Gratuity Eligibility for Long-term Contract Employees: What Are Your Thoughts?

Dear All,

An employee working for more than five years in a company on a contract basis without a break in service is eligible for gratuity. Could you please provide some advice on this matter?

Thank you.

Dear all,

As per the Payment of Gratuity Act, 1972, if any person is employed for wages other than an apprentice, then he is eligible to receive gratuity from the employer if he has rendered five years of continuous service as per section 2A of this Act. For further details, you can also refer to section 2(e) of this Act.

With Regards,
R.N.Khola

Dear all,

An employee working for more than five years in a company on a contract basis without a break in service is eligible for gratuity. Please provide advice on this matter.

Thank you.

Dear All,

I need to submit the Welfare Fund to the Labour Welfare Department. Please help me out in this connection.

Regards,
Shivayogi R H

Dear all,

This thread relates to the payment of gratuity. Therefore, it is suggested that you post your query on a separate thread related to the Labour Welfare Fund Act. Moreover, this is a state act, and you have not provided details in this regard.

With regards,
R.N.Khola

As per Mr. R. N. Khola, "any person" shall be sufficient to cover the entitlement of gratuity, irrespective of whether under a contract or any type of corporate understanding, except under the Apprenticeship Act.

Thanks and regards,

Prasiddh Narayan
9765664475

Dear Shree,

Gratuity is not for employees working on a contractual basis.

Regards,
Maneesha Karki
Officer HR

Dear Manisha,

Your view is wrong. Please go through the reply given by Mr. Khola.

Regards,
vsure

I beg to differ from you, Maneesha. Gratuity is for all, irrespective of whether the employee is on a contract basis or permanent basis.

Yes, in case the employee is on a contract basis, then it will be the responsibility of the contractor to provide the gratuity. It will be the moral responsibility of the Principal Employer to ensure that the contractor has paid the gratuity to the contractual employee.

I would like to draw your attention to one of our earlier threads discussing the same by SUHAS GARDE FROM NAGPUR.

Dear All,

The payment of gratuity is linked with a concept that if someone renders/offers his continuous service for more than 5 years to a particular establishment, then as a gesture of goodwill, he certainly deserves some appreciation. Thus, to extend his gratitude, the employer makes some payment as a token of appreciation for long association/service to the employee. To shape up or streamline this concept, our legislators enacted this into a piece of legislation termed as ''The Payment of Gratuity Act, 1972''. This is a central act and an independent piece of legislation. On the plain reading of Section 2(e) of the Act, i.e., the definition of 'employee', the words 'contract employee' are not seen. This means the employees engaged by the contractor per se are not covered under the Act.

Similarly, the contract employees (which is a subject matter under the Contract Labour Act) being the employees of the contractor, the contractor is at liberty to move them from one establishment to another. Thus, even if the contract employee remains in continuous employment with a contractor, he is rendering his uninterrupted service to his employer, i.e., the 'Contractor'. In many contractual services like security, canteen, garden maintenance, housekeeping, packing, the contractor keeps his employees moving to different locations. That shows the contract employee is offering his service to a particular contractor.

One of our friends has stated that it is the liability of the Principal Employer to pay gratuity in case the contractor fails to make the payment. I feel he wanted to say it in a different context. In Maharashtra, many industries like textile, residual, and some engineering industries are covered under the BIR Act, where the definition of 'employee' covers even the contractor employee. Furthermore, some case laws under the CL(R & A) Act show that in case the contractor fails to make payment to his employees' statutory dues, it is the liability of the Principal Employer to pay. But we haven't come across any such specific case law relating to gratuity payment being made by the Principal Employer.

