The Supreme Court has held that a principal employer cannot be made liable to pay gratuity to workers engaged through a contractor when there is no employer-employee relationship between the principal employer and the contractual workers.
The Court also clarified that the Controlling Authority under the Payment of Gratuity Act, 1972 cannot determine the underlying liability of a principal employer or contractor to pay gratuity. Its statutory role is limited to determining the amount of gratuity payable to an eligible employee.
Background Of The Case
The dispute arose from gratuity claims made by workers engaged through a contractor at Oil and Natural Gas Corporation Ltd. (ONGC).
The Controlling Authority under the Payment of Gratuity Act had held ONGC liable to pay gratuity to the contractual workers. ONGC challenged the decision, arguing that the workers were employees of the contractor and not of ONGC.
The Appellate Authority accepted ONGC’s position. However, the Bombay High Court subsequently reversed that decision and restored the liability against ONGC, leading the corporation to approach the Supreme Court.
Supreme Court Examines Employer-Employee Relationship
A Bench comprising Justice Ahsanuddin Amanullah and Justice Manmohan examined whether the Controlling Authority could fasten gratuity liability upon ONGC.
The Court noted that under Section 4 of the Payment of Gratuity Act, gratuity is payable to an employee in accordance with the statutory requirements. In the present case, the contractual workers were not employees of ONGC.
The Court also considered the contractual arrangement between ONGC and the contractor, which expressly stated that the contract did not create an employer-employee relationship between ONGC and the contractor’s workers.
Controlling Authority Cannot Decide Who Is Liable
The Supreme Court made an important distinction between calculating gratuity and determining who is legally responsible for paying it.
The Court held that the Controlling Authority’s jurisdiction under the Payment of Gratuity Act is confined to computing the amount of gratuity payable to the concerned employee. It cannot adjudicate a separate dispute concerning whether the liability falls upon the contractor or the principal employer.
Accordingly, the Court found that the Controlling Authority had exceeded its jurisdiction by deciding that ONGC was responsible for payment.
Section 21(4) Of Contract Labour Act Considered
ONGC also relied upon Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970, submitting that the statutory responsibility of the principal employer in that provision concerns payment of wages to contract labour where the contractor defaults.
The Supreme Court accepted the submissions advanced on behalf of ONGC concerning the distinction between wages and gratuity under the relevant statutory provisions.
The Court also referred to its earlier decision in Municipal Council, Nandyal Municipality, Kurnool District, AP v. K. Jayaram & Ors. (2025) concerning the absence of an employer-employee relationship between contract workers and the principal employer merely because they worked at the principal employer’s establishment.
Bombay High Court Order Set Aside
The Supreme Court concluded that the Appellate Authority had correctly interfered with the Controlling Authority’s order and that the Bombay High Court was not justified in reversing that decision.
The Court therefore set aside the Bombay High Court’s order and restored the order of the Appellate Authority in favour of ONGC.
Since ONGC had already paid the gratuity amount to the workers, the Supreme Court specifically directed that no recovery should be made from the workers.
Significance Of The Judgment
The judgment clarifies the following important principles:
- A principal employer is not automatically the employer of workers engaged through a contractor.
- Absence of an employer-employee relationship is relevant when determining liability under the Payment of Gratuity Act.
- The Controlling Authority can determine the amount of gratuity payable, but cannot decide a separate dispute regarding which entity is liable to make the payment.
- Liability arising under other labour legislation must be determined before the appropriate forum and cannot simply be imposed by the Controlling Authority under the Gratuity Act.
- Contractual arrangements between the principal employer and contractor may also be relevant in determining the nature of their relationship.
Conclusion
The Supreme Court’s ruling draws a clear jurisdictional distinction between determining the quantum of gratuity and adjudicating the liability to pay gratuity.
Where workers are engaged through a contractor and there is no employer-employee relationship with the principal employer, the Controlling Authority under the Payment of Gratuity Act cannot, in proceedings under that Act, simply fasten gratuity liability upon the principal employer.
The judgment also makes clear that questions concerning liability under other labour statutes must be addressed within the appropriate statutory framework.
