Gratuity Dilemma: Who Should Pay When a Long-Term Contract Ends?

We are providing security services on contract to various establishments. We have provided services to one of the PSU for more than 20 years, and now the contract is discontinued. For all practical purposes, the said PSU has been paying all statutory liabilities like Minimum Salary, P.Fund, ESI contributions, and fixed working margins to us to maintain the unit. Some employees have been working with the same organization for the last 20 years.

Query Regarding Gratuity Payment

Now, my query is regarding the payment of Gratuity to these employees. Who shall pay gratuity - the Principal Employer or the contractor? As a contractor, our understanding with the principal employer is that all statutory payments are to be paid by them. However, the management is now unwilling to pay.

Dear friends,

I shall quote Mr. Madhu T.K via https://www.citehr.com/446827-gratui...-download.html as follows:
"Therefore, if the contractor is not paying the gratuity to his employee(s), the principal employer cannot escape from his liability."
Abbas.P.S

By law, a contractor is liable to pay gratuity to his employees, but by virtue of Section 21(4) of the CLRA Act, the Principal Employer (PE) can make the payment of gratuity to the employees of the contractor and recover the amount from the contractor.

References:

- Superintending Engineer v Appellate Authority, Joint Commissioner of Labour, Coimbatore 2012 LLR 1160 (Madras HC).
- Madras Fertilizers v Controlling Authority 2003 LLR 244 (Madras HC).

In your case, you mentioned that your PE had an understanding with you to pay gratuity to your employees engaged for him, but now he is denying it. Under the circumstances, it is your liability to pay gratuity to your employees. If you fail to pay it, the PE has no option but to pay it and recover it from you.

If you have proof of the said understanding, you can sue him for non-performance of the understanding. However, you cannot take any action under the Gratuity Law, in my view.

Regards

Understanding Contract Labor Law and Statutory Dues

First, there is nothing in contract labor law that says all statutory dues are the liability of the Principal Employer (PE). There are specific things the PE is liable for: wages, bonus, Provident Fund (PF), Employees' State Insurance Corporation (ESIC), and overtime (due to the Factory's Act, not contract labor).

On account of the definition of wages, overtime, leave wages, and minimum wages get covered. Gratuity is not listed anywhere. So, as per law, it's not their responsibility. Further, as per the law, if they pay, then they can recover from you as a debt. But if you had a specific clause in the contract stating they will pay all statutory dues, then you have a legal right.

The Madras High Court has held in a case whose facts are similar to those stated by Sissgulshan that the Principal Employer is liable to pay gratuity to the workmen of the contractor if the contractor does not pay and recover the same from the contractor. (Madras Fertilizer case).

Dear Saswata ji,

You are right, sir, absolutely, beyond any doubt. But... but...

Judgment Reference

The judgment in the case of Superintending Engineer, Mettur Thermal Power Station, Mettur vs. Appellate Authority, Joint Commissioner of Labour, Coimbatore & Anr, 2012 LLR 1160 Madras Court held that gratuity payable under the Payment of Gratuity Act, 1972 falls within this definition of 'wages'.

Contract Labour Act Implications

Section 21 (4) of the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA), mandates that a principal employer is responsible for the payment of 'wages' to a contract employee in the event of a contractor’s failure to pay within the stipulated time or in the event of a contractor making a short payment. Therefore, I said the principal employer is liable to pay gratuity to the contractor's employee if the contractor fails to pay it.

V. Harikrishnan, Joint Commissioner of Labour (Retired), Government of Tamil Nadu, Advocate and Labour Law Consultant, has rightly said that the facts of the above-quoted judgment are similar to the querist's case.

Regards