Are Long-term Contract Workers Entitled to Gratuity? Seeking Guidance on Legal Eligibility

Dear Sir, In view of the decision of our management and as discussed, the contract workers working under two different contractors/employers appear to be surplus and are still working under contractors/employers (SKS) & (BEW). We have already instructed the said contractors/employers (SKS) & (BEW) to retrench the surplus workers, around 10 to 15, after complying with the relevant provisions of labor law including PF, ESIC, PW, MW, Bonus, etc.

Now, a question arises regarding some contract workers who have already put in more than 5 years of service as they are demanding gratuity. In such circumstances, kindly provide detailed guidance.

Query:

1. Are these contract workers eligible to receive gratuity as provided under the Payment of Gratuity Act 1972?

2. Is the Payment of Gratuity Act extended to the Contract Labor (Regulation and Abolition) Act 1970? If yes, under what circumstances?

3. Are there any judicial pronouncements on this matter?

Please enlighten us by giving a suitable opinion in response to the queries mentioned in this text.

If you have an account of who all have been engaged through the contractor, if the contract workers have been reporting to your on-roll supervisors for leaves, grievances, etc., and if these workers have been doing work similar to your on-roll workers, then you should pay gratuity to them also.

Elaboration on the Tests

1. The principal employer knows by name who have been engaged by the contractor. It is not just a number but the persons who are important.

2. The workers take permission from your supervisors for leave. The workers approach your supervisors in case they have any grievances. If you take disciplinary action against the workers engaged through the contractor, you only decide what should be the wages payable to the contract workers. You sign agreements concerning their wages and service conditions.

3. The workers do work similar to that of regular workers.

If you have a similar relationship as above, the contract will become a sham, and in such a situation, you will be bound to pay retrenchment compensation, including gratuity when they are asked to go.

Responsibilities Regarding Payment of Wages Under the Contract Labour (Regulation and Abolition) Act, 1970

Section 21 of the Contract Labour (Regulation and Abolition) Act, 1970 outlines the responsibilities regarding the payment of wages:

(1) A contractor is accountable for paying wages to each worker employed as contract labour, and such wages must be disbursed before the prescribed period expires.

(2) The principal employer must designate a representative authorized to be present during wage disbursement by the contractor. This representative is responsible for certifying the amounts paid as wages.

(3) It is the contractor's duty to ensure that wages are distributed in the presence of the principal employer's authorized representative.

(4) If the contractor fails to pay wages within the specified period or underpays, the principal employer is responsible for making full payment to the contract labourers and can recover this amount from the contractor.

Gratuity Entitlement Under the Payment of Gratuity Act

Gratuity is payable under Section 4 of the Payment of Gratuity Act. Workers are entitled to gratuity benefits in this scenario.

Legal Obligations for Gratuity Payment in Contractual Employment

Let me put two cases here.

In Madras Fertilisers Ltd Vs Controlling Authority Under Payment of Gratuity Act and Others (2003 I LLJ 854), the Madras High Court has ruled that it is the liability of the principal employer to pay gratuity to employees who have worked for him for 5 years and recover the same from the contractor.

In Management of Cruickshank & Company Ltd Vs Appellate Authority under Payment of Gratuity Act and others, the court observed that the responsibility of the principal employer is confined to the payment of wages, and the definition of wages does not include gratuity. The principal employer cannot be liable for gratuity payment. However, as gratuity is a welfare benefit available to workers, the payment of it should not be denied due to a tussle between the principal employer and the contractor. Therefore, the principal employer shall pay it in the first instance and recover the same from the contractor.

In both cases, the ultimate responsibility has been put on the contractor. However, if the principal employer knows that the same worker has been engaged for years, not less than 5 years, he can take a step to ensure that gratuity is paid by the contractor on his retirement or upon leaving the contractor.

Challenges in Recovering Gratuity Payments from Contractors

Now, the question of recovery of the amount paid to contract workers from the contractor is a serious issue, especially if the contractor refuses to accept it, stating that he receives only a few percentages, say 8.33%, as service charges, and it is insufficient to meet his expenses.

Considerations for Genuine Contracts

One more thing to consider is that if your contract with the manpower supplier is genuine, they have a license, they depute their supervisor to handle the grievances of the workers deployed at your site, and you do not know who all have been deployed but are concerned only with the number of persons deployed. If what I have said as #2 is incorrect for your case, then it is okay - you need not pay any gratuity nor ensure that the contractor pays it. However, in practice, the situation is often as I have described. It is not an easy job to deal with contract labor. They can raise an industrial dispute, and that dispute may cause significant harm to you.

Opinion on Query No. 1 - Yes, these contract workers are entitled to receive gratuity, but it should be from their contractor. The principal employer should not pay gratuity. If they challenge their termination and the case is decided in their favor, the Labour Court may reinstate them in the employment of the principal employer.

Query No. 2 - Workers of the contractor will need to have an industrial dispute adjudicated in their favor to hold the principal employer liable for paying gratuity to them. The Controlling Authority under the Payment of Gratuity Act 1972 is not vested with such powers. However, the Authority can pass orders directing the principal employer to pay gratuity to contract workers and recover the same from the contractor. The Contract Labour (Regulation and Abolition) Act 1970 also provides for such a procedure.

Dear colleague, after perusing relevant provisions under both the Gratuity Act and CLRA, as well as High Court and Apex Court rulings, some of which are referred to above, what emerges is that the responsibility to pay gratuity to eligible employees on termination is that of the Contractor-Immediate Employer. If he fails, it will be that of the Principal Employer, who can recover it later from payments due to the contractor. To be on the safer side, it will be necessary to include a suitable clause in the contract document between the Principal Employer and the Contractor, casting full responsibility of payment of the gratuity on the contractor to avoid any litigation in the future.

Regards, Vinayak Nagarkar HR and Employee Relations Consultant

Recognition of Contract Workers' Rights

It is also to be noted that such issues are very common, although a few of them will be escalated and settled with the intervention of courts, but after long industrial disputes and loss of production and harmony. Therefore, practically, contract workers who have been part and parcel of our organization shall be recognized, at least to the extent of their rights to receive social welfare benefits like gratuity.

The Nature of Contractual Agreements

Nowhere can you see a contract that is genuine in all respects, and the majority of such contracts aim for flexibility in operation for the principal employer. Of course, many states have decided to be more employer-friendly post-COVID-19. It is meaningless to debate such things here because the labor laws are going to be just some letters printed and put on the lowest rack of the cupboard without any sense, with no one to refer to!

Dear Ananta,

The workmen are eligible to get gratuity if they have completed 5 years of work. The workman, whether on regular service under the principal employer or under a contractor, is eligible to receive gratuity under the Payment of Gratuity Act. The definition of the act is sufficient; no judicial pronouncement is required as it may only confuse you.