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Employees had worked under Contractor for more than 5 years in 3 consecutive WOs/Extn WOs. Now new Contractor has received the Tender/WO under the same Principal Employer. Not a single Employee terminated from their employment after he has rendered continuous service for not less than five years, No one got superannuation, retirement or resignation, any death or disablement due to accident or disease under the same Principal Employer and two different Contractor. Employees are asking for their Gratuity payment from the last Contractor. Is this liable to give Gratuity or not to all employees by the last contractor?

Labour Law & Hr Consultant
Seasoned Ir Professional
Partner - Risk Management
Pan Singh Dangwal
Joint Manager
Hod(contract Management Cell)


Dear friend,

It is clearly discernible from your narration that it is only an " Umbrella Contract " the primary and predominant feature of which is that only the contractor changes and the group of contract labor continues to serve the same principal employer successively forever under different contractors as per the PE's choice. Though such a contract can be termed as 'Sham' without any hesitation, unfortunately the practice remains ubiquitous particularly in large manufacturing units for the sake of keeping the hiring and firing of skilled labor simple and convenient.

Therefore, it is better to advise the previous contractor under whom the contract labor served for 5 years and above to settle their gratuity amounts on his exit. Otherwise, as Principal Employer, you would be liable.

From India, Salem

The post is not clear, but I am assuming that the contractor has not kept the old employees and has brought his own. In that case, the contractor will be liable to Gratuity as the workers were his employees for that period.

There is no clause that says Principal Employer is liable for gratuity, but there are Supreme Court judgments ordering PE to pay. So you will be liable.

If the employees are continuing in the new contractor, even then it is better to settle their Gratuity. Why will the new employer pay for gratuity of the older period when he was not the employer? also from a cost point of view, it is cheaper to settle them and let them start new.

From India, Mumbai
Pan Singh Dangwal

Dear Member,

Primarily, since all have completed 05 years continuous service under the previous contractor hence all are eligible to get gratuity from the previous contractor.

Here we need to understand below points:-

1. If it is a comprehensive WO (inclusive of material and labour) than first we have to check whether the cost of all the statutory compliance have been included in contractor's scope and properly mentioned in the agreement as well. If so, contractor must pay the gratuity and the PE can should instruct to do so. Till all statutory compliance fulfilled the PE should HOLD adequate bill/amt. If contractor deny to pay PE can pay the same and Debit the amt to the contractor (certain procedures to be followed).

2. If it is only Manpower contract (Third Party management with fixed Service Charge on monthly CTC). In such case also though legally the contractor is liable to pay the gratuity (if mentioned in the agreement). If the contractor was paid only nominal service charge (either fixed or 4%-5% of CTC) which generally includes the ROI, admin charges and other overhead. In such case since the gratuity cost never paid than how contractor will bear the cost. In such case if matter goes to court the PE will also in trouble.

So as per my opinion here the main point is what does the agreement terms says and whether Gratuity was part of the cost or not?

From India, Delhi

Dear Pan Singh,

I have a different perception in view of the ratio decidendi of the Madras High Court's judgment in Madras Fertlizers Ltd v. The Controlling Authority case on the interpretation of the term 'wages' under the Payment of Wages Act,1936 in respect of the PE's liability to pay gratuity to contract labor with reference to the vicarious liability imposed on him to pay wages under section 21(4) of the CLRAA,1970.

Therefore, my conclusion is that notwithstanding the presence or absence of any clause towards the payment of gratuity to the contract labor in the contract for service between the PE and the contractor, it is the PE's responsibility to settle the claim for gratuity first and proceed to recover the same later from the concerned contractor.

From India, Salem
Pan Singh Dangwal

Dear Umakanthan sir,

I learnt a lot from your comments in which you give suggestions as laid down in various acts or court verdicts.

However, on this topic it is not so important that PE is liable or not. But more important is whether on first instance gratuity should be paid by the contractor or by the PE.

Above I described various situations through which we can ascertain who is primarily responsible to pay the gratuity.

We all know under CLRA Act if contractor fail to pay any statutory obligation the PE is responsible. But here being the immediate employer the contractor has primary liability for gratuity payment.

Moreover, under Gratuity Act Principal Employer is not mentioned anywhere. I would like to state the matter is more related to Gratuity Act instead of CLRA Act.

