Contractual Employees and Gratuity: Should Vendor Changes Affect Their Benefits?

What about contractual or third-party employees? Should they receive gratuity if they have not completed five years in the same organization? Companies are deceiving employees by changing vendors before the completion of five years. If a vendor is changed but the employee continues to serve the same company under a different vendor, should they still receive gratuity? Additionally, how can an employee become a permanent employee?

Thank you for your attention to this matter.

Dear Ravi,

Please note, gratuity is applicable when an employee works under any employer for 4 years and 240 days or more. If a vendor is changing, that means they are not in continuous employment under any vendor for the prescribed period. Also, it is surely a wrong labor practice being followed by the company.

Dear Ravi,

There is no legal obligation on the part of the principal employer to pay gratuity to the contract labour. In various enactments like PF, ESI, EC Act, etc., the liability is attached to the principal employer but not so in gratuity. In PGA, it is the establishment that employs the labourer which is liable to pay gratuity.

If the vendor changes, continuity in service also gets affected for the worker, and he need not be paid gratuity by the vendor (new) or the Principal Employer until he completes the prescribed period.

Gratuity Settlement for Contract Employees

The Principal Employer is responsible for the Gratuity Settlement for Contract Employees. If an employee raises a complaint with the Labour Office, stating that he has worked for the same organization for more than 5 years with different contractors, it means he is also eligible for Gratuity as proof that he has served the same company. Contractor Employees have full rights to take this to court. In such cases, the principal employer would likely be required to pay Gratuity.

Initially, contracts were given to experts in the field, but nowadays contractors are acting more like manpower consultants. They can do anything for their commission of 7 to 12 percent of the Manpower Cost.

For queries, please write to my Gmail ID: [Email Removed For Privacy Reasons]

Legal and Ethical Facets of Employment Contracts

The scenario presented in the post has two facets: one is legal and the other is ethical. Basically, employment itself is a direct contractual relationship between the employer and the employee, thereby creating certain perceivable mutual rights and obligations until the contract between them subsists. However, any practice, by whatever name it is called, such as outsourcing/contract labor, introduces the element of indirectness into the relationship, resulting in the disownment of one of the essential partners of production by the other, who is actually the ultimate beneficiary. This creates an identity crisis in the relationship, apart from the denial of certain employment rights and benefits otherwise available to such indirect labor.

Of course, such a practice of indirect labor can be justified in incidental and intermittent nature of activities in terms of flexibility of hire and fire and economy of operations. When it is adopted in core activities too, it assumes the character of exploitation. To remedy this mischief, the Contract Labor (Regulation and Abolition) Act, 1970 was passed by the Government of India.

Challenges in Enforcing the Contract Labor Act

However, an unbiased analysis of practical experience will certainly prove that this Act is at the top of the list of poorly enforced labor legislation in India. Particularly after the advent of LPG, the status quo is more in contravention than in compliance despite the case laws enunciated by the higher judiciary about the vicarious liability of the principal employer on the service conditions of their contract labor. Employers always prove to be more intelligent than the lawmakers everywhere. In order to circumvent the provisions of the CLRA Act, either they found their benami satellite units of production and outsource the sizable core activities or create umbrella labor contracts, as mentioned in the post, and reap the consequential benefits of economy of operations, flexibility of hire and fire, and prevention of unionization of such employees.

Liability of Principal Employers Regarding Gratuity

Regarding the liability of the principal employer in respect of payment of gratuity to their contract labor, the courts do not have a consensus of opinion. Particularly, when the contractors change periodically before the completion of every five years, the question of gratuity becomes even more difficult in view of the minimum qualifying service under the same employer prescribed by the Payment of Gratuity Act, 1972. Therefore, the only legal remedy available to such contract labor is to raise an industrial dispute under section 2(k) of the Industrial Disputes Act, 1947, for the conferment of equality in service conditions on par with the regular workmen of the principal employer by declaring the contract as a sham one.

Manoj Ji, KK Ji, Venkata Vamsi Krishna Patnaik Ji, Vinoth Ji, Umakanthan53 Ji, thank you very much for your reviews. Actually, I am currently researching contract labor as I want to initiate some welfare reforms for contract laborers. They should receive gratuity and all benefits.

Thanks a lot.