Legal consequences of establishing a sham contract versus a genuine contract under CLRA

A clear legal distinction governs the consequences of a valid prohibited contract versus an arrangement proven to be sham, nominal, or a camouflage. If the contract is genuine and registered under the Contract Labour (Regulation and Abolition) Act, 1970, the discontinuance of contract labour upon prohibition or expiry of the agreement terminates their deployment at that establishment without converting them into regular employees, though they remain employees of the contractor. Conversely, where the contract is established through adjudicatory evidence to be a paper transaction and a facade—wherein the principal employer retains master-servant control, directs supervision, and dictates wages while using the contractor as a mere name-lender—the corporate veil is pierced, and the contract is discarded as a legal fiction. In such cases of sham contracts, the workers are deemed to be direct de facto employees of the principal employer from inception or a designated date, entitled to consequential regularisation and parity of service benefits. (M/S Premium Transmission Private Limited Vs The State of Maharashtra and Others | 2026 INSC 87).