Is the Principal Employer Responsible for Paying Gratuity to Contracted Employees? Seeking Experiences and Insights

Hello! I had a query. Is the principal employer liable to pay gratuity to the contracted employees? Say, an employee joined ABC contractor in the year 2001 and has been working with him until 2008. He joins my organization as a contracted employee in the year 2006 through contractor ABC. At the end of the year 2008, he leaves the job. In the above scenario, is the principal employer liable to pay the gratuity to this employee, as in, can the contractor bill the principal employer for gratuity? There is really nothing in the books. Can anyone share their experiences?

Regards,
Viraj

Principal of the employer is not paying gratuity to the contractor, and they are not eligible.

---

I have corrected the spelling and grammar errors in the text provided. I have also ensured proper paragraph formatting by maintaining a single line break between the paragraphs.

Hi, if there is an agreement between the principal employer and contractor, then he is eligible. However, he has to serve for 5 years of service.

Regards, Nayan

Hello,

Mr. T. Sivasankaran has answered the question, and I agree. But I wish to amplify some concerned and related aspects.

1. Under the Contract Labour (Regulation & Abolition) Act, if applicable, the Principal Employer's responsibilities are defined, and these do NOT include Gratuity and Bonus.
2. If you read (and you should!) the Payment of Gratuity Act, that will also clarify your doubt.
3. Each law is applicable to an establishment/employer/employee.
4. The Payment of Gratuity Act may be applicable to the Contractor also as an independent establishment/employer.

Having said that, let us be clear as to what are the terms and conditions of the contract between the Contractor and the Principal Employer as we also be governed by these when they are consistent with the law. We get the Contractor bound to all applicable labor law compliances and to keep us, as the Principal Employer, indemnified. This is fine.

Many generous and HR-oriented employers are also willing to reimburse, at least notionally, the bonus each year and gratuity if and when applicable for the service the employee may render to the Principal Employer in excess of five years. Such provisions are voluntary or mutually agreed but are certainly not legally obligatory.

This is a forum for the development of sound HR practices. We must remember that the law prescribes the minimum and does not prevent or prohibit an employer from doing better than what the law prescribes. There are Principal Employers who follow this approach. I am only presenting more perspectives on the subject.

Hope these observations will help.

Regards
Samvedan
July 27, 2008

Dear Samvedan,

I beg to differ with you. For all statutory payments, the Principal Employer is indemnified. Payment of Bonus and Gratuity arises in the following cases, where the Principal Employer can be held liable:

1) Outsourced staff
2) Labour supply

It does not arise in the case of Job or Work Contract, where the Principal Employer has no control over the number of workers to be employed for the particular job or work.

Furthermore, in case the contractor becomes insolvent, then all dues need to be paid by the Principal Employer, which includes Statutory Bonus and Gratuity.

Regards,
SC

Dear Samvedan,

You are absolutely right. What is not specified under the Contract Labour (Regulation & Abolition) Act is not the responsibility of the Principal Employer. If the Contractor fails to discharge his/her statutory obligations, there are means to recover the same to satisfy the dues to the contract labour.

Regards,
krk rao

Hello, Mr. T. Sivasankaran has answered the question and I agree. But I wish to amplify some concerned and related aspects.

1. Under the Contract Labour (Regulation & Abolition) Act, if applicable, the Principal Employer's responsibilities are defined, and these do NOT include Gratuity and Bonus.
2. If you read (and you should!) the Payment of Gratuity Act, that will also clarify your doubt.
3. Each law is applicable to an establishment/employer/employee.
4. The Payment of Gratuity Act may be applicable to the Contractor also as an independent establishment/employer.

Having said that, let us be clear as to what are the terms and conditions of the contract between the Contractor and the Principal Employer as we also be governed by these when they are consistent with the law. We get the Contractor bound to all applicable labor law compliances and to keep us, as Principal Employer, indemnified. This is fine.

But many generous and HR-oriented employers are also willing to reimburse, at least notionally, the bonus each year and gratuity if and when applicable for the service the employee may render to the Principal Employer in excess of five years. Such provisions are voluntary or are mutually agreed but are certainly not legally obligatory.

This is a forum for the development of sound HR practices. We must remember that the law prescribes the minimum and does not prevent or prohibit an employer from doing better than what the law prescribes. There are Principal Employers who follow this approach. I am only presenting more perspectives on the subject.

Hope these observations will help.

Regards,
Samvedan
July 27, 2008

Hello SC,

Disagreements are not a problem at all. The original query was if gratuity was applicable to contractor's workman?

My position on that is that since the act is applicable to an establishment, the claimant will have to first prove an employer-employee relationship with the Principal Employer. If the claimant is a workman employed through a Contractor, under the Contract Labour (Regulation and Abolition) Act and if the documents and processes are in place, then the Principal Employer is in no way responsible to pay gratuity to the contractor's workman UNLESS the following conditions exist:

1. The contract is a sham, and therefore,
2. Employer-employee relationship subsists between the claimant and the Principal Employer.

