Sections 85 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 85 makes a principal employer liable for compensation to a contractor's workers, with a right of indemnity. Section 86 lets an employer who has paid compensation recover from a stranger who is legally liable for damages. Section 87 protects the employee when the employer is insolvent and has insured the liability.
If an employer contracts out work ordinarily part of his trade or business, he is liable to pay compensation to the contractor's employee as if the employee were his own, calculated on the wages the employee actually earns (s.85(1)). He can be indemnified by the contractor, and the employee may instead claim from the contractor (s.85(2)-(3)). An employer who has paid can recover from a stranger liable in damages (s.86). If the employer becomes insolvent or is wound up, his rights against the insurer vest in the employee (s.87), and compensation gets priority among debts.
Why it matters
Principal employers often assume accidents among a contractor's staff are the contractor's problem. Section 85 says otherwise, and the contract needs an indemnity and insurance clause that reflects it. Drafting and reviewing such terms is a matter for legal consultation. See also our post on contract labour under the new Labour Codes and on tracking contractors' EPF compliance, which covers a similar principal-employer exposure.
Section 85: the principal employer and the contractor
| Sub-section | Rule |
|---|---|
| (1) | Where an employer, in the course of or for the purposes of his trade or business, contracts with a contractor for execution of the whole or any part of work which is ordinarily part of his trade or business, he is liable to pay to any employee employed in the work any compensation he would have been liable to pay had that employee been immediately employed by him; compensation is calculated by reference to the employee's wages under the employer who immediately employs him |
| (2) | The employer is entitled to be indemnified by the contractor, or any other person from whom the employee could have recovered; a contractor who is himself an employer and liable is entitled to be indemnified by any sub-contractor in the same way. Disputes on indemnity in default of agreement are settled by the competent authority |
| (3) | The employee may still recover from the contractor instead of the employer |
| (4) | Section 85 does not apply if the accident occurred elsewhere than on, in or about the premises where the employer has undertaken or usually undertakes to execute the work, or which are otherwise under his control or management |
Three points stand out. The test is whether the work is "ordinarily part of the trade or business", not whether the contractor is independent. The wages used are those the contractor pays, which matters for the section 78 calculation in sections 77 and 78. And the premises limit in (4) can defeat a claim against the principal for an accident elsewhere.
Section 86: remedy against a stranger
Where an employee has recovered compensation for an injury caused in circumstances creating a legal liability of some person other than the one who paid compensation to pay damages, then the person who paid and any person called on to pay indemnity under section 85 are entitled to be indemnified by the person liable for damages. A road accident caused by a third party's negligence is the typical case. The text does not set a procedure or time limit for this indemnity; it states the right. It must be read with section 74(7), which bars the employee from both suing for damages and claiming compensation.
Section 87: insolvency of the employer
When it applies
An employer has a contract with insurers for liability under the Chapter, and then becomes insolvent, makes a composition or scheme of arrangement with creditors, or, as a company, commences winding up.
What happens
| Sub-section | Effect |
|---|---|
| (1) | The employer's rights against the insurers for that liability vest in the employee, notwithstanding insolvency or winding-up laws; the insurers have the same rights and liabilities as if they were the employer, but no greater liability |
| (2) | If the insurers' liability is less than the employer's, the burden of proof for the balance in the insolvency or liquidation lies on the employee |
| (3) | If the insurance contract is void or voidable for non-compliance with terms (other than premium payment), sub-section (1) applies as if it were not, and the insurers may prove in the insolvency for the amount paid; this does not apply if the employee fails to give notice to the insurers as soon as practicable after learning of the insolvency or liquidation proceedings |
| (4) | Compensation liability accrued before adjudication or winding-up is deemed a priority debt under the Insolvency and Bankruptcy Code, 2016 and the Companies Act, 2013 |
| (5) | A half-monthly payment is taken, for this purpose, as the lump sum it could be redeemed for under section 80; the authority's certificate of that sum is conclusive |
| (6) | (4) applies to amounts an insurer proves under (3), but otherwise not where an insurance contract of this kind exists |
| (7) | Section 87 does not apply where a company is wound up voluntarily merely for reconstruction or amalgamation |
The priority in (4) is worth underlining for lenders and resolution professionals: the text puts compensation accrued before the date of the order or winding-up among the debts paid in priority. For the wider insolvency picture, our posts on the Insolvency and Bankruptcy Code are a separate subject.
A worked example
A construction company (the principal) awards a contractor the work of fabricating steel frames that form part of its business. A contractor's welder is injured on the company's site. Under s.85(1) the company is liable to pay compensation as if he were its own employee, based on the wages the contractor pays him. The welder may also claim directly from the contractor. After paying, the company claims indemnity from the contractor under s.85(2). If the injury was caused by a crane operator of a third-party firm, both the company and the contractor can seek indemnity from that firm under s.86. If the contractor's insurer and the contractor itself then face insolvency, the contractor's rights against its insurer vest in the welder under s.87(1). (Illustrative.)
Which rules apply
The Central Rules do not add a separate rule for these three sections in the parts we read; general competent authority procedure applies. The Central Rules apply where the Central Government is the appropriate Government; where the State Government is, the State's own rules apply.
Need help drafting contractor and insurance terms?
Indemnity clauses, insurance conditions and the premises test in section 85(4) all affect who pays after an accident. If you would like contracts or claims reviewed, our legal consultation team can help.
Key takeaways
- A principal employer is liable for compensation to a contractor's workers doing work ordinarily part of his business, on the contractor's wage basis.
- The principal can claim indemnity from the contractor; the worker may claim from the contractor instead.
- Section 85 does not apply if the accident occurs away from the premises where the work is done or which he controls.
- Anyone who has paid may recover from a third party liable in damages (s.86).
- On insolvency, the employer's rights against the insurer vest in the employee; compensation has priority among debts.
Read next
- Sections 82 to 84: Notice, claim, special provisions and medical examination
- Sections 88 to 90: Statements, registration of agreements and reference to competent authority
- Contract labour under the new Labour Codes
- Tracking contractors' EPF compliance by the principal employer
Disclaimer: Based on the Code on Social Security, 2020 (as enacted) and, where noted, the Code on Social Security (Central) Rules, 2026 (G.S.R. 344(E), 8 May 2026), as on 30 September 2026. The Code is in force from 21 November 2025; some provisions may be notified later, and State Governments make their own rules for establishments where the State is the appropriate Government. Verify the current position before acting.