Agency and temporary workers in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Hiring an agency or temporary worker in India is not the same as hiring a permanent employee — the compliance obligations, contractual relationships and statutory entitlements differ in important ways. Understanding those differences protects both the business and the worker.
What "agency" and "temporary" actually mean in India
These terms are often used loosely, so it helps to be precise.
A contract worker (or agency worker) is placed with you by a contractor or staffing agency. The agency is the legal employer; you are the principal employer. This arrangement is governed by the Contract Labour (Regulation and Abolition) Act, 1970 — still operative alongside the four consolidated Labour Codes that came into force in 2025.
A temporary or fixed-term employee is engaged directly by your business for a specific duration. Under the Industrial Relations Code 2020 (one of the four Labour Codes), fixed-term employees are entitled to the same statutory benefits as permanent employees on a pro-rata basis, including gratuity — without the usual five-year service threshold.
Getting this distinction wrong is a common source of compliance risk.
Principal employer obligations under contract labour arrangements
When you engage workers through a staffing agency, you are not entirely off the hook. As the principal employer, you carry specific statutory duties.
You must ensure the contractor holds a valid licence under the applicable legislation. If the contractor fails to pay wages or provide statutory benefits, the liability can fall on you as principal employer. This includes provident fund contributions — 12% from the employee and 12% from the employer — and ESI coverage for eligible workers below the wage threshold.
In practice, this means you should:
- Verify the agency's registration and licence before signing any agreement
- Include contractual clauses requiring the agency to provide proof of EPF and ESI compliance each month
- Keep records of workers deployed at your premises, including attendance and wages paid
The 2025 Labour Codes have updated registration and licensing processes, so confirm current requirements with a qualified adviser rather than relying on older templates.
Fixed-term employment: what the Labour Codes changed
Fixed-term employment was formalised under the Industrial Relations Code, and it shifted the landscape significantly for employers who previously relied on informal short-term contracts.
The key changes:
- Fixed-term employees must receive wages and benefits equivalent to permanent employees doing the same work, on a pro-rata basis
- Gratuity is payable at the end of a fixed term regardless of whether the worker completes five years — the standard threshold that applies to permanent employees does not apply here
- There is no notice period obligation if the contract simply expires at its agreed end date, but terminating a fixed-term contract early carries different obligations
For employers, fixed-term contracts are now a more transparent tool — useful for project-based work, seasonal demand or specific skill requirements — but they carry real cost implications that must be budgeted for upfront.
Tax and payroll obligations
The nature of the engagement determines what you deduct and report.
For direct temporary employees on your payroll, the full payroll compliance applies: TDS deducted at source under the new income tax regime (with slabs rising to 30%, a section 87A rebate for lower incomes, and a 4% health and education cess), EPF contributions, ESI where applicable, Form 16 issued at year end, and quarterly Form 24Q filings.
For agency workers, the staffing firm handles payroll and statutory deductions. Your obligation is to pay the agency's invoices and retain documentation that the agency is meeting its obligations. If GSTIN is involved in the agency's invoicing, ensure your accounts team handles input tax credit correctly.
One area of risk: if the arrangement is structured as a contractor engagement but the worker is functionally an employee (fixed hours, under your direct supervision, using your equipment), tax authorities or labour inspectors may treat it as an employment relationship. This is sometimes called disguised employment, and the consequences — back taxes, penalties, EPF arrears — can be significant.
Practical steps before you hire
Before bringing on agency or temporary workers, run through this checklist:
Clarify the legal structure. Is this a contract labour arrangement, a fixed-term direct hire, or a genuine independent contractor? Each has different compliance requirements.
Review your agreements. Staffing agency contracts should clearly allocate liability, specify compliance obligations and include audit rights.
Check registration thresholds. The Labour Codes set thresholds for when certain provisions apply based on the number of workers. Your obligations may change as headcount crosses those thresholds.
Maintain your own records. Even when an agency is the employer of record, you are responsible for records of contract workers at your establishment.
Revisit annually. Labour Code implementation is still evolving at the state level. Rules notified by one state may differ from another, which matters if you operate across locations.
---
Run HR and payroll in India with Mellow
Mellow brings HR, payroll and 12 AI agents into one platform — built to handle India properly, with payroll included, from £4 per employee per month. The AI agents don't just answer questions; they generate contracts, run cost estimates and draft letters for you.
[Start a free trial →](/register)