I am of the opinion that the contractor's employee is not the liability of the Principal Employer to pay as far as the issue relating to gratuity payment is concerned. This can be validated with a reasoning that any establishment engages the contract employees for a specific nature of the job and for a specified period, with specific numbers, by signing an agreement and by complying with provisions under CL (R & A) Act. The establishment ensures that the services being given on contract are not of a permanent nature and duration but rather support services, such as security, canteen, transport, packing, housekeeping, garden maintenance, loading, stacking, etc. Any industry offloads/outsources such support services to a contractor/vendor by following prescribed provisions under the CL (R & A) Act, which is again a separate enactment. Thus, to talk about security service, it can certainly be given on contract. The contractor keeps them on rotation by moving them to various locations; hence, we can conclude that for such services, even if liability arises for gratuity, it is for the contractor to pay and not for the Principal Employer.

In Maharashtra, for regulating the employment of private security guards employed in factories and establishments, the security agency has to get registered under ''The Maharashtra Private Security Guards (Regulation of Employment & Welfare) Act, 1981.'' This is a board that declares minimum wages for private security guards and takes care of such issues, it's like the mathadi board.

Please do not engage contract workers in continuous uninterrupted service for more than 5+ years; then, you have no reason to call them contract employees.

Thanks and Regards,

Deepak Sabharwal

I would like to state the clauses as well for the above.

Under sub-clause (4) Section 21 of the C L (R&A) Act, a responsibility is cast upon the PE to make the payment of wages if the Contractor fails to pay wages which, under the definition of "wages" under the C L (R&A) Act, state that the definition of wages under the Payment of Wages Act (POWA) shall be applicable.

Section 2 of the POWA states the definition of WAGES as "any sum which by reason of the termination of employment of the person employed is payable under any law, contract, or instrument which provides for the payment of such sum whether with or without deductions but does not provide for the time within which the payment is to be made."

Therefore, considering the definition of wages under the POWA, the same covers gratuity which is payable upon termination of services under the Payment of Gratuity Act. Under the C L (R&A) Act, responsibility is cast upon the PE to make payment of gratuity if the Contractor fails to pay the same.

Thanks and Regards,
Deepak Sabharwal

Dear all,

Would you please let me know the following:

In our company, more than 5 employees have been working for the past 10 years. However, they have not received any gratuity. As an HR professional, what should I do? I am new to this field.

How is gratuity calculated?

Thanks & Regards,
Jenny

Dear,

You are not required to calculate gratuity as the Payment of Gratuity Act, 1972 is not applicable to your establishment. For more details, you may refer to the applicability clause of this Act.

With Regards,
R.N.Khola

Dear Friend,

Yes, after completing 5 years, the employee is eligible to receive Gratuity. The formula is: Basic/26 * 15 * number of years.

Regards,
Ram Koshti
9860027281

Hi Jenny,

In normal cases, the minimum number of employees required is 10. However, if you are covered under the Companies Act 1956, then you can opt for gratuity even if you have just 1 employee. Gratuity should be calculated as: Basic/26 * 15 * number of years. Additionally, if the duration is 5 years and 6 months, you should calculate it for 6 years.

Regards,
Pradeepan

To Deepak Sabharwal,

Your answer regarding the gratuity liability of the Principal Employer, if a contractor fails to meet the same, is not so impressive and reasonable. Please go through the preamble of the Contract Labour Act where the Principal Employer is only liable under the heads of welfare, payment (wage only), and health. Gratuity is linked with gratuitous payment, and only PF & ESI will be attractable under the head of Welfare in case liability comes into the picture.

As per the Gratuity Act, a person is entitled to gratuity if they have completed 5 years of service from the date of joining. It does not matter whether they are on a contract basis. If the individual is working in the organization without a break, they can claim their payable gratuity and have the right to ask for it.

Though the company is paying gratuity from its fund, looking at the clauses mentioned in the Act, the company is bound to pay the amount.

Dear,

Where have you or anybody else deposited the gratuity amount?

With Regards,
R.N.Khola

An employer will be required to pay up to INR 1,000,000 (which amount shall be tax-free in the hands of the employee) to eligible employees upon retirement, resignation, or termination of employment.

Rajesh
Manager Legal