Coming to the reference of Madras High Court Judgement, I have gone through an article which describes,

“The liability of principal employer for the payment of gratuity to the contract labor under the P.G Act 1972 is also in the twilight as there are divergent views among different High Courts. For instance, in Cominco Binani Zinc Ltd. V. Pappachan [1989 LLR 123] the Kerala High Court held that neither the C.L.R. Act nor the P.G Act provide that the employees engaged thru the contractor would be entitled to gratuity from the principal employer and as such the principal employer would not be liable to pay gratuity to the contract labor. On the contrary, the Madras High Court has held in Madras Fertilizers Ltd.v. C.A under the P.G Act [2003 LLR 244] that the principal employer can be directed to pay gratuity to his contract labor subject to reimbursement by way of recovery from the contractor”.

Pls refer to 02nd last line "Principal Employer can be directed". That itself explained if contractor failed to pay than only PE can be held responsible.

So on basis of my experience and practical approach I will again suggest first check where the Gratuity cost was absorbed. If Gratuity cost was not paid in the bills than how we can ask the contractor to pay gratuity. But if the contract was comprehensive nature and contractor accepted to bear all statutory cost then the contractor is liable to pay gratuity.

I share same views in below link (related to payment for increased wages as per MW Act).

In the end I would like Mr RAJEKc5Q to visualize the case and give proper inputs, so that senior members can give most relevant solutions.

From India, Delhi

In respect of employees who are engaged by contractor with whom the principal employer has GENUINE contract the contractor shall be responsible to discharge the gratuity liability. But in respect of a SHAM contract the Principal employer is bound to pay gratuity. In a sham contract the contractor is only an agent in the paper and everything is decided by the principal employer himself. Keeping the same employees under different contractor evidences that the contract is not genuine. Moreover, in this case principal employer is not only concerned with the number of persons engaged by the contractor but is concerned about who all are engaged and has sufficient knowledge about who all are engaged. as such, I feel that principal employer is responsible for making gratuity payment.
From India, Kannur
Gone through all the comments. I myself is contractor. let me share you the actual situation. While we are bidding the tender PE writes that contractor is liable for all legal responsibilities on the hand PE give a certain Performa where we have to fill the rate that BOQ give only option M.W+ PF+ESI+ Service Charge. there is no column of Bonus, leave encashment, gratuity. Sometime bonus column is there but not other column. Now please let me know in this scenario what is the contractor liability toward gratuity etc.

Yes in most of cases now a days manpower remain same only contractor change.

From India, Noida

It is for the contractor to decide at what rate he should accept the contract. If the contract is expected to last for more than 5 years, obviously, he should envisage a payout like gratuity. Accordingly the service charges should be adjusted.

Regarding bonus, I don't think that any principal employer will disown. You can very well include it as cost to company.

Very important. If you are absorbing the workmen who were under some other contractor's rolls, (workmen remain the same but only contractor changes) you should be more vigilant and should not accept the contract unless an agreement is reached about unpaid statutory liabilities.

From India, Kannur
Pan Singh Dangwal

Rightly said by Indu-Bala,

Due to cost optimization many PEs have started the practice to award contract on basis of existing MW, few statutory compliance and Fixed Service Charge.

Hence in my comment I insisted to first check whether Gratuity cost was included & accepted in contractor’s scope. If so, than PE should insist the contractor to pay and must HOLD adequate bill/s till all statutory clearance provided by the contractor. But if only wages, PF-ESI, leave cost paid to the contractor than PE is liable for gratuity (Either pay directly or generate a separate invoice and reimburse the same).

Dear Madhu sir,

Ethically your suggestion is right "before signing any agreement the contractor first get statutory clearance for the previous period". But practically if he apply the pattern he will loose the contract. Hence contract is initiated on assumption of “Dekha jayega”.

Here the PE should play vital role in including all statutory components (not only existing but projected as well like MW Revision, PL, Gratuity, EC Policy etc.) in the cost calculation (contract agreement).

Ours is a Project base company (Prime contractor) having Municipal & Industrial clients. We sub-let various jobs to many contractors (only manpower + comprehensive). I have been dealing with more than 100 such contracts and consider projected cost as well in the contract process-approvals.

However, process the monthly bills on actual (as per existing pattern) and take necessary approval-amendments for projected cost (MW, PL, Gratuity, Actual Bonus pymt).

We never had any such situation. Hope all learned members will agree with my points-suggestions and correct me, if I am wrong.

From India, Delhi
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