Who Pays Gratuity for Contract Workers with Multiple Employers Over 5 Years?

If a contractor deploys labor for 2 years in one organization and the same labor for 3 years in another organization, who would be liable for paying gratuity to contract laborers in this case? Would the contractor be liable, or if the principal employer is responsible for paying the gratuity, which principal employer of the organizations would be liable to pay – the principal employer of the first organization, the second organization, or both organizations?

Gratuity Liability Under the Payment of Gratuity Act 1972

As per the Payment of Gratuity Act 1972, the liability to pay gratuity is on the establishment that has employed the workman, which in this case is the contract labor. There is no direct liability of the Principal Employer under this statute. The contractor establishment is liable to pay the gratuity, and a claim can lie on it only. The following High Court Judgements are clear on this point.

(1) Comminco Binani Zinc Ltd. v. Pappachan, 1989 LLR 123 (Ker.H.C.) = 1989 (58) FLR 528.
(2) Madras Fertilisers Ltd. v. Controlling Authority under the Payment of Gratuity Act, 2003 LLR 244 (Mad. H.C.) = 2003 (97) FLR 275.
(3) Superintending Engineer, Mettur Thermal Power Station, Mettur v. Appellate Authority, Joint Commissioner of Labour Coimbatore & Another, 2012 LLR 1160 (Mad. H.C.)

The contractor would suitably load the gratuity factor in its cost, and indirectly, the Principal Employer has to bear it.

I am well aware of the fact that it is the responsibility of the contractor establishment to pay for the gratuity, and the principal employer will pay in case of default by the contractor establishment. My concern/query is, when a contract laborer is employed by a contractor for 3 years in one firm and for 2 years in another firm, would they be eligible for gratuity as they have completed 5 years of service? And if yes, in the case of default by the contractor establishment, which of the principal employers would be liable?

Responsibility for Gratuity Payment to Contract Labor

Neither the Principal Employer I nor II will be legally responsible for the payment of gratuity to the contract labor. The claim for gratuity can only be made against the Contractor. The aforementioned judgments support this position of law.

Legal Liability of Principal Employers for Gratuity

Legally, there is nothing to say that the principal employer is liable. Unfortunately, the courts have decided otherwise. There are many cases, including some at the Supreme Court level.

Madras High Court Ruling on Gratuity

This particular case decided by the Madras High Court very clearly states that the principal employer is liable for gratuity to be paid to the contract workers in addition to the liability of the contractor. The judgment is detailed and will take time to read, but it clearly states that gratuity is covered in Section 21(4) of the Contract Labour Act.

https://indiankanoon.org/doc/1632593/

I would, of course, be happy if the seniors in the group give their opinion because this matter has come up many times in our audits, and there is a dispute regarding this.

There was also a decision by the Supreme Court in the case of SPIC or one of its fertilizer subsidiaries for contract labor used in Chennai Port, which I cannot find at the moment.

Liability for Gratuity of Contractor's Worker

Even if we admit that the same worker has been engaged for three years, how can the principal employer be held liable for the gratuity of the contractor's worker when the worker has worked only for three years? The principal employer cannot take on his shoulder the service of the workman for two years under some other principal employer.

It is true that if the same worker has been working for the same principal employer but under different contractors, the responsibility of payment of gratuity MAY fall on the principal employer, provided it is established that the principal employer has sufficient knowledge that the same worker has been engaged and the principal employer has been supervising the work of the worker in all respects or simply if the contract is a sham contract. But in this case, it is the contractor who has employed the worker for five years, and certainly, the contractor should pay gratuity provided the Payment of Gratuity Act is applicable to his establishment.

The contractor is liable to pay gratuity, provided he has been charging the gratuity amount from the principal employer against the worker under the contract. While ensuring that the worker working for the contract fulfills the terms and conditions for gratuity, irrespective of the number of principal employers for whom he worked under the same contractor, the length of service with the contractor must be accounted for gratuity.

While appointing the contractor and agreement therein made by the parties, the principal employer usually puts the liability of statutory compliances on the contractor and pays accordingly. Therefore, it becomes the contractor's responsibility to abide by and arrange the management of such payments like gratuity to pay to the eligible candidates.

The important factor is the proper establishment of the contract and the due fulfillment of the same.

Dear Angad, the paymaster is liable to pay the gratuity; hence, the contractor is the paymaster. Your posting gives the impression that the employees are working under a contractor, but he deploys them in different organizations for different periods. By this, the employees have already completed five years of service. If this is the case, the contractor is liable to pay the gratuity.

Furthermore, the principal employer discharges the liability where the contractor fails to do so. However, in the said case, the principal employers are more than one, and the eligible workmen have not been engaged in their establishment for the full term of five years.

Therefore, the contractor under whom the workmen were working has to pay the gratuity.

Dear All, every contract worker is eligible for gratuity if they have worked for a minimum of 5 years continuously (without any break in employment, weekly off/paid holidays/absence with permission exempted) under one contractor only.

Different spells of employment with multiple contractors cannot be computed to arrive at the stipulated 5 years.

Also, if the worker's service was discontinued due to the completion of the present/running contract and they were re-engaged on another contract, it also cannot be combined to count for 5 years.

Please correct me if I am wrong.

What is the objective of the Gratuity Act?

The objective of the act is to help the workman financially by giving gratuity after retirement for the recognition of continuous, meritorious services and sincere efforts by the employee towards the organization or at the point of resignation after 5 years of continuous service.

Gratuity is a benefit payable under the Payment of Gratuity Act 1972. It is a sum of money paid by an employer to an employee for services rendered in the company. However, gratuity is paid only to employees who complete five or more years with the company.

The basic condition is that 5 years under an employer is a mandatory condition except in the case of death or disablement. In the given brief, as guided by our colleagues, there is no binding on any of the contractors or the Principal Employer to pay gratuity. However, in such situations, the Principal employer may face potential legal litigations.

In some instances, the contractors keep changing, but the workplace/principal employer and contract worker continue to work for over 30 years or so. This raises questions from authorities and employers, even though legally not directly liable, they are answerable. This is a practical scenario. Instances of a huge number of continued workers, maybe 100/200 or more, can lead to a batch of petitions. When a contractor changes, it is better to hire a fresh set of workers, which is an ideal process but practically challenging. However, doing so can minimize a lot of litigations.

Kindly consider this perspective.

All the best,
Dr. P. Sivakumar
Doctor Siva Global HR
Tamil Nadu

Dear Sir, In your case, I want to say that's why most companies give breaks in the middle to contract workers. This is so that the period of 240 days in one year cannot be completed.

Secondly, you can also add the payment of their gratuity in the CTC of the contract worker and keep that amount with you. Whenever any contract worker leaves the company and comes under the purview of gratuity payment, you can pay for it.

As for the contractor, he pays only what is made to him by the main employer. Many companies also give bonuses, and many do not. So for the companies that give bonuses, the contractor also pays the bonus in that company.

The thing to think about is that whatever statutory liability of the contractor will be given by the company itself, only then will it pay its workers.

Thank you.