Gratuity Concerns: Can You Claim It After 5 Years with the Same Contractor?

Respected All,

I am working on a contract basis in a manufacturing company through a contractor. I have a query in my mind: Is an employee eligible to receive the gratuity amount if they work continuously for five years with the same contractor? Is the contractor liable to pay a gratuity amount to that employee? What if the contractor denies paying the same? I would greatly appreciate your valuable reply.

Thanks

Dear friend,

Basically, as per the provisions of the Payment of Gratuity Act, 1972, the employer under whom an employee serves for not less than a continuous service of five years is bound to pay him gratuity in case of the employee's termination of employment other than dismissal arising out of any misconduct involving riotous behavior or moral turpitude if the Act is applicable to his establishment. There is no distinction whether he is a contractor or otherwise.

You are eligible for gratuity if you have worked continuously for 5 years or more.

If the contractor does not pay gratuity, then the principal employer is liable to pay, which the principal employer can recover the amount from the contractor later.

Dear Mr. Ritesh,

If a member has worked with different establishments but the same contractor, totaling more than 5 years of service, which establishment is responsible for paying Gratuity?

Thanks,
Vidyadhar Bhat

In that case, the contractor is liable to pay. The responsibility of principal employers comes into play only when the contractor fails to fulfill its obligations.

I would like to request Mr. Vidhyadhar to go through my answers to the thread "35 Interesting Questions Relating to Contract Labour." Continuous and unblemished service under the same employer is the most essential ingredient for entitlement to gratuity for an employee upon the normal termination of their employment. Since contract labour is a system of indirect employment involving the existence of dual or triple layers of employers, even the higher judiciary has divergent views on the ultimate liability to pay gratuity to contract labour.

Respected All,

Mr. Vidhyadhar Sir rightly raised a query that I also had. Umakanthan Sir responded to Vidhyadhar Sir's query stating that "even the higher Judiciary has different views on the liability to pay gratuity to a contract labour." However, the confusion persists: if the higher judiciary holds different opinions, what is the final answer? Who is ultimately responsible for paying gratuity to contract labourers? What are we expected to do in this case?

As is rightly put by Resp. Umakantan, irrespective of the number of layers running to the principal employer, for the contract worker, the CONTRACTOR is to be construed as the Principal employer for the purpose of Gratuity, and the worker is to be paid by the contractor alone, whether he is receiving compensation from the company where he is contracted.

Regards

It is my considered and humble opinion that any question of law can be understood and answered in the right perspective only through one's own meticulous reading of all available judgments, even if contradictory, on the question. That's why I intentionally refrained from providing pinpoint answers to the queries of both Vidhyadhar and yourself.

Analysis of Relevant Judgments

Now, let us make a brief analysis of the following judgments on the issue as far as known to me:

1. Cominco Binani Zinc Ltd v. Pappachan [1989 LLR 123 - Kerala High Court]

2. Madras Fertilizers Ltd v. Controlling Authority under the P.G Act [2003 LLR 244 - Madras High Court]

3. Mettur Thermal Station v. Appellate Authority under the P.G Act [2012 LLR 1160 - Madras H.C]

In the first case, the questions before the Court were the liability of payment of bonus and gratuity to the contract labor employed in the factory of the Principal Employer. Since the claim was based on the settlement between the contractor and the union of contract labor, the honorable Kerala High Court refused to fasten the liability on the PE as he was not a party to the said settlement based on the narrow interpretation of sec. 21(4) of the CLRA Act, 1970.

In the second case, the honorable Madras High Court undertook a detailed analysis of sec. 21(4) of the CLRA Act with reference to the term "wages" as defined under sec. 2(vi) of the Payment of Wages Act, 1936, particularly elaborately interpreting clause (d) of the definition and ruled that the PE is liable to pay gratuity to the contract labor by virtue of the vicarious liability imposed by the section in case of failure by the contractor.

The third case followed the ratio decidendi of the second case law.

Therefore, the inescapable conclusion is that a contract employee working for a principal employer can stake a strong claim for gratuity directly from the PE at the time of termination of his employment if he is otherwise qualified in the event of the contractor's failure. Since "gratuity" also falls within the ambit of the definition of wages under the PW Act, 1936, and the vicarious liability created by sec. 21(4) of the CLRA Act, 1970 on the PE for payment of wages and other benefits applies to the payment of gratuity too, it is advisable for all the PEs engaging contract labor through manpower agencies and other contractors to include the amount of gratuity in the CTC of the contract labor on an annual/pro rata basis irrespective of the length of service.

Regards, RKORE77

I have a question. A contract worker worked for a fixed contract (3 + 3) for 6 years. However, the main contractor engaged two subcontractors, one for 4 years and another for 2 years. What about gratuity? Are there any case laws related to this situation?

Dear friend,

For claiming gratuity, what supporting documents need to be submitted?