Gratuity Payment Dilemma: Are We Liable for a Contractor's Long Service?

Dear All,

In February 2019, we appointed ABC Manpower, a supplying contractor agency, for Housekeeping and Security services.

In November 2019, one of their long-serving employees, Mr. XYZ, who has been with ABC since 2012 and working at our site since February 2019, is leaving the ABC company.

Please confirm - he has completed 7 years with ABC company but will only have worked with us for 9 months. What will be our liability regarding his Gratuity Payment?

Dear Chandrakanth,

Extension of the doctrine of vicarious liability

The extension of the doctrine of vicarious liability enjoined upon a principal employer under Section 21(4) of the CLRA Act, 1970, regarding the payment of gratuity to the workmen of the contractor engaged by him, still remains a matter of controversy among the various High Courts.

From the inputs given, I am of the opinion that even the proportionate liability of the principal employer has not arisen since the existing workman had only completed 9 months of service as contract labor in the establishment. As such, the principal employer can legally resist the claim for gratuity if it is staked against him as well.

Alternatively, the principal employer may pay the entire sum of gratuity to the employee and recover the same from the contractor.

Challenges in Contractual Employment

Generally, contracts are considered by principal employers based on lower quotations of wages. There are quotations for a 1 or 2 percent increase to secure the contract as L1, with a quotation containing minimum wages alone. In those situations, if the contract continues for years at such lower quotations, it becomes very difficult even to run his own office. How can the contractor pay gratuity to all his contract laborers when he has insufficient funds? Furthermore, how can the laborers be justified in receiving underpayment of gratuity? Even in those cases, how can the principal employer recover from the contractor when he himself did not pay the gratuity amount to the contractor as per the contract terms? The same situation is applicable to bonuses as well in cases where quotations only include wages.

Financial Implications of Long-term Contracts

When a quotation is raised exclusively for wages and continues for years, doesn't the contractor face bankruptcy if legally obliged to pay gratuity to all workers who have completed 5 years when the contract is terminated?

When the rates are negotiated and finalized with the contractor, it is expected of the PE to pay, amongst others, the cost of bonus and gratuity in terms of CTC per employee/category. Therefore, the question of the contractor's inability to pay bonus and gratuity does not arise. In some companies, the gratuity part of CTC alone is withheld by PE to ensure against default by contractors, and the PE settles the gratuity to the contract workman through the contractor in the event of CW leaving the services of the contractor and when the contractor raises a demand thereof. Most of the agreements with contractors have an enabling proviso in the contract agreement.

Panchsen
P. Senthilkumar
Former Corporate Head of IR
Email: senprithvib6@gmail.com
Phone: 9884009193