Liability Of Gratutity

Dear HR Fraternity,
Greetings of the day
I have a query regarding liability of principal employer towards Gratuity. A Coal Mining company is going to bind-up its business due to cancellation of lease. There are about 500 contractual workers who have legitimately qualified for Gratuity.
My question is whether Contractor or principal employer is liable for payment of Gratuity. In case contractor denies to pay the Gratuity, should principal employer to make the payment???
Regards,
Raj Kaurav

Between the contract workmen and the employer there does not exist any employee employer relationship. Therefore, only the contractor who has appointed these workers and who pay them wages is liable to pay gratuity to the contract workers. However, if the same employees have been engaged in for the same principal employer for years, and if the contract has been found to be sham contract, then the principal employer cannot disown his responsibility for payment of gratuity.
Madhu.T.K

This is an interesting grey area.

I have seen this before and do not have a concrete answer.

First, the basic jurisprudence of labour laws in india is that the Principal Employer is liable for ensuring payment of wages and statutory dues of the contract workers. This has been consistently followed by the courts.

On the other hand, the definition of employee in Payment of Gratuity Act does not specifically cover contract labour. Nor is there any specific mention of gratuity in contract labour act.

By that definition per se, the principal employer is not liable for payment of gratuity to the contract labour. However, there have been court cases that have decided (at Supreme Court Level) that the amount, though payable by contractor, can be recovered instead from principal employer, who can, if he wishes recover it as debt from the contractor. That case was about loading and unloading stevedoring labour in port of madras and held against a large fertiliser company (as far as i recall) but i dont have the citation. This was a case where the labour were not in permanent employment for this particular client or even working every day, but had work for most of the months. In your case, they were working permanently and exclusively for you.

Going by the direct wording of the law, you can refuse to pay, saying its not stated in the act.

However, it is likely that on a compliant, the Labour Commissioner (or authority under the gratuity act) will raise a notice on you, and then take the matter to court. Just the cost of fighting the case (government has free legal team effectively) may be higher than the cost of paying the gratuity and in case you lose, you pay along with the interest and penalty, which would be huge.

So its a call the management needs to take.

It is a good idea to speak to a reputed labour lawyer and take an opinion based on the full facts of the case, as the implications either way is pretty high.

Ok, i managed to find the judgement (its very long and complex)

The Management Of Cruickshank & ... vs The Appellate Authority on 20 November, 2006

And this section at the end is probably the crux of what you wish to know :

But, on a conjoint reading of Section 2(vi)(d) and sub-clause (6) of Section 2(vi) and by virtue of legal/statutory fiction created in sub-clause (6) of Section 2(vi) exempting the benefits conferred under clause(d) within the purview of gratuity that is excluded from the meaning of wages under sub-clause (6) and the gratuity claimed by the claimants herein being a welfare benefit created and payable by operation of law under the provisions of the Payment of Gratuity Act which are included under clause(d) of Section 2(vi) of the Payment of Wages Act within the meaning of wages payable to the contract labourers, it would be the basic responsibility of the petitioner to make payment of gratuity to the claimants in full or in part as per Section 21(4) of the Contract Labour Act, of course, without prejudice to the right of the petitioner to recover the same from the third respondent, contractor, even though the initial responsibility to make such payment of gratuity lies with the third respondent, contractor, as the welfare legislations such as

In the above reading, petitioner is the principal employer and the third respondent is the contractor.

so it basically says :

It would be the basic responsibility of the Principal Employer to make payment of gratuity to the contract workers in full or in part as per Section 21(4) of the Contract Labour Act, of course, without prejudice to the right of the Principal Employer to recover the same from the contractor

Hope this helps.

but please read the full judgement

and i suggest you speak to a good lawyer with massive labour law experience.

Dear All
In a case whose facts are similar to the facts stated by the individual who started this thread, the Honourable Madras High Court had directed the principal employer to pay the gratuity and to recover the same from the contractor.
With regards