Can a consultant do core activities in an organization?
Core activity under OSH Code means activity for which the establishment is set up, for an NGO this means program delivery. The intent of law is to ensure engagement of employees-regular or fixed term in core activity i.e. program delivery. Further, OSH code prohibits engagement of contract labor in core activity.
Please note that consultant is not covered under the definition of employee since engagement is through a contract for service and not contract of service. The law intends that core activity be delivered through employees and not consultant or contract labor. Consultants are engaged to provide professional or technical services based on qualification and experience which normal employees may lack. To have consultant contracts for delivery of core activity as for an employee will make them deemed employee entitled to all employee benefits. The social sector has used consultants in lieu of employees without fully considering their status as distinct from employees and to bypass offering employee benefits even though they render services to be delivered by employees routinely.
The intent to introduce fixed term employees (FTE) in SS Code is to address the practise of consultant engagement in routine employment i.e. core activity along with prohibiting contract labor engagement in core activity under OSH Code. So, for core activity, now the choice is regular or FTE essentially under the new codes.
Please consider above for employee categorization as a long-term HR strategy with the new codes now in place.
CS Sharad Bhargava
Can consultants be delegated financial roles to manage the organisation? Will it be also considered as core activity of the organisation?
Thanks for your query. Let us understand the difference between employee and consultant. Employee works under a contract “of” service with key features of such engagement being control, line authority, designation, integration, exclusivity, part of hierarchy, fixed periodic pay etc. Consultant works with a contract “for” service for specific deliverables as a self-employed independent professional. Consultants cannot take up executive roles for an organization in terms of managing its affairs which requires hiring employees. NGOs have been engaging consultant for executive roles and for long duration delivering routine management functions which vitiates the rationale for engagement of consultant. Consultant is not within the ambit of labour laws.
A better option for engaging persons who have crossed superannuation age in executive roles instead of engaging them as consultant is fixed term employment (FTE) which is recognised in SS Code.
Hope it clarifies.
CS Sharad Bhargava
An additional point-core activity is a coinage under the OSHWC Code and applies when deciding on engagement of contract labour only which is prohibited. The core activity and non core activity applies to contract worker engagement only in the Contract Labour chapter of OSHWC Code.
CS Sharad Bhargava
Thank you very much. This is very helpful. I have few additional queries. Requesting you to kindly address them.
Non-profit organizations often face situations where highly experienced or trusted individuals cannot be compensated at market expectations under the standard organizational pay scale. To bridge this gap, organizations hire them as independent consultants, but in practice, delegate executive/management functions to them.
Questions:
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Legal & Role Correctness: Is it legally problematic or improper to assign core executive/management responsibilities to an individual hired on a consultancy contract?
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Mutual Consent vs. Compliance: If both the organization and the consultant explicitly agree to this arrangement, can it still trigger legal or administrative issues?
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Regulatory Scrutiny: What specific risks or questions could regulatory authorities raise regarding this arrangement?
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Income Tax Authorities: (e.g., misclassification of salary vs. professional fees, Tax Deducted at Source / TDS discrepancies, profit-motive vs. consultancy nature)
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Labor & Employment Authorities: (e.g., control and supervision tests, entitlement to employee benefits, employment misclassification)
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Governance & Regulatory Bodies: (e.g., governance oversight, board accountability, or statutory compliance for non-profits)
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Thanks for your questions. Please see below:
- Legal & Role Correctness: Is it legally problematic or improper to assign core executive/management responsibilities to an individual hired on a consultancy contract?
SB: Yes because substance does not match form and authorities and courts have lifted the veil to ascertain substance. A consultant who is in executive and fiduciary role is an employee. - Mutual Consent vs. Compliance: If both the organization and the consultant explicitly agree to this arrangement, can it still trigger legal or administrative issues?
SB: Yes because the matter will be governed by law and statutory provisions and not mutual agreement. - Regulatory Scrutiny: What specific risks or questions could regulatory authorities raise regarding this arrangement?
o Income Tax Authorities: (e.g., misclassification of salary vs. professional fees, Tax Deducted at Source / TDS discrepancies, profit-motive vs. consultancy nature)
SB: Tax treatment for salary and professional fees are different. There would be retrospective applicability of differential TDS, interest, penalty etc.
o Labor & Employment Authorities: (e.g., control and supervision tests, entitlement to employee benefits, employment misclassification)
SB: This can be more lethal. Past liability, interest and penalty on account of not providing social security benefits like EPF, ESI, Gratuity etc
o Governance & Regulatory Bodies: (e.g., governance oversight, board accountability, or statutory compliance for non-profits)
SB: Ye, there is exposure to statutory compliance risk, audit and reputational risks for the Board.
The practical solution:
- If such individuals are delivering executive function, they be engaged as employee only within the comp structure
- If such individuals are not to be considered as employee but consultant, please ensure that the arrangement is a consultant arrangement in substance.
- If such individuals are also related person under Income Tax, please ensure reasonableness of compensation based on experience, qualification and work delivered.
CS Sharad Bhargava
Hi, I have a follow up question on the 3 solutions you advised for hiring consultants for executive role. I understand the first one, to hire as employee. Will you please give some example to understand point 2 and 3. Also, would like to state that at times, senior level people voluntarily opt for consultancy status. As 1) they are highly paid people and their tax liability reduces when they are consultants. And 2) it allows them to be able to take up some other role part time, or be on board on other ngo, or to have their own company, where they may not have an active part. In regular employment, that becomes a case of moonlighting and hence prohibited. And NGOs also are ok with that, as they can negotiate better compensation terms in such cases with decreasing statutory liabilities.
As HR person, please suggest what is advisable in such situations.
Thanks for your query and observations.
On point 2, the substance over form test is applied for consultant versus employee engagement. Employees from substance standpoint entailcontrol, integration, exclusivity, subordination, fixed periodic pay, line-management, executive-authority, title/designation unlike consultant. This has been the stand of courts and statutory agencies. If in substance, the attributes of employment are not fulfilled, consultant engagement is fine. For example, a consultant is an independent service provider, provides professional and not routine service, has no control, management or executive role, does not bear a title, not a bank signatory etc.
On point 3, Income Tax Act 2025 mandates that payment for benefit to a ‘related person’ as defined in Section 355 and Rule 183 of Income Tax Rules 2026 should not be unreasonable. What is indicated is that if a consultant or employee is related person, remuneration should pass the test of reasonableness.
On your comment of a person wanting to opt for consultancy engagement, what needs to be looked at is not mutual agreement otherwise there would be undue consultant engagement versus employee engagement in organisaiton due to obvious convenience and flexibility. If in substance the attributes are employee centric, it should be an employer employee arrangement.
CS Sharad Bhargava