Is the principal employer liable to pay gratuity to workers engaged by contractors?

Gratuity will not have to be paid by the principal employer if the same workers are working through different contractors on the establishment of the principal employer for many years under the control and supervision of the contractor, and the workers are regularly transferred to establishments other than that of the principal employer. It must also be ensured that the previous contractor enters into an agreement with the successor contractor to the affect that the latter will bear the liability to pay gratuity to the contract workmen.

Gaurav Kumar, Advocate, Supreme Court of India
Editor : Labour Law Reporter

In the recent judgment of Indian Institute of Technology, Bombay v. Tanaji Babaji Lad and Ors. 1 , (“ IIT Bombay ”, hereinafter), the Bombay High Court has held that IIT Bombay, the principal employer therein, is liable to pay gratuity to the workers of the contractor. This entitlement, according to the High Court, stemmed from the principal employer itself having control and supervision over the activities of the workers. The Court placed reliance on section 2(f)(iii) of the Payment of Gratuity Act, 1972 (“ Gratuity Act ”, hereinafer) which provides that a person who has ‘ultimate control' over the affairs of an establishment is the ‘employer' for the purposes of payment of gratuity. In the said case, not only were some of the workers directly employed by the principal employer initially, but had been working on the estalbihsment of the principal employer for several years despite change of multiple contractors. The very fact, according to the Court, that the workers were not made to work at various other places where the contractors were awarded contracts, shows that their services were rendered on the establishment of the principal employer, and not on the establishment of the new contractors. The Court even went to the extent of holding that factors such as the extent of control and supervision and change of multiple contractors were enough to establish ‘employer-employee' relationship between the purported principal employer and the workers. The work order also contained a clause that the principal employer would be paying gratuity directly to workers if the contractor fails to.

Would this, then, imply that the findings of the Bombay High Court in IIT Bombay were omnibus in nature and that the principal employer would be liable to pay gratuity to the workers of the contractor in all cases? The answer is both yes and no. The Bombay High Court in IIT Bombay itself makes it clear in para 31 that its findings are limited to the peculiar circumstances of the workers working continuously and under the supervision of the principal employer. In this regard, it would be apposite to refer to an earlier judgment of the Bombay High Court in Cummins (I) Ltd. v. Industrial Cleaning Services and Ors. 2 , (“ Cummins ”, hereinafter) wherein it was held that the principal employer, who did not have ‘ultimate control' over the ‘establishment' in which the workers of the contractor were working, is not an employer under section 2(f) of the Gratuity Act. It was held that though the workers were physically working in the establishment of the principal employer, but the same was only a part of their duties with the establishment of the contractor. It would appear that the situation in Cummins was different when compared with IIT Bombay as the ultimate control of the principal employer was established in the latter by the virtue of no transfers of contract workers, multiple contractors and workers working the same establishment for several years. Similar observations have also been made by the Calcutta High Court in Sailen Seth v. Deputy Labour Commissioner & Ors. 3 . It would also be imperative to note that the Madras High Court 4 has, on as many as three occasions, held that it would be the responsibility of the principal employer under Section 21(4) of the Contract Labour (R&A) Act, 1970 (“ CLRA Act ”, hereinafter) to make the payment of gratuity to the contractor's workmen and thereafter to recover the same from the contractor. Whilst the Bombay High Court in Cummins agreed with this observation, it disagreed with the Madras High Court on the aspect as to how the Authority under the Gratuity Act could determine the liability of any other person to pay gratuity by virtue of another law as the Authority itself derives it powers from the Gratuity Act.

Be that as it may, a Special Leave Petition was filed by Contractor challenging the judgment in Cummins which was dismissed by the Supreme Court by order dated 27 February 2017. Thus, having received the imprimatur of the Supreme Court, it would be safe to say that the law laid down in Cummins would be binding.

Another judgment of the Bombay High Court in Suryakand D. Lad and Ors. v. M/s. Oil and Natural Gas Corporation Ltd. and Anr. 5 (“ ONGC ”, hereinafter) is often times relied upon by workers to contend that the principal employer would be liable to pay gratuity to the workers of the contractors. It must, however, be understood that the principal employer in the judgment of ONGC was an establishment which could be termed to be belonging to or under the control of the Government. For the said reason, ONGC would have been an ‘employer' under section 2(f)(i) of the Gratuity Act. In contrast, Cummins was exclusively dealing with section 2(f)(iii) of the Gratuity Act which talks about the person who or the authority which has the ultimate control over the affairs of the establishment (other than the one under the control or belonging to the Government), as explained supra . Even the findings of the Court in Cummins with respect to the Authority not having the power to take recourse to section 21(4) of the CLRA Act were not directly controverted in ONGC as the observations were in the context of the juxtaposition of definition of the employee under Section 2(e) of the CLRA Act with the Sub-clause (i) of Section 2(f) of the Gratuity Act vis-à-vis the Central Government exercising control over the establishment. Also, in ONGC , ONGC had entered into a MoU for making a provision to extend the gratuity benefit to the contract-workmen. The Court in ONGC also held that the contractor through whom the services of the workers were being used on the date of the cessation of employment, would alone be the person liable to pay the gratuity for the entire service tenure and that would bring in the element of the liability of the last contractor to pay gratuity even in respect of the past service for which the contract employees were not employed by him in the presence of a specific contractual stipulation in this regard.
The practical upshot of the above discussion is as follows:

a) If the same workers are working through different contractors for many years on the establishment of the principal employer, with the principal employer exercising some degree of control and supervision – principal employer will have to pay gratuity.
b) If the same workers are working through different contractors on the establishment of the principal employer for many years but there is no control and supervision on the part of the principal employer and the workers are regularly transferred to establishments other than that of the principal employer – gratuity will not have to be paid by the principal employer.
Certain practical tips:
1) There should be no clause in the contract providing that the principal employer will be paying gratuity in case the contractor fails to.
2) All endevours must be made to ensure that gratuity is paid timely by the contractor. Even though the contract workers cannot approach the Authority under the Payment of Gratuity Act, they can still seek action under Section 15 of the Payment of the Wages Act, 1936 read with Section 21 of the CLRA Act or, alternatively, under Section 33-C of the Industrial Disputes Act, 1947.
3) Same workers should not be continued through different contractors and/or for years together. In case they are, they should regularly be transferred by the contractor to other establishments as well. Further, the previous contractor should enter into an agreement with the successor contractor that the latter will bear the liability to pay the gratuity to the contract workmen.
4) The officers of the principal employer must not exercise any degree of control and supervision over the workers of the contractor. (Supervision and control means deciding where the employee will work and how long he will work and subject to what conditions; see International Airport Authority of India Vs. International Air Cargo Workers' Union and Anr. 6
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1. 2024 LLR WEB 354 (Bom. HC).
2. WP No.7867/2003 dated. 05.01.2017 (Bom. HC).
3. 2010 LLR 1070 (Cal. HC)
4. Madras Fertilisers Ltd. v. Controlling Authority under Payment of Gratuity Act and Ors., 2003 LLR 244 (Mad. HC); Superintending Engineer, Mettur Thermal Power Station, Mettur v. Appellate Authority Joint Commissioner of Labour, Coimbatore, 2012 LLR 1160; and The Mgt. of Cruickshank and Company Ltd. v. The Appellate Authority under Payment of Gratuity Act, W.P. No.6743/2000 dt. 20.11.2006 (Mad. HC).
5. WP No. 2443/2022 dated 23.08.2023 (Bom. HC).
6. 2009 LLR 923 (SC).