Gratuity for Contractual Workers: Legio-juridical Dilemma

Summary: The question of liability for payment of gratuity to contractual workers has attracted renewed attention following the Supreme Court proceedings in Oil and Natural Gas Corporation Ltd. (ONGC) versus Suryakand D. Lad and Others. The dispute concerns whether a principal employer can be held responsible for gratuity where workers have rendered services for several years through successive contractors. The article examines the submissions made on behalf of ONGC, the distinction between a contract of service and a contract for service, and the statutory definitions of employee and employer under the Payment of Gratuity Act, 1972. A central argument of the article is that the true nature of the employment relationship should be determined by examining continuity of service, control over working conditions, the nature of work and the contractor’s actual role. The author questions whether changing contractors should defeat gratuity entitlements when workers continue performing the same duties at the same establishment for periods extending to 15–25 years. The article also examines Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970, the scope of the Controlling Authority’s jurisdiction, and the distinction between statutory gratuity liability and contractual arrangements. It considers the practical difficulty of assigning gratuity liability to the last contractor when employment has continued through multiple contracts. Finally, the author discusses fixed-term employment provisions under the Code on Social Security, 2020 and proposes a mechanism for annually funding gratuity through a worker-linked account. The article concludes by advocating stronger statutory protection, continuity-based eligibility and reconsideration of the legal position adopted in the ONGC proceedings.

1. Origin and Changing Nature of Gratuity

The word “gratuity” has its linguistic origin in the idea of something given gratuitously as a mark of appreciation. It is derived from the Latin words “gratuitas/gratuitus”, meaning something given freely or as a favour. This concept of gratuity as a payment of a gratuitous nature changed when gratuity entered into the statute book. Now, it is having the status of a labour right duly enforceable by law.

The question comes to our mind as to why we are discussing gratuity. This is due to a very recent judgment of the Hon’ble Supreme Court in the matter of M/s Oil and Natural Gas Corporation Ltd. (hereinafter referred to as “ONGC”), versus Suryakand D. Lad and Others, after which the issue of gratuity for contractual employees has been widely circulated on social media. It is pertinent to highlight that most of the contractual workers did not enter into appearance despite service of notices. The Hon’ble Court passed an order on submission of the Ld. Solicitor General of India (SG), who is the second-highest law officer of the Union of India.

In this judgment, the core issue: who is responsible for payment of gratuity in respect of contractual workers. The Ld. SG has taken a stand that ONGC is not liable for payment of gratuity for the reason that the contract is a job contract at arm’s length, but nature of contract was not discussed by the Hon’ble Supreme Court in the judgment. The Ld. SG has taken a stand that the jurisdiction of the Controlling Authority under the Payment of Gratuity Act, 1972(herein referred as PGA-1972) is limited only to calculating the gratuity payable, but not to deciding and fastening liability upon ONGC. This is recorded in paragraph 11 of the order. There is nothing to counter the submission of the Ld. SG. The Ld. SG relied upon the judgment of one Municipal Council, but the Hon’ble Apex Court has not found any purpose in the said judgment as it was on a somewhat different context.

2. Contract Labour and the Contract Labour (Regulation and Abolition) Act, 1970

The Contract Labour (Regulation and Abolition) Act, 1970 (herein after referred as CLA -1970) was passed with the motive to abolish contract labour and, where abolition was not possible, to regulate the conditions of service of contract labourers for their betterment. We have seen that, on the ground, whatever happened was just opposite to the intent of the Act. With the passage of time, the economy shifted a large portion of employment from regular employment to contractual employment and now, economy moving from contractual workers to gig workers. The Government is considered an ideal employer, but nowadays there is a situation where the Government itself is a biggest contractor employing a large number of contractual employees even for regular nature of work and these workers are working for years together.

3. Relationship Between Principal Employer and Contractor

The relationship between the principal employer and contractor is decided through a contract. The contract can theoretically be divided into two categories:

i. Contract of Service

ii. Contract for Service

Contract of Service

A contract of service basically was not a contract with a contractor, but it was a kind of employment contract. However, with the incorporation of the CLA-1970 and acceptance of contract labour, the scenario changed. In a contract of service, the principal employer controls the service of contractual workers and determines: when the worker will work; where the worker will work; hours of work; manner of work; and other conditions of employment.

Contract for Service

Whereas, in a contract for service, the relationship between contractual worker and the principal employer is entirely broken. Here, the principal employer is concerned about the performance of the service, and it is immaterial how the service is performed. For example, the principal employer may give a contract for construction of a road. In such a case, it depends upon the contractor how the work is performed through machine or entirely from manpower.

4. Categories of Contract Labour

Category I

This category is near to a contract of service, where the principal employer engages labour through a contractor. The principal employer is controlling conditions of work: when labour will work; duties; hours of work; nature of work; payment; leave, etc. The work is also, in most cases, of a regular nature. Here, the role of the contractor is only one kind of facilitator or payroll manager. Workers are mostly working in the premises of the principal employer for years together, on the same work. Every year, or sometimes after two or more years, the contractor is changed or the contract is renewed/extended on paper. The contractor is charging a fixed service charge based on total contract value or per worker billing in the contract. The principal employer is paying wages, PF, ESIC or any other charges and actual disbursement is at the end of the contractor. In most cases, attendance is maintained formally by the contractor, salary is disbursed and returns for PF, ESIC and other departments are filed in lieu of the fixed service charge. Contractual workers are working for years together with the same principal employer, at the same work and most of the time on the premises of the principal employer.

