which a worker's role is integrated into the principal business of the employer. The greater the integration, the stronger the indication of an employment relationship. The Court noted that this test is particularly relevant for professional and skilled workers where direct supervision may not be feasible.

By blending the control and integration tests, the Court acknowledged the shift from a master–servant framework to a more nuanced, multifactorial analysis.

3. Multifactor Test

Moving beyond single-criterion approaches, the Court endorsed the multifactor test, which examines a combination of indicators such as:

a) Control

b) Ownership of the tools

c) Integration/Organisation

d) Chance of profit

e) Risk of loss

f) the master's power of selecting his servant

g) the payment of wages or other remuneration

h) The master's right to control the method of doing the work, and

i) The master's right of suspension or dismissal.

Referring to Workmen of Nilgiri Coop. Marketing Society Ltd. v. State of T.N. (2004) 5 SCC 514, the Court stressed that no single factor is determinative. Instead, the totality of circumstances must be considered to discern whether a contract of service exists.

The Bench also reiterated that where sham or camouflage arrangements are found, designed to disguise real employment under a contractor, courts are empowered to pierce the veil and recognise the workers as employees of the principal establishment.

In Bengal Nagpur Cotton Mills v. Bharat Lal reported in (2011) 1 SCC 635, the Court laid down two factors to be considered to determine the true nature of the hiring entity, i.e., whether it is the principal employer or contractor:

(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?

4. Refinement Of The Multifactor Test

In recent years, the Court noted, Indian jurisprudence has evolved towards a refined multifactor approach, exemplified by Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd. (2021) 7 SCC 151.

The following factors are considered :

a) Control over the work and manner in which it is conducted

b) Level of integration into employers' business

c) Manner in which remuneration is disbursed to workers

d) Economic control over workers

e) Whether work being conducted is for oneself or a third party

While Balwant Rai Saluja v. Air India Ltd. (2014) 9 SCC 407 had spoken of “effective and absolute control”, the Court in Sushilaben preferred the phrase “sufficient degree of control”, recognising the flexibility needed to adapt the test to varied forms of employment.

 “The degree and level of control required would depend on the facts and circumstances of each case,” the Bench observed, suggesting that there can be no straightjacket formula.

Factual background

The Court was deciding an appeal against an Allahabad High Court judgment which directed the reinstatement of four canteen workers of the U.P. Cooperative Bank.

The canteen was run by a cooperative society formed by the employees of the bank. The bank had provided certain subsidy for running the canteen. When the bank refused to enhance the subsidy, the society stopped the canteen and the workers were terminated from service. The workers approached the Labour Court, which directed the Bank to reinstate them. The High Court also affirmed this view holding that the bank was having an employer relationship with the canteen workers.

The Supreme Court, however, reversed those findings, holding that the canteen was not managed or supervised by the Bank and that its role was limited to providing infrastructure and partial financial support.

“The Bank might have played a pivotal role in setting up the canteen by providing the necessary infrastructure, finance and subsidies, but there is nothing to indicate that the Bank had a direct role to play in managing its affairs,” the Bench observed.

In the present case, it was found that the canteen employees were appointed and paid by the cooperative society, not by the Bank.

Relying on precedents including Balwant Rai Saluja v. Air India Ltd. (2014) 9 SCC 407, Employers in Relation to Management of RBI v. Workmen (1996) 3 SCC 267, and State Bank of India v. SBI Canteen Employees' Union (2000) 5 SCC 531, the Court reiterated that mere provision of subsidies or facilities does not make canteen workers employees of the institution.

The Bench also noted that there was no statutory or contractual obligation on the U.P. Cooperative Bank to run a canteen, and therefore, the workers could not claim parity with regular bank employees.

Holding that both the Labour Court and the High Court had proceeded on an erroneous premise, the Supreme Court allowed the Bank's appeals, set aside the High Court's judgment dated October 8, 2012, and quashed the Labour Court's award dated September 14, 1999.

Case : GENERAL MANAGER, U.P. COOPERATIVE BANK LTD v. ACHCHEY LAL & ANR.

Citation : 2025 LiveLaw (SC) 1024

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