In our bank, contractors are changed once in three or four years. But the employees continue to work in the establishment under different contractors. What is the legal position with regard to their gratuity entitlement? Since the tenure of the contract is never more than 5 years, at no point in time the provisions of the Payment of Gratuity Act, 1972 will be applicable to the outsourced employees. What can be our demand to ensure the Gratuity amount is paid to these outsourced employees?
From India, Madras


The Contract Employees are entitled for Gratuity and terminal/retirement benefits. As for the liability, the Contractor is primarily liable. However, if the contractor fails to discharge this liability, the court may direct the principal employer to discharge the same and recover from the contractor separately. This principal employer's liability is applicable for any dues payable to the contract employee, during the tenure of the service agreement, irrespective of what agreement is executed between the principal employer and the contractor.

In accordance with the CLRA Act, that the principal employer has to settle the dues and separately recover the same. The objective is where the contractors are small time/sham, the employees who ultimately work for the principal employer's benefit should not suffer.

Principal Employer (PE) should ensure that the Outsourced employee gets all the statutory benefits by keeping a check.

From India, Madras

In this case it is not the eligibility of the employees to get gratuity but the maintainability of the contract which is very important. If the contractor keeps on changing in every three years but the employees remain the same, then it is a clear case of sham contract. It should also be studied whether these employees are engaged in the core activities of the organisation, the bank. Normally, house keeping and security activities shall come under non perennial and contract workers can be deployed in such areas only. On the other hand, if the bank has been putting them in cash, customer care and other activities directly connected with the business of the bank, not only the bank will have to absorb them in service but to pay gratuity and other terminal benefits to them when they leave after completing the prescribed period.
From India, Kannur

My earlier other posts I have mentioned that it is classic case of exploitation of contract labor by changing contractors but continuing with same contract labor. As mentioned by other learned members that the contract labors should get gratuity though they are not completing 5 years with each contractor. I also agree with the situation.

It is the responsibility of the PE to keep track of total years of service of each contract labor under different contractors such that they should not be deprived of payment of gratuity while leaving the employment either after retirement or otherwise leaving the job after completion of 5 years.

I have one MNC client who pay gratuity to contract labor who are eligible through contractor and while changing the contractor - the new one is asked to continue the past service record to avoid any mistake.

S K Bandyopadhyay ( WB, Howrah)
CEO-USD HR Solutions
+91 98310 81531

USD HR Solutions – To Strive towards excellence with effort and integrity

From India, New Delhi

The issue is also sensitive from an IR point of view and we have to see the long-term consequences. In such a situation where we have to continue the contract labour with the new contractor, I have seen many organizations which are giving ex-gratia equivalent to gratuity for even less than five years of service. Once this practice is followed, it creates an understanding to the contract labour that they are not losers (though the ex-gratuity is calculated on the present wages), and they do not have any grievance at the time of separation towards gratuity for the past service.


From India, Delhi

If you pay ex gratia then that would lead to a right for others in future. The responsibility to pay gratuity falls on the employer (ie, the contractor in this case) but when there is no contractor or when the contractor has changed, the scope of payment of gratuity is limited. Then it will become a question of law, is it a genuine arrangement or just a camouflage or windscreen? Naturally, keeping the workers but changing the contractors is a classic example of sham contract.
From India, Kannur

Dear Sathya,

The facts disclosed in your post indicate that your Bank daringly indulges in unfair labor practice circumventing the provisions of the IDA,1947, CLRAA,1970 and the PGA,1972 in respect of employees continuously engaged on out-source basis. On this matter of fact, I would appreciate the suggestions given by Mr.Madhu on the basis of appropriate legal compliance and that of Bandyobathyayji which ensures the benefit of hassle-free gratuity to such employees rotated among different contractors.

There is new definition of the term " core activity " in the new Labor Code pertaining to contract labor system. When it comes into effect you cannot engage contract labor on any work or activity relating to the purpose for which the establishment stands. Therefore, it is better to take remedial measures right from now onwards.

From India, Salem

Dear Members,
A very interesting thread indeed.
While the point about "sham contract" has been made by many learned members; but the reality is that many govt organisations also have such arrangements due to various reasons.
Just because the contractor has changed doesn't make it a sham contract, it generally is for a genuine requirement, a genuine tender and its outcome.
When it comes to manpower contracts in Govt Org, the competition is stiff and contractor doesn't have any latitude in quoting (its min wages + other statutory benefits + a wafer thin margin). The competition is such that multiple vendors are declared L1 and then the contract is split equally amongst all L1s. In such a the organisation may very well end up with a new contractor every year.
Now from the organization's POV it makes sense to continue with the same person, provided the new contractor agrees, for practical and convenience reasons. From the person's POV this ensures continuity of earning, PF and other statutory benefits except of course Gratuity.
As far as Gratuity is concerned, the issue will be resolved if the new Wage & SS Codes are implemented.
I am sure a Pvt organisation has more latitude in these matters.

From India, Kochi

Who said that Contractor should not change? Contractor should change but along with the change in contractor the employees of the contractor should also change. If the principal employer is changing the contractor and at the same time keeping the workers of the contractor then that contract would be regarded as SHAM only.

With the new Social Security Codes being enforced how is it going to change? It is true that the contractor can employ some workers for a specified project for a specified time at principal employer's site. He can offer the employment as a fixed term contract and when the project is over or when the contract is terminated, he can discharge the workers paying gratuity for the period they have worked. This can be done now also. There is no such provision either in the new Code to protect an employer from any such camouflage arrangements.

When the employer is in a position to employ people on a fixed term contract (FTC) why should the employers resort to employees through a contractor is the question. The principal employer is required to take care of all the employee benefits and social security measures in respect of the employees engaged through a contractor. Then should they depend on a contractor??

From India, Kannur

It doesn't matter period of contract, but each contractor has to pay the amount of gratuity on end day of the contract to the contractual employees for the period of employment under him.
If such things are not happening means, it is the liability of the principal employer to pay the amount of gratuity. The instant case is the bright examples of Sham and Camouflage Contract. As per the verdict of the apex court in the matter of the SAIL, RSP, the Bank is the employer and liability is to be fixed with Bank. The employees under contractual should claim as the employees of the concerned bank before the labour department, because the work nature is perennial & continuous.

From India, Mumbai
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