How Can We Ensure Gratuity for Long-term Outsourced Employees Under Changing Contractors?

In our bank, contractors are changed once every three or four years. However, employees continue to work in the establishment under different contractors. What is the legal position regarding their gratuity entitlement? Since the tenure of the contract is never more than five years, the provisions of the Payment of Gratuity Act, 1972 will not be applicable to the outsourced employees at any point in time. What steps can we take to ensure that the gratuity amount is paid to these outsourced employees?

Hi, The contract employees are entitled to gratuity and terminal/retirement benefits. As for the liability, the contractor is primarily liable. However, if the contractor fails to discharge this liability, the court may direct the principal employer to discharge the same and recover from the contractor separately. This principal employer's liability is applicable for any dues payable to the contract employee during the tenure of the service agreement, irrespective of the agreement executed between the principal employer and the contractor.

In accordance with the CLRA Act, the principal employer has to settle the dues and separately recover the same. The objective is that where the contractors are small-time/sham, the employees who ultimately work for the principal employer's benefit should not suffer.

The principal employer (PE) should ensure that the outsourced employee gets all the statutory benefits by keeping a check.

In this case, it is not the eligibility of the employees to get gratuity but the maintainability of the contract which is very important. If the contractor keeps changing every three years but the employees remain the same, then it is a clear case of a sham contract. It should also be studied whether these employees are engaged in the core activities of the organization, the bank. Normally, housekeeping and security activities shall come under non-perennial, and contract workers can be deployed in such areas only.

On the other hand, if the bank has been putting them in cash, customer care, and other activities directly connected with the business of the bank, not only will the bank have to absorb them into service but also pay gratuity and other terminal benefits to them when they leave after completing the prescribed period.

My earlier posts have mentioned that it is a classic case of exploitation of contract labor by changing contractors but continuing with the same contract labor. As mentioned by other learned members, the contract laborers should receive gratuity even if they do not complete 5 years with each contractor. I also agree with the situation.

Responsibility of the Principal Employer

It is the responsibility of the Principal Employer (PE) to keep track of the total years of service of each contract laborer under different contractors so that they are not deprived of gratuity payments when leaving employment, either after retirement or upon completing 5 years.

Example of Gratuity Payment Practice

I have an MNC client who pays gratuity to contract laborers who are eligible through the contractor. When changing contractors, the new one is asked to continue the past service record to avoid any mistakes.

Regards, S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] USD HR Solutions – To strive towards excellence with effort and integrity

The issue is also sensitive from an IR point of view, and we have to consider the long-term consequences. In such a situation where we have to continue the contract labor with the new contractor, I have seen many organizations that are providing ex-gratia equivalent to gratuity for even less than five years of service. Once this practice is followed, it creates an understanding for the contract labor that they are not losing out (even though the ex-gratia is calculated based on current wages), and they do not have any grievances at the time of separation regarding gratuity for past service.

Regards,

If you pay ex gratia, then that would lead to a right for others in the future. The responsibility to pay gratuity falls on the employer (i.e., the contractor in this case). However, when there is no contractor or when the contractor has changed, the scope of payment of gratuity is limited. Then it will become a question of law: is it a genuine arrangement or just a camouflage or windscreen? Naturally, keeping the workers but changing the contractors is a classic example of a sham contract.

Dear Sathya,

The facts disclosed in your post indicate that your bank daringly indulges in unfair labor practices, circumventing the provisions of the IDA, 1947, CLRAA, 1970, and the PGA, 1972 in respect of employees continuously engaged on an outsourced basis. On this matter of fact, I would appreciate the suggestions given by Mr. Madhu on the basis of appropriate legal compliance and that of Bandyobathyayji, which ensures the benefit of hassle-free gratuity to such employees rotated among different contractors.

New Definition of "Core Activity"

There is a new definition of the term "core activity" in the new Labor Code pertaining to the contract labor system. When it comes into effect, you cannot engage contract labor on any work or activity relating to the purpose for which the establishment stands. Therefore, it is better to take remedial measures right from now onwards.

Dear Members,

A very interesting thread indeed. While the point about "sham contract" has been made by many learned members, the reality is that many government organizations also have such arrangements due to various reasons. Just because the contractor has changed doesn't make it a sham contract; it generally is for a genuine requirement, a genuine tender, and its outcome.

Manpower contracts in government organizations

When it comes to manpower contracts in government organizations, the competition is stiff, and the contractor doesn't have any latitude in quoting (it's minimum wages + other statutory benefits + a wafer-thin margin). The competition is such that multiple vendors are declared L1, and then the contract is split equally amongst all L1s. In such a scenario, the organization may very well end up with a new contractor every year.

Continuity of employment and benefits

Now, from the organization's point of view, it makes sense to continue with the same person, provided the new contractor agrees, for practical and convenience reasons. From the person's point of view, this ensures continuity of earning, PF, and other statutory benefits except, of course, Gratuity.

Gratuity and new Wage & SS Codes

As far as Gratuity is concerned, the issue will be resolved if the new Wage & SS Codes are implemented. I am sure a private organization has more latitude in these matters.

Contractor Changes and Employee Continuity

Who said that a contractor should not change? A contractor should change, but along with the change in the contractor, the employees of the contractor should also change. If the principal employer is changing the contractor and at the same time keeping the workers of the contractor, then that contract would be regarded as a sham only.

Impact of New Social Security Codes

With the new Social Security Codes being enforced, how is it going to change? It is true that the contractor can employ some workers for a specified project for a specified time at the principal employer's site. He can offer the employment as a fixed-term contract, and when the project is over or when the contract is terminated, he can discharge the workers, paying gratuity for the period they have worked. This can be done now also. There is no provision in the new Code to protect an employer from any such camouflage arrangements.

Fixed-Term Contracts vs. Contractor Employment

When the employer is in a position to employ people on a fixed-term contract (FTC), why should the employers resort to employees through a contractor? The principal employer is required to take care of all the employee benefits and social security measures in respect of the employees engaged through a contractor. Then should they depend on a contractor?

It doesn't matter the period of the contract, but each contractor has to pay the amount of gratuity on the end day of the contract to the contractual employees for the period of employment under him. If such things are not happening, it is the liability of the principal employer to pay the amount of gratuity. The instant case is a bright example of Sham and Camouflage Contracts. As per the verdict of the apex court in the matter of SAIL, RSP, the Bank is the employer, and the liability is to be fixed with the Bank. The employees under a contract should claim as the employees of the concerned bank before the labor department because the work nature is perennial and continuous.