The principal employer is the source of funds and beneficiary of the work of individual worker, and the role of the contractor is just that of a facilitator. In this category, contractual workers are performing the work of the principal employer and there is clear employer-employee relationship.

Category II

This category lies in-between contract of service and contract for service, where the nature of contract is wholly dependent upon the degree of control. It is better to be adjudicated based on terms and conditions of the contract.

For example, a gold company gives raw gold to a contractor by weighing gold to make a jewel of particular design decided by gold company. Here, the principal employer makes payment based on the work output that may be piece-rate basis or item-based work. The work is not taking place in the premises of the principal employer, but the principal employer is providing the raw material and controlling the work output and getting back the final product. This is generally called a job contract.

Here, the employer-employee relationship is purely a matter of contract and depends upon the degree of control as well as inclination of contract towards a contract of service or contract for service.

Category III

In this case, the contract is generally a work contract, where a work order is allotted by the principal employer to contractor to perform a specific task, such as a civil contract. The principal employer is not bothered about manner of performance of the work and but only bothered about end result. It is solely the jurisdiction of the contractor to employ labour or machines. The material may also be brought by the contractor. The contractor is taking the contract at a fixed price and generating own profit. Here, workers are independently hired by the contractor and he is generating his own profit based on his skill. Therefore, there is no employer-employee relationship as such between the workers engaged by contractor and principal employer and contractor is independent employer. Only issue arise sometimes in case of exclusive contractor or dummy contractors.

Practically, to be seen, no contract is exactly a “contract of service” or “contract for service” and any contract is lying between the above discussed three categories.

5. Arguments of Ld. SG and Brief Facts of Case

The Ld. SG has taken a stand before the Hon’ble Apex Court that the provision of Section 21(4) of the CLA-1970 cannot be imported into the adjudication under the PGA, 1972 to make M/s ONGC, the principal employer, liable for gratuity. Basically, Section 21(4) holds the principal employer liable for payment of wages where the contractor fails to make payment of wages. Ld. SG, in order to supplement his argument, puts reliance on clause (vi) of Section 2 of the Payment of Wages Act, 1936, that as per the exclusion of said clause, gratuity is not part of wages. Ld. SG puts reliance on a particular clause of the contract (Clause 12.4) to make his argument and contract was a job contract. Ld. SG has taken a stand that jurisdiction of Controlling Authority under PGA-1972 is limited only to calculate the gratuity but not to fasten any liability on the M/s ONGC. At last, Ld. SG has taken a stand that there is no employer-employee relationship between contractual workers and M/s ONGC.

It is recorded in the judgment of Hon’ble Bombay High Court (the order in WP No. 2443 of 2023 against which this special appeal was filed before Hon’ble Apex Court) in paragraph 3(a) that contractual workers claimed that they worked in the premises of M/s ONGC. They were engaged through various contractors and last one was M/s Nobel Enterprises (Which is one of the parties before Hon’ble Apex Court in SLP). That means work was in the premises of M/s ONGC and work and workers remain the same but contractors changed time to time. As discussed above, this happens mostly in Cat-I Contract. It is on record that contractual workers worked for years ranging between 15 to 25 years and it is irony of system that after such a long period of work with one employer we call them contractual and we are not even proving them gratuity but any regular government servant is eligible for pro-rata pension even on 10 years of service.

6. Nature of Work of Contract Workers

It is pertinent to highlight that they were released from employment on submission of undertaking under Goodwill Package Scheme by M/s ONGC not by contractors but M/s ONGC is denying even status as employer that is a separate legal issue whether such package include gratuity or not. Now, question arise if M/s ONGC was not the employer then how workers stayed so long in the premises of M/s ONGC despite change of contractors. If contractors were the employer, then workers must have changed with change in contractor. If contractors were the employer, then work of the workers must have changed with change in contractor but nothing such happened but still, we are saying that contractors are employer. For example, contract is given for construction of a building and contractor will bring his workers and complete the work thereafter workers will move on completion of work then we can say that contractor is employer.

Contractual workers are working for years together with the same principal employer, on the same work and most of the time in the premises of the principal employer, but not paid any gratuity on the logic that contractors are employer. The principal employer is the source of funds and direct beneficiary of the work and the role of the contractor is just that of a facilitator. In that case, contractual workers are performing the work of the principal employer and there is clear employer-employee relationship. This relationship is such an enduring nature that it is not even breaking with the change of contractor. In such a situation where there is no detachment of worker from the work even with the change in contractor then there is clear employer-employee relationship between principal employer and contractual workers even if contract is a job contract. (Emphasis Supplied)

7. First Argument of Ld. SG

Ld. SG has taken stand that provision of Section 21(4) of CLA-1970 cannot be imported in the adjudication under PGA-1972 and Ld. SG has put reliance on the clause (vi) of section 2 of Payment of Wages Act-1936 to buttress the argument that under the said clause Gratuity is not even included in the wages.

