Bombay High Court Holds That VRS Paid By Principal Employer Establishes Direct Employment Relationship

The Bombay High Court in Emerson Climate Technologies (India) Pvt. Ltd. v. Bharatiya Kamgar Karmachari Mahasangh, 2025 LLR 952, decided around 18 November 2025, dealt with a dispute concerning contract workers who were extended a Voluntary Retirement Scheme (VRS) directly by the principal employer. The case involved long-serving contract workers engaged through a contractor, where the principal employer chose to pay VRS compensation from its own funds rather than routing it through the contractor. The workers claimed that this act reflected a direct employer–employee relationship, while the company argued that the payments were made only as a gesture and not an admission of employment.

The Court held that where a principal employer voluntarily pays VRS amounts directly to contract workers, without involving the contractor or distancing itself from the benefit, the act carries strong evidentiary value indicating that the workers were in fact under its employment. The Court observed that VRS is traditionally offered to employees, not to outsourced labour, and the decision to fund such payments directly supports the inference that the workers were treated as part of the principal employer’s establishment. This substantially weakens the employer’s claim that the workers belonged solely to the contractor.

On the issue of control and supervision, the Court reiterated that determining the real employer depends on the “control test” and the “integration test”: who supervised the work, who maintained discipline, who controlled attendance, and who bore responsibility for payment of wages or terminal benefits. By taking on the financial burden of VRS, the principal employer had effectively assumed a role that contractors ordinarily fulfil. This factual context, combined with evidence of day-to-day supervision, led the Court to conclude that the workers’ connection with the principal employer was more than superficial.

For employers, this judgment is a reminder that financial decisions, especially relating to retirement benefits, ex-gratia payments, or VRS carry legal implications extending far beyond intention. When principal employers directly disburse benefits to contracted personnel, they risk creating an evidentiary trail suggesting a direct employment relationship. HR, finance, and legal teams must therefore coordinate carefully before issuing payments to contractor staff, ensuring that any such benefits are correctly structured, documented, and routed through appropriate channels to avoid unintended recognition of employment.

Above all, the ruling reinforces that employment relationships are determined by facts and conduct, not by contractual labels. Employers relying on contract labour must exercise caution in how they engage, supervise, and compensate outsourced workers. Decisions taken out of goodwill or convenience can, if not documented properly, alter the legal character of the relationship and expose the organization to claims for permanency, service continuity, or statutory benefits.