Service Charge vs. Gratuity: How Should Contractors Handle Employer Payment Refusals?

Service Charge and Gratuity Payment Dilemma

Just asking: The contractor only charges 5% as the service charge, and the Gratuity is 4.81%. How will the contractor be able to pay the Gratuity if the principal employer does not pay for the Gratuity separately?

The contractor is willing to pay Gratuity to the employees, but the bill needs to be raised for that specified amount and sent to the principal employer. However, the principal employer does not wish to pay the bills regarding Gratuity payment. They state that the contractor should take care of that.

Possible Solutions for Contractors

What should be the right course of action for the contractor since it will be financially impossible for the contractor to pay for the Gratuity of the employees with such a low margin of service charge? There are some principal employers who only pay 3% as a service charge.

Amazing explanation "Story".

When GST is only 18% of the labor contract, and the contractor is working on a 5% service charge, labor license fees, and other benefits for employees like EPF, ESIC, conveyance, etc., are also additional payments. Above all, they have to pay income tax on the contractor business.

This is between the contractor and the principal employer; employees cannot suffer for the same. It is the prime responsibility of the contractor to pay the gratuity. If the contractor fails to do so, then the responsibility shifts towards the principal employer. Later on, the principal employer can charge the same from the contractor for paying gratuity on their behalf.

The ideal scenario in this type of situation is for the contractor to pay the gratuity to the eligible employee and charge the same from the principal employer. This is because the contractual employee worked for the principal employer and helped in the working of the process/company.

Grounds for Compelling Gratuity Payment

I wish to convey that we, as contractors, are willing to pay the employees their dues. However, on what grounds can we compel the principal employer to pay for the Gratuity? According to some old contracts we hold with the principal employer, charges for PF, ESI, etc., are included and mentioned, but Gratuity is not. When we asked them to pay for the Gratuity, they stated that it is not specified in the contract.

Please suggest on what grounds we can compel the principal employer to pay for the Gratuity, or is it that we cannot ask them for the Gratuity payment since it was not mentioned in the contract?

I need suggestions...

Regards, [Email Removed For Privacy Reasons]

@ Jeet, you can have an addendum in the contract to include a gratuity clause. Ask the principal employer if the employee worked for them and assisted in the company's processes. To show gratitude to the employee, they should pay the gratuity.

Agreement Details Between PE and Contractor

The agreement between the PE and contractor should be on an actual cost basis plus a service charge. The invoice may include the monthly gross salary, the employer's portion of PF & ESI, leave pay (as and when applicable), statutory bonus (as and when applicable), gratuity (as and when applicable), a service charge (5% or 3% or any other percentage), and GST as applicable.

Viability of Service Charge

In my opinion, with the above method and at least a 5% service charge, the service may be viable. Otherwise, after deducting 1% TDS for proprietorship organizations and 2% TDS for others, along with other costs (employee salary, labor license, electricity, internet, rent, stationery, etc.), it will be very difficult to provide service properly.

Challenges in the Eastern Region

Unfortunately, there are many service providers due to a lack of business opportunities, especially in the eastern region, who accept business at very low service charge percentages. Some of these service providers deposit less in contributions to PF, ESIC, etc., by falsifying the payroll month after month.

Ethical Business Practices

To conduct business ethically, it is also the responsibility of the PE to properly care for the service providers; failing to do so will result in society suffering in general.

Personal Experience

I have had a bitter personal experience with one of the big US organizations six years ago when the HR department of the concerned organization suggested that I remove employees every three years to avoid gratuity—this is the reality even with big organizations.

S K Bandyopadhyay (Howrah, WB)

Primary Responsibility for Gratuity Payment

The primary responsibility of the contractor is to pay the entitled gratuity. If the contractor fails to do so, the project engineer (PE) can step in, clear the amount, and recover it from the contractor.

Gratuity Payment Responsibility

The contractor is responsible for paying gratuity to workmen engaged under him, not the principal employer. The work awarded to the contractor by the principal employer includes all labor liabilities. The contractor cannot deny paying gratuity to its employees on the grounds that the awarded job did not have a gratuity component.

The aggrieved employees need to file a case for their gratuity claim before the authority or court. The authority or court can only direct the principal employer to pay gratuity if the contractor fails to comply.

Issue with Gratuity Payment in Contracts

The matter of discussion is not whether the employee will be paid gratuity or not. The employee is paid gratuity by the contractor. However, the actual issue is that some old contracts between the Principal Employer and the Contractor do not mention the gratuity clause. As a result, the Principal Employer is refusing to pay the gratuity portion to the contractor, which is meant to be paid to the employees.

Questions to Address

Q1. What should be done in this situation?
Q2. How can the contractor convince the Principal Employer that, like PF, ESI, etc., they also need to pay for all statutory compliance for the employee, even if it was not mentioned in the contract?

Kindly suggest.

Gratuity Responsibility in Long-Term Contracts

The gratuity is due after 5 years of continuous work. It is the responsibility of the contractor to quote or accept a rate that covers everything for a long-term contract.

Compliance with Rules and Regulations

In most work orders, it is stated that the contractor must comply with all rules currently in force. Any new rules, such as changes in minimum wage rates, laws, and regulations, should be considered by the principal employer or reimbursed by them.

Addressing Gratuity Concerns

In this case, the reply would be that gratuity is not a new imposition. There is no reason on your side to deny it; instead, take up the matter with the principal employer for consideration. Your work order provides the solution; it is essential to carefully read what is mentioned. Do not interpret these views as intended to undermine your claim; they are based on practical experience.

Regards, Prabhat

[Phone Number Removed For Privacy-Reasons]

Why is an employee denied payment of gratuity amidst the dispute between the principal employer and contractor?

If the liability exists, payment should be made. If unable to pay, it is advisable to approach the local labor office for grievances and redressal if the matter is not resolved within 15 days after the claim.

Thanks & Regards,
Sumit Kumar Saxena