Gratuity To Contract Labours

Is there any judgment on payment of Gratuity by the Principal Employer in respect of contract laborers working with different contractors for different periods of time, with less than 5 years of service in respect of each contractor but more than 20 years of total service?

Rgds,
DG

If these workers have been working under different contractors but for the same principal employer, there is a chance that the contract itself would be viewed as a sham contract. In such a scenario, the principal employer will have to bear the liability of payment of gratuity.

Madhu.T.K

Rightly put by Madhu T. K., if contractors are changed on a regular basis, it not only deprives the legal rights of the employees but also becomes a sham contract, falling under the purview of unfair labor practice. Moreover, in such circumstances, the principal employer becomes liable to pay the gratuity.

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There is a Supreme Court case I'm appealing from a Madras High Court decision, under which the principal employer was held liable for gratuity for dock workers unloading raw material for the company over a long period of time. In that case, the decision was in favor of the workers even though they were not working continuously every day.

You will need to search for the case. It's almost 20 years ago.

The important element that defines the employer-employee relationship is the supervision by the employer. Supervision does not mean instructions to do work and similar routine supervision, but taking disciplinary action against the contract workers, fixing their wages, etc. In these circumstances, it can be easily established that the principal employer has knowledge about the employment of a particular worker over a period of time.

On the other hand, in a genuine contract, the principal employer only knows the number of workers engaged (not employed) and has no knowledge as to who all are deployed by the contractor. For the principal employer, it is the service that they want to get, and in delivering the same, whoever is engaged by the contractor is immaterial.

At the same time, many contracts are made to avoid the complications of collective bargaining. There is a general feeling that if work is done through contract labor, the employer has no legal obligation, whereas legally, they are bound to ensure minimum wages, statutory contributions, and the welfare of those engaged. It is true that the provisions of standing orders may not be directly applicable, but to what extent these would benefit the employer is minimum.

It is also doubtful if these workers would take the same responsibility that the regular workers take in discharging their duties. Moreover, such engagements are only possible in areas of operations that are not directly related to the main objective of the organization. The Contract Labour (Regulation and Abolition) Act has been legislated with the view of reducing this kind of employment. Needless to say, this Act remains unenforced in many areas of India, which are industrially very advanced! You may read this comment in the context of the Maruti incident!

Madhu.T.K

In case of contract labor, if he completes 5 years of service, then the contractor has to pay gratuity amount to him. If the contractor is not paid, the principal employer has to pay the gratuity to the contract labor. For less than 5 years of service, there is no rule for payment.

Gurumurthy Sir, his question is slightly twisted. He says the contract workers worked for more than 20 years at the same location but under different contractors. Each contractor was for less than 5 years and therefore individually not liable for gratuity. However, is the principal employer liable because they worked at his factory for 20 years?

Incidentally, the act does not state that the principal employer is liable for gratuity, only for PF, ESIC, wages, bonus, and minimum wages. Nevertheless, courts have granted it as a liability if the principal employer.

So, your opinion will be appreciated in light of the above.

The basic issue is that there have been different contractors, and all these contractors have been employing the same workers for the same principal employer. "Changing the contractor but the workers remain the same" is a genuine example of a sham contract. When the contract becomes a sham, the question of regularisation would arise. Therefore, ultimately, the principal employer will be liable for payment of gratuity to those who have worked for him for 5 years and more.

Madhu.T.K

However much we can twist and turn, the Principal employer becomes liable for Gratuity in this case. Sham act of terminating or changing contractor overtime lesser than 5 years will not save PE from liability falling on him wherever contractor has failed to meet his statutory coverages.

This is what I understand from the laws relating to the subject: The liabilities of a principal employer under the Contract Labour Act are examples of vicarious liability on owners of establishments. The Contract Labour Act provides respite and recourse to contract labour from non-payment of wage by allowing them access to the principal employer in the event of a default by the contractor. The principal employer is required to ensure that a representative be present while the contractor is disbursing payment to the contract labour (Section 21(2)).

Sir,

The problem is that gratuity is not defined as a part of wages either under the Contract Labour Act or the Payment of Wages Act. So, a claim of gratuity by contract labour is a long-drawn process stemming from (1) sham contract and (2) eligibility of permanency due to working for a long time on perennial jobs. Morally, the Principal Employer (PE) should pay. Probably, the court will order it to be paid. Then it's the question of whether the company wants to take the risk of the matter in court, its cost, and possible impact.