Contract labour vs employer of record vs own payroll: which model fits in India?
Use your own payroll when you will employ people long term and run the work yourself. Use an employer of record (EOR) to employ a few people in India without your own entity. Use contract labour only when a licensed contractor supplies workers for contract work, accepting that you remain a principal employer with duties under the OSH Code.
Indian central rules as of 31 October 2026. This is general information, not legal advice.
At a glance
- Own payroll: you are the employer. You hold the registrations, run PF, ESI and tax, and carry every employer duty.
- EOR: a local company is the legal employer and you direct the work. See what an EOR is in India.
- Contract labour: a contractor engages workers and supplies them to you as principal employer. The OSH Code has specific rules for this.
- The Labour Codes have applied since 21 November 2025, per PIB.
The three models side by side
| Question | Own payroll | EOR | Contract labour |
|---|---|---|---|
| Who is the employer on paper | You | The EOR | The contractor |
| Who directs daily work | You | You | Usually the contractor's supervisors, with your site controls |
| Needs your own Indian entity | Yes | No | Usually, as the principal employer |
| Typical fit | Core, long-term roles | Small teams, entry without an entity | Defined jobs on contract, seasonal or project volume |
| Main risk | Compliance burden | Vendor and exit terms | Principal employer liability |
For the full EOR picture, including how it differs from a subsidiary, see the employer of record guide. This page compares the three models and does not repeat those basics.
What the OSH Code says about contract labour
The Ministry's handbook describes the contract labour rules in the Occupational Safety, Health and Working Conditions Code, 2020:
- They apply to every establishment where 50 or more contract workers are or were employed on any day of the preceding 12 months.
- A contractor employing 50 or more contract workers must hold a licence, valid for 5 years.
- A contractor working across several states, or across India, may get a licence from the authority the Central Government notifies.
- The principal employer provides the prescribed welfare facilities.
- If the contractor fails to pay wages on time, or short-pays them, the principal employer must pay the contract workers.
- A common licence for contract labour, factories and certain other uses can be applied for electronically.
On core activities, the Ministry's FAQ says the Code defines core and non-core activities in its Section 57. The principal employer may engage contract labour for core activities that are ordinarily carried out through a contractor, are intermittent in nature, or involve a sudden increase in volume of work needing time-bound completion. For the general definition, see contract labour and the OSH Code explainer.
Which model fits which situation?
You are entering India with one to a handful of hires. An EOR avoids setting up an entity first. Revisit when headcount or permanence grows.
You have an Indian entity and a long-term team. Own payroll. You control contracts, benefits and culture. Plan for PF, ESI and gratuity.
You need extra hands for a defined job or a seasonal spike. Contract labour can fit, if the work is the kind the Code allows and the contractor is licensed.
You want to avoid employer duties. None of the three removes them. Treating long-term, supervised, core staff as contract labour is where the exposure grows. Take legal advice before you design it that way.
You are hiring an individual specialist who runs their own business. That is an independent contractor, which is a different arrangement from all three. Read contractor vs employee.
Legal exposure under the Codes, by model
| Exposure | Own payroll | EOR | Contract labour |
|---|---|---|---|
| Wages, PF, ESI, gratuity | Yours | The EOR is the employer, but check the contract on who bears costs | Contractor first, principal employer for unpaid wages |
| Termination and retrenchment | Yours; see termination rules | The EOR runs it, subject to the contract | Contractor |
| Workplace harassment duties | Yours; see POSH for employers | Clarify in writing | Clarify in writing |
| Data protection | Yours | Shared; see DPDP for employers | Shared |
The Ministry's handbook describes contractors and principal employers. It does not describe an EOR, so ask your counsel how a given vendor arrangement is treated and what it means for you.
Due diligence before you choose
- Ask for the entity's registrations and licences, and verify them with the issuing authority.
- Read who bears wage, statutory and exit liabilities and any indemnities.
- Check how the model handles notice, termination and records.
- Confirm data handling and confidentiality terms.
- Plan the exit: transfer to your payroll, or contract end.
FAQ
Is an EOR the same as a manpower contractor? No. The EOR model is a commercial arrangement. Contract labour is regulated in the OSH Code by thresholds, licences and principal employer duties.
Is contract labour cheaper than own payroll? Cost depends on the contract and the vendor. Do not choose a model to avoid legal duties.
When is a contractor licence required? The handbook says every contractor employing 50 or more contract workers must obtain one.
Can I switch models later? Yes, but plan the transfer of employment and settlement of dues.
Do state rules matter? Yes, for state-sphere establishments. See rules status and state variations.
Sources
See front matter. Accessed 31 October 2026.
This is general information, not legal, tax or immigration advice. Rules change and your situation may differ. Consult a licensed attorney or qualified adviser.