The Contract Labour Act specifically casts an obligation on the Principal Employer in respect of non-payment/less payment of wages by the contractor, to comply and empowers the Principal Employer to recover the concerned amounts from the Contractor. (Sec. 21 or 22, but I am not sure as I write this mail) Neither Bonus nor Gratuity are wages, and the Principal Employer cannot be held responsible for the payment of these to the contractor's workmen subject to exceptions stated above under any conditions.

Even in the case of the Contractor becoming insolvent, the Principal Employer's liability will be limited by the money it owes to the Contractor at the relevant time.

See, the test of the Employer-Employee Relationship is the crux of the matter to determine the legal obligations of the Principal Employer.

I trust this will dissolve disagreements. If it does not, I am open to correction. Or I have not correctly grasped the import of your mail!

Regards,
Samvedan
July 29, 2008

----------------

Dear Samvedan,

I beg to differ with you, for all statutory payments the Principal Employer is indemnified. Payment of Bonus and Gratuity arises in the following cases, where the Principal Employer can be held liable:
1) Outsourced staff
2) Labour supply

It does not arise in case of Job or Work Contract, where the Principal Employer has no control over the number of workers to be employed for the particular job or work.

Further, in case the contractor becomes insolvent, then all dues need to be paid by the Principal Employer, which includes Statutory Bonus and Gratuity.

Regards,
SC

Dear Samvedan,

It is true that the term "wages" does not include bonus and gratuity under the Payment of Wages Act. However, for contracts of labor supply and outsource agency, the control of the employee directly lies with the Principal Employer and not the Contractor. Any statutory liabilities that arise fall under the purview of the Principal Employer, which the Contractor has every right to claim.

If we are employing contract labor strictly following the law, no employer will be able to employ any contract labor in any area that constitutes their core activity or business.

Another point that came up for discussion regarding the application of PF: It was observed that the total strength of workers in a factory was 82. Out of these, there were eight sweepers under a separate contractor. The contractor was a staff member of the company and a union leader, and the agency was under the name of his wife. The agency did not do any other work anywhere else. The agency claimed that none of the statutes (PF, gratuity, bonus) were applicable. However, the inspector stated that while counting the total strength, the total strength of the factory should be taken into account. Otherwise, it will be very easy to evade statutory responsibilities by fragmenting the workforce under different contractors. Hence, the responsibility falls with the Principal Employer for both bonus, gratuity, and other liabilities in these cases.

Regards,
SC

Hello SC,

Thanks for the response.

My position remains unaltered, but I am willing to look at the possibility of whether, under the Contract Labour (R & A) Act, if a contractor supplies labor to a factory and his own establishment is NOT covered under any of the labor laws (particularly like Payment of Wages, Minimum Wages, PF and ESI, or for that matter Bonus and Gratuity Act also), then as a Principal Employer, because the workers supplied by such a contractor conform to the definition of a "worker" under the Factories Act, the Principal Employer will be liable to cover such employees at least under the Payment of Wages, Minimum Wages, PF, and ESI since all these acts borrow the definition of a "worker" provided in the Factories Act. I am not too sure about the other two acts. Would you kindly check out the provisions from the bare acts and inform?

Further, I am aware of Sec. 10 of the Contractor Labour (R & A) Act, which makes it possible for the abolition of contract labor in any industry or trade after following a due process stipulated in the act itself. Similarly, the criteria provided under the guidelines of the act also indicate that if the contract labor is employed in the main process of manufacture, it may qualify for abolition, as also if the contract labor does the same work as that of the regular workman, then he must be paid the same wages too. If an employer does not do this, then such an act of not doing so may also qualify for abolition.

I think we are engaged in a very meaningful discussion; let us continue, but we both seem to know what we need to know anyway! I am wondering about the member who started the thread. Is he no longer interested? Why is he or, for that matter, others not contributing to this thread? After all, the forum is meant for the enrichment of all!

Looking forward to your usual studied comments.

Regards,
Samvedan
July 30, 2008

Dear Experts,

I would like to express my views on the employment of contract labor by management. This is often considered as a last option. According to the law, the tasks performed by contract labor should not involve the core operations of the industry.

In many organizations, certain functions like security and canteen services are outsourced to subcontractors. Production-related contract labor is referred to as "Production Subcontract," while others are termed as "Service Subcontract." Typically, these arrangements are short-lived as organizations prefer not to retain the same contractors for more than five years.

There is no guarantee that the same employees from a contract agency will continue to work with the principal employer over an extended period. Most managements prefer not to have the same employees from a contract agency for an extended duration. Only in rare cases do such situations occur.

In the event of long-term service, the principal employer is usually not responsible for providing gratuity or bonuses to contracted employees. It is suggested that the contract agency should handle these payments if their employees meet the criteria.

It is important to note that bonuses and gratuities are not considered regular earnings for employees; they are rewards earned through years of service with a specific organization. Therefore, in practice, the principal employer may not be obliged to make gratuity payments.

It would be beneficial if experts could provide references to relevant laws on this matter.

-Saravana Rajan

If a contract worker is employed in any organization, the principal employer is liable for PF, Gratuity, ESI, and Bonus.

Thank you.