Gratuity Eligibility for Contract Workers: Does Switching Contractors Affect Service Continuity?

If a contract worker leaves one contractor and joins another contractor in the same work location and works for more than 5 years, is he eligible for gratuity? Will it be treated as continuity of service?

Continuous working for five years is required to be eligible for gratuity from the contractor/employer. In your case, you have not worked continuously with any of the contractors, and hence you are not eligible to receive gratuity at this stage.

Regards, R N KHOLA

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Dear Colleague,

The objective of the Gratuity Act is arranged in such a manner that the employer demonstrates his gratitude to his employees who have served at least 5 years of service with him by paying gratuity.

Section 7: Determination of the amount of gratuity

If you look at Section 7, which determines gratuity, it is the employer who determines and pays it to the employee. In the given case, the contract worker should have worked for 5 years under one single contractor to claim his gratuity.

If he left before completing such minimum service, he is not eligible to claim his gratuity. Each contractor is a separate employer, and the establishments are different. They may be in the same location, but the employer is what matters. Therefore, in the case given, if the contract worker works for 5 years continuously under one contract, he can claim his gratuity from his employer contractor for that period only.

(1) A person eligible for payment of gratuity under this Act or any person authorized, in writing, to act on his behalf shall send a written application to the employer, within the prescribed time and form, for payment of such gratuity.

(2) Once gratuity becomes payable, the employer shall, whether an application has been made or not, determine the amount of gratuity and give written notice to the person to whom the gratuity is payable and also to the controlling authority, specifying the amount of gratuity so determined.

(3) The employer shall arrange to pay the amount of gratuity within thirty days from the date it becomes payable to the person entitled to it.

Principal Employer's Liability for Gratuity Payment to Contract Labour

The question of whether the Principal Employer is liable to pay gratuity for contract labour has not yet been decided by the Supreme Court, so the final word is still pending. However, there are several High Court judgments on this point, with the views of the Madras High Court placing the onus on the Principal Employer.

Reference is invited to the following cases:

1. Madras Fertilizers Ltd vs The Regional Labour Commissioner, decided on 29 October 2010
2. The Superintending Engineer vs Appellate Authority, decided on 23 June 2011
3. J. Kasithangam vs The Tamilnadu Electricity Board, decided on 9 September 2014
4. Manager, Chattisgarh State Cooperative vs Ram Swaroop Sahu, decided on 6 August 2021 by the Chattisgarh High Court

In the judgment of Superintending Engineer vs Appellate Authority, the Hon'ble High Court of Madras held that although the initial responsibility lies with the contractor to make the payment of gratuity in view of Section 21(4) of the CLRA Act, if the contractor fails to pay gratuity to the contract labour, the Principal Employer is liable to pay gratuity, which can then be recovered from the contractor. This ratio has been followed in other cases.

Contrasting View from Kerala High Court

The Kerala High Court held an opposite view in Cominco Binani Zinc Ltd. vs Pappachan, decided on 28 December 1988 ((1989) ILLJ 452 Ker), stating, “The principal employer’s liability to pay wages is recognized in Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970, as well. If the contractor fails to pay the wages, the petitioner will be bound to pay the same. The wages due to the workmen do not include bonus or gratuity. This is made clear by the definition of wages in the Industrial Disputes Act and Payment of Wages Act. While defining the term 'wages,' the above-mentioned Acts specifically exclude bonus and gratuity from its purview.”

Current Legal Position

Based on the aforesaid judgments, the point of law as it stands is that:

1. Regarding Contract Labour, although the Payment of Gratuity Act 1972 does not directly cast the responsibility on the Principal Employer, an interpretation of the term wages as provided in the Contract Labour (Regulation & Abolition) Act 1970 allows a claim to lie on the employer for both its on-roll and outsourced employees.
2. The Principal Employer can claim or recover the gratuity amount paid to the contract labour from the contractor.

Application of the Payment of Gratuity Act 1972

Under Section 3, the Payment of Gratuity Act 1972 applies to every factory and any shop or establishment where 10 persons are employed.

Definition of "Employee"

"Employee," as defined in Section 2(e), means any person employed for wages in any kind of work, in or in connection with the work of a factory, shop, or other establishment to which the Act applies.

Definition of "Employer"

"Employer," as defined in Section 2(f), means the person who has the ultimate control over the affairs of the establishment, factory, or shop.

Entitlement to Gratuity

Section 4 of the Payment of Gratuity Act 1972 entitles an "employee" to gratuity upon termination of employment due to superannuation, retirement, resignation, or death. Since the ultimate control over the affairs of the establishment/factory/shop where the employee was employed is with the principal employer, and since the employee left the earlier contractor only because his contract with the principal employer was terminated, the employee did not superannuate, retire, or resign. Hence, the liability for payment would be upon the principal employer to pay gratuity to such an employee.

- S. K. Mittal
[Phone Number Removed For Privacy-Reasons]

Here, I wish to differ a little from the above. There is no clarity on whether the workman completed 5 years under any single contractor. It seems he cumulatively completed this period (an assumption only), but not under a single contractor. In such a case, he cannot be eligible. Though he may be working at the same location or organization, unless he works for a continuous period of 5 years, the workman is not eligible for gratuity. If the workman works continuously for 5 years and if the contractor fails, the liability may arise, and the Principal Employer will come into the picture. When there is no eligibility at all, the question of who is to pay may not arise.

The weakest section of employees in relation to any organization is contractual labor. PE and its HR representatives are always finding loopholes in the law to avoid certain statutory payments, such as gratuity and leave pay. Non-payment of gratuity to contractual labor on the plea of not completing 5 years of continuous service is one such example. All over India, there are organizations where PE is asking contractors to change their employees within 3 years to avoid gratuity payment (I have faced this with a renowned MNC). There are employers who are changing contractors without changing contract labor again to avoid payment of gratuity. This is a classic exploitation of contractual labor by the PE.

There are cases pending at the Apex Court in this regard. My personal feeling is that the award will be in favor of the contractual labor in the future. There are contractual laborers who worked under one PE for years together through different contractors but were deprived of gratuity as, in each case, it is less than 5 years of continuous service.

In this regard, I can share one story (which may be a fact) where one organization had huge problems with employees and unions. The organization employed one champion IR/HR person in a permanent position who was assigned to bring down the manpower and set the organization properly. The said person was also declared as a Welfare Officer under the Factories Act. Through his acumen, faculty, intelligence, and a lot of hard work, within 3 years, he brought down the manpower from 800 to 300, and the organization was running peacefully.

Now the owner of the organization called the Welfare Officer and told him, "Thank you very much for your effort and result. I am not well conversant with labor laws, but I know one thing: if the number of employees is below 500, there would not be a requirement for any Welfare Officer. You please leave the organization, and as you have worked for only 3 years, therefore you are not eligible for gratuity."

I know a few organizations that are taking care of contractual workers very sincerely and have settled their gratuity even when the worker has not completed 5 years of continuous service with any single contractor.

My personal feeling is that going beyond the interpretation of the law and with the proper mindset under the backdrop of PNJ (principle of natural justice), every employer may consider each case on its merit to pay gratuity to the contractual workers if the total working years with the same PE (maybe under different contractors) are 5 years or more of continuous service.

Regards, S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] www.usdhrs.in

Eligibility for Gratuity in Case of Multiple Contractors

The workman in the captioned matter is not eligible for gratuity. The reason is simple: he has not performed 5 years of work under one contractor. Instead, the period is the sum total of several contractors/paymasters. The workman would have been eligible if he had put in 5 years of work under one contractor.