The point of liability for paying gratuity to contract labour is highly contentious, and there are now conflicting judgments on this point. There is no straightforward answer. The perception of manpower supplier agencies (contractor firms) at large is that they are merely commission agents for the company, i.e. principal employer. They organise manpower, supply according to demand, raise salary bills, distribute payments to workers, and earn a small commission for this service. Principal Employer also pay ESI and PF employer’s (Contractor’s) share, which they deposit with the government in respective employee accounts under their respective codes. From where, then, would they get the funds for paying bonus or gratuity? They do not have such profit margins. If the company reimburses these expenses, they will pay. Conversely, the principal employers argue that since they have contracted a manpower supplier agency, it is that agency’s responsibility to provide the service and bear all legal obligations concerning the engaged manpower. The company (Principal Employer) has no employer-employee relationship with the workers employed by the contractor, so why should the company (principal employer)pay gratuity or bonus to the contractor’s employees? This sounds plausible and reasonable on paper, but in reality, the situation is quite different. In most cases, if the contractual manpower supply arrangement is examined legally, it will be found to be a sham and bogus. The contractor is merely a nominal entity; all control and supervision rest with the principal employer. In fact, the principal employer dictates everything—from selection of persons to appointment torates of wages to benefits to working conditions, and termination—even if not formally documented. Now, consider- a contractor is paid only a 7-10% service charge on such labour supply—how much could they earn, and how able would they be able to meet legal obligations such as paying gratuity, bonus, and leaves, etc?
Let us decode the complexity legally and practically.
As per clause 2(e) of the Payment of Gratuity Act, the basic requirement for a person to qualify for gratuity is that he should be in the employment of some shop, factory or establishment meeting threshold limit and having employer-employee relationship. The Payment of Gratuity Act neither defines “contract labour” nor the “Principal Employer”. It only defines the terms ‘employee’ and ‘employer’. On the other hand, Section 21(4) of the Contract Labour( R&A) Act makes the principal employer liable for payment of ‘wages’ to the contract workers in the event of non-payment of ‘wages’ by the contractor or in the event of short payment. Now, the question comes as to what “wages” mean under the CLRA Act? Here,one point is clear that contract labourers are entitled to get gratuity payment once they qualify for the same, be t paid by the contractor or principal employer.
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Sec. 2(h) of the CLRA Act says that the meaning of ‘wages’ will be the same as assigned to it in clause (vi) of Section 2 of the Payment of Wages Act, 1936. On a perusal of the definition of ‘wages’ under Payment of Wages Act, it becomes evident that gratuity has been specifically excluded from the definition of ‘wages’ as per Sec.2(vi)(6) This exclusion is clearly separable from clause (d) which talks about any sum payable on termination under any law but does not provide any time for such payment. So, this clause cannot cover gratuity because the time for payment of gratuity by the employer has been prescribed under the Act and that is thirty days from the cessation of employment. In view of the above legal position, the principal employer is not legally liable to pay gratuity to contract labour.
Therefore, even if the principal employer is asked to pay gratuity to contract labour in certain circumstances in the limited event of defaults by the contractor as has been done by some high courts in certain cases, the primary liability of the payment of gratuity cannot be passed upon the principal employer as it is specifically excluded from the definition of ‘wages’.
Conflicting Judgments:
Whereas, Kerala High Court in Cominco Binani Zinc Limited v. Pappachan (1989) ILLJ 452, Calcutta High Court in Sailen Seth v. Deputy Labour Commissioner and Others 2010 (126)FLR 923; 2010 LLR 1070 , and High Court of Bombay in Cummins (I) Limited v. Industrial Cleaning Services and Others [WP No.7867/2003] have held that principal employer is not liable to pay gratuity to the contract labour under Payment of Gratuity Act, few other high courts have taken a divergent view.
Calcutta HC in FIS Payment Solutions and Services India Private Limited v. The Assistant Labour Commissioner Central Siliguri & Others 2024 LLR 21; 2023(179) FLR 442 remanded the case back to the controlling authority, wherein the contractor was directed to pay the gratuity to the employee of sub-subcontractor without hearing the plea and objections of the contractor. In this case, according to the agreement between the contractor and sub- contractor, it was agreed by sub subcontractor to discharge all legal obligations including gratuity.
Calcutta HC in the case of Sail Growth Works v Sri Sasanka Maji & Ors., WPA/388/2025 decided on 10.3.2025. has ordered the principal employer to pay gratuity to contract labour because the factory was closed many years back, there was no employment record available of the contractor and contract labour, etc, but authorised the principal employer to recover the gratuity amount so paid from the contractor.
Jharkhand High Court, in the case of Heavy Engineering Corporation Limited, through its Chairman-cum-Managing Director, registered office at Plant Plaza Road, Dhurwa, Ranchi v. The Union of India & Others [WP (L) No. LPA 2of 2021 decided on 9.10.2023] held the principal employer liable to pay gratuity to contract labour employed through a society, being a sham contract. In this case, PF of the contract labour was deposited in the corporation PF trust and records and registers of the society were maintained by the Corporation.
Bombay High Court in Indian Institute Technology v Tanaji Balaji Lad [WP No. 12467 of 2024 decided on 4.10.24] held the principal employer liable for gratuity payment to contract labour because the employer-employee relationship was apparent. Contract labourers were working continuously under different contractors beyond the period mentioned in the work order. Although the work order mentions ESI and PF deductions by the Contractor, it remains silent on gratuity payments.
Madras High Court in the case of Superintending Engineer, Mettur Thermal Power Station, Mettur vs. Appellate Authority, Joint Commissioner of Labour, Coimbatore & Anr, 2012 LLR 1160 , also made the principal employer responsible for payment of gratuity to contract labour under Sec 21(4) of CLRA Act because the contractor did not pay the gratuity to its labour.
My Thoughts:
The principal employer is not primarily liable to pay gratuity to contract labour as per payment of Gratuity Act.Even if it is done in remote circumstances, same can be recovered from the contractor. But what the Principal Employer and Contractor need to take care of:
- The contract should be genuine on a principal-to-principal basis, Persons are appointed by the contractor, their wages are decided and paid by the contractor, such workers are routinely transferred by the contractor to his different work sites and control and supervision are also exercised through his supervisors. In such a case, with a specific condition of gratuity payment compliance by the contractor in agreement, the principal employer will not be liable to pay gratuity to contract labour.
- The terms of agreement should specify who will be responsible for paying gratuity. In case of no such clarity, the principal employer may be held responsible.
- If the effective control and supervision of the principal employer over contract labour is established resulting into employer- employer-employee relationship, liability to pay gratuity on the principal employer may be fastened.
- Contractors should decide the commercial terms cautiously with the principal employer so that the cost of all legal expenses like Wages, Overtime, uniforms, shoes, canteen, transport, ESI, PF, GST, Leaves, Bonus, gratuity and other benefits are fully covered in service charges.
- Principal employer should avoid keeping the same set of workers year to year and only change the contractor name by merely transferring their services from one contractor to another.
To conclude,it is the facts and circumstances of the case that influence the factor of liability of paying gratuity to contract labour by the principal employer.
Disclaimer: The article is aimed at sharing general information only for non-commercial use,and it should not be taken as legal advice. The author shall not be liable for any differing interpretation or accuracy of the information contained therein.
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