Employer–Employee Relationship: Evolution of Judicial Tests and Recent Developments

Identifying the existence of an employer–employee relationship is a crucial step in resolving any dispute under the Industrial Disputes Act, 1947, and related labour legislations.

Over the years, courts have often been called upon to decide whether a worker qualifies as an “employee” and whether an “industrial dispute” truly exists. The judiciary has, through a series of rulings, evolved various tests to determine such relationship.

The Supreme Court has recently revisited this issue in the case of General Manager, U.P. Cooperative Bank Ltd. v. Achchey Lal & Anr.^[1] This case pertained to whether the canteen workers of a bank, who were supervised and managed by a cooperative society established by employees, can be considered as employees of the bank. The workers contended that they were employees of the bank and the bank exercised control over them, given that the bank had provided them with premises, infrastructure, and financial support in the form of subsidies essential for operating the canteen.

Even though the Labour Court and the High Court had accepted the contention of the workers, the Hon’ble Supreme Court took a different view and stated as follows:

“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.”^[2]

As the cooperative society independently managed the recruitment of these workers along with making payment of their wages and conducting day-to-day supervision of these workers, the essential elements of control and supervision by the bank were missing. The Hon’ble Supreme Court emphasised that an employer-employee relationship is determined by actual and effective control rather than peripheral assistance or facilitative support. Providing infrastructure or financial aid alone was held to be insufficient for existence of employer-employee relationship.

Moreover, the degree of integration plays a crucial role. A worker must be meaningfully embedded within the employer’s operations to be regarded as an employee.

It was reiterated that the existence of an employment relationship must be determined by taking a holistic view and considering factors such as supervision, mode of payment, nature of duties, ownership of tools, and the worker’s economic dependence, rather than relying on any single element in isolation.  

Judicial Evolution: The Core Tests

1.         Control Test

The ‘control’ test suggests 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 examines whether the alleged employer controls not only what work is done but also the way it is done. The ‘control’ test was expanded to mean due control and supervision. The test was refined from it’s earlier form by the Apex Court in the case of Dharangadhara ChemicalWorks Ltd. v. State of Saurashtra^[3]. In subsequent cases, the test identified and adopted in Dharangadhara (supra)remained the sole factor in determining the employer-employee relationship. With the changing landscape of work where it is becoming increasingly specialised and the employer cannot fully control the way the work is done, this test alone has become inadequate for assessing the existence of employer-employee relationship.

2.         Organisation/ Integration Test

The shift from the ‘control’ test (as a sole determinative factor) to this ‘organization/ integration’ test for determining the employer-employee relationship could be traced in the case of Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishments^[4]. This test focuses on whether the worker’s role is integrated into the employer’s business operations. If the individual performs functions that are an essential and ongoing part of such enterprise, then it indicates an employment relationship rather than an independent contractual arrangement.

As such, the integration test assesses the extent to which a worker’s activities are integrated into the employer’s core business operations. When combined with the control test, this approach enables the classification of professional workers as employees, even in situations where the employer exercises limited control over the manner in which the work is performed.

3.         Multifactor Test

Realising that no single criterion can define modern work relationships, courts now adopt a holistic ‘multifactor’ approach.

The Supreme Court in Workmen of Nilgiri Coop. Marketing Society Ltd. v. State of T.N. ^[5] stated that the overall circumstances are to be assessed holistically, without placing emphasis on any one aspect^[6]. The relevance of factors other than the ‘control and integration’ to determine whether the workers are employees or independent contractors was brought out. The Apex Court examined inter alia the following factors^[7]:

a)        Who is the appointing authority and who can dismiss?

b)        Who is the paymaster?

c)        Duration of service

d)        Extent of control and supervision

e)        Nature of the job, professional or skilled work

f)         Right to reject

Over the years this ‘multifactor’ test has been refined by judicial authorities. This is evident from the Hon’ble Supreme Court’s determination in the case of Sushilaben Indravadan Gandhi v The New India Assurance Company Limited^[8],wherein it identified the following factors forming the basis of this test:

a)        Degree of control exercised over the work and the manner of its performance.

b)        Extent of the worker’s integration within the employer’s business operations.

c)        Mode and structure of remuneration provided to the worker.

d)        Degree of economic dependence or control over the worker.

e)        Whether work is undertaken for the worker’s own benefit or on behalf of a third party.

Based on the above, it can reasonably be understood that the multifactor approach involves looking at various factors including but not limited to supervision and control, ownership of equipment, payment of wages and remuneration, power to hire or dismiss, the worker’s economic dependence.

Conclusion

The courts, while determining the existence of employer-employee relationships, have moved away from requiring absolute control. The question is whether there exists a sufficient degree of control and economic dependence that signals an employer-employee relationship. The focus has now shifted to the substance of the arrangement rather than form.

Drawing from the case law discussed above, the following indicative factors emerge as critical in determining whether an engagement constitutes an employer–employee relationship:

1.           Degree of Control and Supervision

2.           Integration into Core Operations

3.           Power to hire and dismiss

4.           Remuneration and Financial Arrangement  

5.           Economic Dependence

6.           Nature and Continuity of Work

7.           Control over Working Conditions

An assessment of these factors, in a composite and holistic manner, enables differentiation between genuine employment relationships and facilitative or intermediary arrangements designed to avoid statutory obligations.

References

[1] 2025 SCC OnLine SC2096

[2] Para 40 (Supra)

[3] (1956) 2 SCC 636

[4] (1974) 3 SCC 498

[5] (2004) 3 SCC 514

[6] Para 38 (Supra)

[7] Para 37(Supra)

[8] (2021) 7 SCC 151

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