Is This Employee Eligible for Gratuity After Contract and Third-Party Payroll? Seeking Advice

Hi Seniors, Please help me resolve the case mentioned below with your valuable thoughts and also refer me to some relevant judgments available regarding this.

Employee Contract and Gratuity Eligibility

One of our employees was on a direct contract with us for 6 months. After the 6 months of the contract, he worked with us on a third-party payroll for 3 years, and after that, he was absorbed as an on-roll employee of the company and worked for 2.6 years before leaving the company.

Now, my query is whether this employee is eligible for gratuity. Please share your opinion and any valid documents/judgments available with you.

Thanks,
Chatar Singh

No, the employee is not eligible as per the provision of continuous service in the Act.

Hi, there was no mention of in-between breaks in the above-mentioned periods.

As the employee worked with you on third-party payroll for 3 years, he is not eligible for Gratuity.

While his initial stint with the company for 0.6 months and last employment period of 2.6 years is okay, 3 years on third-party payroll stands distinct.

Service Tenure and Gratuity Eligibility

Initial service on a direct contract, whether it is on a regular basis or a Fixed Term Contract, is 0-06 months. Subsequent service on third-party payroll (probably with his consent) is 3 years. Service rendered after absorption as an on-roll employee before leaving is 2 years and 6 months. The total service rendered in the organization is 6 years.

However, he has not completed the minimum qualifying service of 5 continuous years in any of the different modes of employment, namely FTC, off-roll, or on-roll. Thus, although the establishment is the same and the total service is 6 years, the intermittent changes in his modes of employment render him ineligible to stake a claim for gratuity under the Payment of Gratuity Act, 1972, unless there is a specific clause for regularization in the absorption orders to include the past service.

I appreciate the comments by Umakanthan Sir. However, I feel that the act of the employer putting the employee under a third-party role was not a genuine attempt but merely a sham arrangement. If the employee could prove that during that period, he was supervised by company employees, I believe he would be entitled to gratuity considering his length of service. It is also noteworthy that after a three-year gap under a third-party role, the company absorbed him into regular roles. Do you not think that there was something that could render the three-year contract employment a sham?

The employee is eligible for gratuity because he has rendered 6 years of service in your establishment.

Third-Party Payroll Clarification

There is no such thing as a third-party payroll. If someone was working with another paymaster, what prompted you to absorb them into your company's payroll?

Request for Timeline Details

To provide better suggestions, please provide the timeline of the employee (6-month contract from - to, third party from - to, and on the payroll from - to).

I agree with you, Madhu. At the outset, such a concern arose in my mind too on reading the narrative. However, I preferred to answer the query as it is rather than reading between the lines. That's why I added the caveat of regularization of the different spells of service prior to the employee's absorption.

Generally, many questioners do not reveal the real story in its entirety, prompting their questions. But, being outsiders, we do not know the actual reasons for such shuffling. In such a situation, we have to believe that the arrangements are a gentlemen's agreement and the changes were made with the active consideration and consent of the employee concerned, though it can be termed as an unfair labor practice on the part of the employer.

After all, gratuity is a reward for long and blemishless service in the same establishment to an employee, and a statutory obligation on the part of the employer upon termination of employment. Let good sense prevail over the employer in case of a disputed claim for gratuity or even otherwise!

Dear Sir, If the vendor changes and the worker remains the same, and he has completed five years, will we give him gratuity or not as a principal employer? Please suggest me. Regards, Amod Kumar Singh Manager - HR

Mr. Amod Kr Singh,

Gratuity Eligibility and Payment Responsibility

The act and rules state that if one completes five years of continuous service, they are eligible to receive gratuity upon their exit from the employer. If a worker is employed under a contractor, then gratuity is payable by the contractor. In cases where the contractor fails to make the payment, the liability falls upon the Principal Employer.

It doesn't matter if the worker has served over five years in one establishment without interruption or breaks in service; they are still eligible for gratuity, even if vendors changed during their employment period. It is advisable to request all vendors under whom the worker was engaged to pay proportionately for the period of work. As the Principal Employer, you should pay the amount to the worker and then recover it from the vendors' bills. I hope this clarifies your question.

In addition to what Mohanty has said, I would like to say that an arrangement where the contractor changes but the workers remain the same is an example of a SHAM CONTRACT. This situation can lead to the workers' services being regularized as on-roll workers.