Can Company ABC Claim Gratuity from Principal Employers for Contract Work Periods?

Hi,

Employee A has worked at company ABC for 7 years. During his 7-year tenure, he was seconded on a contract basis by his parent company to work with Principal Employer X for 2 years, Y for 3 years, and Z for 2 years.

Now, as company ABC (employer of A) is required to pay gratuity to A, can company ABC claim the same from Principal Employers X, Y, and Z for the periods A worked with them on a pro-rata basis?

Thank you.

Dear Chandrakanth, you may refer to the previous threads on the subject, particularly one titled "35 Interesting Questions Related to Contract Labor."

Principal Employer's Liability to Pay Gratuity to Contract Labor

The Principal Employer's liability to pay gratuity to contract labor is a matter over which there is no consensus in judicial opinion so far. The view of the Kerala High Court is that the Principal Employer has no legal obligation to pay gratuity to his contract labor because neither the Contract Labour (Regulation and Abolition) Act, 1970, nor the Payment of Gratuity Act, 1972, provides for the payment of gratuity to contract labor by the Principal Employer [Cominco Binani Zinc Ltd., v Pappachan (1989 LLR 123)]. On the other hand, the Madras High Court has held in Madras Fertilizers Ltd., v C.A under the Payment of Gratuity Act [2003 LLR 244] that gratuity should be paid by the Principal Employer first and then reimbursed from the concerned contractor later, as per the vicarious liability imposed on him under section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970.

Conclusion on Gratuity Claims

Regarding the situation described in your query, my view is that the time elapsed as well as the respective length of service under each Principal Employer falling below the minimum qualifying service would forbid any later claim for gratuity from them.

Gratuity Responsibility in Contract Work

Since A has been an employee of ABC, a company that takes on contract work and has sent him to work with different principal employers, how can he claim gratuity from the latter? There is a specific master-servant relationship between A and ABC. It is not as if he was deployed solely in Principal Employer X for 7 years; then the scenario would have been different. Just because you deploy your employees to work for others (i.e., Principal Employers), how can you be exempt from the coverage of the Payment of Gratuity Act? It is the sole responsibility of the employer (ABC) to pay gratuity to its employees when they leave the service after fulfilling the qualifying period. You cannot pass this responsibility on to your clients.

ABC is liable for gratuity. Depending on its contractual terms with PE, if any, it gets reimbursed from PE. But primarily, ABC is liable as A is employed by ABC.

Since none of the Principal Employers has engaged A for five years, the contractor cannot claim it from any of these Principal employers. If it is to claim from the Principal Employer who engages a contract worker for, say three years, then there would be no end to it because every worker should have service with any other principal employer. It is okay if the same worker is engaged for five years by a principal employer.

Gratuity Payment Responsibility

The employer of the employee is liable to pay the gratuity. Here, M/s ABC is the employer as well as the paymaster of the employee. It is relevant where the employee worked until his last day of service. The person rendered his service to M/s X, Y & Z as an employee of M/s ABC. Furthermore, gratuity is the liability of the immediate employer, not the principal employer.

Claiming Gratuity Costs

The cost of gratuity can be claimed by M/s ABC from M/s X, Y & Z if there had been any understanding to compensate or reimburse the cost of providing the service. The principal employers M/s X, Y, and Z are in no way associated with the payment of gratuity for the employees of M/s ABC.

Gratuity and the Payment of Gratuity Act, 1972

Gratuity, payable under the Payment of Gratuity Act, 1972, is a gratuitous payment required to be made by an employer to their employee at the time of termination of services or upon the employee's death.

Contract Labour (Regulation and Abolition) Act, 1970

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 timelines or in the event of a contractor making a short payment. The principal employer then has the ability to recover the amount paid as 'wages' from the contractor. Section 2(h) of the CLRA defines the term 'wages' as all remuneration (whether by salary, allowances, or otherwise) expressed in terms of money or capable of being so expressed, which would, if the terms of employment, expressed or implied, were fulfilled, be payable to a person employed in respect of their employment or of work done in such employment and includes, among others, "(d) any sum which by reason of the termination of employment of the person employed is payable under any law, contract, or instrument which provides for the payment...". However, it excludes "(6) any gratuity payable on the termination of employees in cases other than those specified in (d)."

Judgment on Gratuity as Wages

The judgment below has now held that gratuity payable under the Payment of Gratuity Act, 1972 falls within this definition of 'wages'.

Superintending Engineer, Mettur Thermal Power Station, Mettur vs. Appellate Authority, Joint Commissioner of Labour, Coimbatore & Anr, 2012 LLR 1160