Gratuity in Contractor Work Orders: Is It Compulsory and How Can We Ensure Payment?

Gratuity Cost Component in Contractor Work Orders

I have one issue. In our company, almost all the work orders of contractors have the gratuity cost component (4.81%) in the cost breakdown sheet, along with other statutory components.

Compulsory Gratuity Scheme for Contractors

My query is, is it compulsory for a contractor's establishment to have the gratuity scheme of LIC? What is the relevance of LIC's gratuity scheme?

Ensuring Gratuity Payment by Contractors

Since we have included the gratuity component, how can we ensure that the contractor will pay gratuity to his employees after 5 years? It is clear that after the work completion, the contractor may engage his employees with different companies from time to time.

Please advise on the appropriate steps we should take as the Principal Employer.

Regards,
Mantu71

Principal Employer's Responsibility for Gratuity

The principal employer is concerned only with those employees engaged through a contractor who have been with the principal employer for five years. Though there are conflicting judgments about the principal employer's liability towards gratuity payable to contract labor, we can rely on one common principle: an employer's responsibility in case a worker works for at least five years, whether on his rolls, including as a casual worker, or through a contractor.

At the same time, if the principal employer has no control over the persons being engaged by the contractor (all genuine contracts will be like this only), the PE will not have any responsibility for payment of gratuity. But if the principal employer dictates who should be engaged at his plant and the contractor only obeys it, that is to say, the contract itself is for a namesake and is a sham contract, then the PE will know who all have worked for him and how long they had worked for him. In such a circumstance, it becomes his responsibility to ensure that the contractor has paid the gratuity once he discontinues the service after five years of engagement.

Best Practices for Principal Employers

To be on the safer side, it is always good if the PE does not interfere in the matter of selection of people for his plant. If he does so, as far as possible, do not engage the same persons for more than one or two years at a time. This does not mean that you should give artificial breaks. Artificial breaks for a few days will not be counted anyway since the principle of 240 days in 12 months is a sharp weapon against any employer.

Gratuity Funding through LIC Policy

Taking an LIC policy is purely an arrangement for funding the payment of gratuity, and it is to be taken care of by the contractor. Moreover, if the PE involves in such matters, the contract may become a sham also.

Regards,
Madhu.T.K

You can do it easily in a cost-effective way while also keeping in view the statutory compliances. Add two things to your work order:

1. Specify that you will only pay the LIC premium to the contractor.
2. Specify that you will pay the gratuity amount when an individual completes five years of continuous service with your organization and remove the clause regarding the gratuity cost component of 4.81% in the cost breakdown sheet.

I hope you will benefit from these additions.