First, we need to understand that “wages” under clause (vi) of Section 2 of Payment of Wages Act, 1936 is not actually “wages” but it is “basic wages”, and similar definition is incorporated in Gratuity Act, 1972 and EPF & MP Act – 1952. That exclusion is not from the perspective of payment but from the perspective of “uniformity” to maintain uniform basic structure for workers among different establishment and industries as some are paid HRA whereas some are provided housing facilities. It is not appropriate to discuss that exclusion from basic wage and logic behind here in principle, but that is well discussed in famous “Bridge & Roof” (Supra) judgement of Hon’ble Apex Court. Second, Gratuity is the by-product of wages or driven from wages. Whereas, wages in Section 2(vi) of CLA – 1970 is discussed from perspective of “payment” that who is liable to make payment. Principal employer is the beneficiary of work and principal employer is to receive funds therefore principal employer held responsible for payment.

Second, there was no need to import the provision of CLA – 1970 in PGA – 1972. CLRA was passed in 1970 and PGA was passed in 1972, therefore, the provision of CLA-1970 were in the knowledge of legislature while framing PGA-1972, and legislature in its wisdom not borrowed the terminology and definitions of said Act into PGA-1972. We have to keep in mind that if legislature has not brought the concept of principal employer in PGA-1972 then legislature not intended to bring the concept of contractor also under PGA-1972 (emphasis supplied). The simple meaning is that for PGA-1972, we have to keep the concept of contractor and principal employer all together by the side and only need to decide that that establishment concerned is employer or not, for concerned employees, strictly as per the definition of “employee” and then, we have to identify the employer (as person) as per the definition of employer so that amount can be recovered from said person. Employee under Section 2(e) defined as under:

{“employee” means any person (other than an apprentice) who is employed for wages, whether the terms of such employment are express or implied, in any kind of work, manual or otherwise, in or in connection with the work of a factory, mine, oilfield, plantation, port, railway company, shop or other establishment to which this Act applies, but does not include any such person who holds a post under the Central Government or a State Government and is governed by any other Act or by any rules providing for payment of gratuity;]}

Above definition of Employee is broad in nature and only exclusion is “apprentice”, legislature not categorises employee in any sub-categories like contractual, casual, worker etc despite the fact that at that time CLA-1970 was in force. Other exclusion is the employees separately governed by any Act or rules, such as government employee or employees of statutory bodies. Therefore, while deciding any dispute related to gratuity, we only need to bother about whether concerned person is employee or not without divulging into the concept of principal employer or contractor.

Employee is defined as any person engaged for wages and naturally contractual worker in this case are engaged for wages that is not in dispute. Legislature clarified that terms of employment may be implied also and that is especially applicable in case of contractual employees. It is discussed above that in case of contract falling is category I, principal employer only deciding the terms of employment such as what time worker will come, when will go, how many hours will work, wages etc. Contractor is not the employer but he is only a commission agent or pay roll manager or facilitator. All terms of employment are decided by employer (so called principal employers through contract En masse for all workers). Legislature further defined this relationship with incorporation of wording “in any type of work.” So, there are two factors, first is the contract of employment, it may be express or implied. As in case of individual worker, this will be express whereas where workers are engaged En masse then it will be implied. Second factor is the work, for whose work workers are engaged. Whether work belonging to principal and contractor is just a medium or work is belonging to contractor and he is generating his independent profit. We have discussed above that in this case, work and workers were attached with employer (so called principal employers M/s ONGC) only. Contractors were changing or renewing every year, but worker used to do same work, same premises and same employer (ONGC). We cannot say that work was belonging to contractors if so in that case workers must have moved with contractors on the completion of work. Contractors should have the freedom to do work as their like manners and freedom to generate profit but that is not the case seems.

Legislature was aware that employer may move and assign work to any other place other than premises so legislature has not kept this definition limited only to the work being carried in the premises of the establishment. If work is connected with the establishment, then even if work is carried beyond the premises of the establishment, then also employer is liable but we are unable to extend benefits even for workers working in the premises of the establishment.

It is unfortunate that legislature has incorporated such a wide definition to extend the benefit of noble legislation but we are defeating that purpose by entangling this definition in the terminology of principal employer or contractor despite the fact that both terms are not even part of definitions under section- 2 of the PGA- 1972. Now a days, most of big corporate firms are preparing the contract very tactfully. They are preparing it in two parts, first is contract and second is Annexures. There are preparing main contract as it appears like principal-to-principal basis contract but when we are going through annexures then it appears like any ordinary employment/labour engagement contract. The sole purpose is to present that workers are belonging to contractor.

In this case, work was belonging to M/s ONGC and workers were working for M/s ONGC for 15 or more years. Contractors’ role was not just a facilitator. In my humble opinion, we have made this matter unnecessary complex by relying and importing the provision of CLRA-1970 otherwise provisions of PGA- 1972 are sufficient enough for adjudication in this matter.