Why Is Our Company Paying Gratuity for Security Agency Workers? Seeking Clarification

We have deployed a security agency for our company, and they are charging gratuity on the gross salary at a rate of 4.81%.

Gratuity Payment Responsibility

My question is, why does the principal employer have to pay gratuity? As a security agency employee, should he not pay the gratuity after completing 5 years or 4 years and 240 days?

I request your input on this matter.

Regards,
Satya

Gratuity Responsibility

Gratuity is the primary responsibility of the contractor/security agency and not that of the principal employer. However, the security agency must factor in this cost in the wage bill. This creates a contingent liability that may or may not accrue, so how can they factor it in now?

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Contract Labour Act and Gratuity Responsibilities

The Contract Labour Act does not make the principal employer liable for the payment of gratuity for contract workers. However, the margins on security contracts are slim. You are talking about a 10% margin on salary. Out of that, 4% goes towards TDS, service tax, etc.

How is the contractor going to pay gratuity to any employee who has worked with him for more than 5 years? Or to anyone who dies while in service? Once the contract is over, will you entertain his request for money to pay gratuity?

So, if you think he is not going to charge you a gratuity amount, will he be working for free? It's not a charity, you see.

Gratuity Payment by Agencies

Gratuity has to be paid by the agency. However, similar to other statutory payments such as EPF and ESI, the agency must bill the gratuity part as well. This is to ensure that employees are compensated after the completion of the stipulated period.

Gratuity Payment Responsibility

Gratuity, as per the act, is applicable to employees; hence, the contractor has the responsibility to charge it. The responsibility lies with the principal employer. However, the payment terms of gratuity can be mutually agreed upon between the contractor and the principal employer regarding how the payments of gratuity will be made. The gratuity is payable to the employee upon eligibility as per the Gratuity Act.

Regards,
Bijay

Principal Employer's Liability in Gratuity Payment Disputes

During recent times, labor authorities have been calling upon the principal employer in cases of disputes raised by contract labor regarding the payment of gratuity. Today, the situation is such that if the contractor fails to pay gratuity, then the principal employer is held liable!