Summary of this article
The Supreme Court rules principal employers are not liable for contractual labour gratuity.
Controlling Authorities lack the power to decide employment ties.
The Court set aside the Bombay High Court order but barred recovery of paid funds.
The Supreme Court has clarified in a recent ruling that principal employers cannot automatically be held liable for gratuity payment to contractual workers (those who are employed through third-party contractors). The two-judge Bench of Justice Ahsanuddin Amanullah and Justice Manmohan set aside a Bombay High Court judgment that had directed the appellant, Oil and Natural Gas Corporation (ONGC), to pay gratuities to the third-party contractual employees.
The Supreme Court clarified that controlling authorities lack the statutory jurisdiction for matters related to employer-employee relationship, or impose financial obligations on principal employers, under the Payment of Gratuity Act, 1972. It provided legal clarity over the employer-employee relationship by ruling that contractual labour arrangement does not mean direct employment.
The dispute started following the Bombay High Court’s judgment dated August 23, 2023. Under this, the high court had held ONGC liable to pay statutory gratuity to contractual workers, engaged in the company’s work but employed by independent contractors. Initially, the controlling authority under the Payment of Gratuity Act, 1972 also fastened the liability directly onto ONGC, instead of the independent contractors. However, the appellate authority overturned this ruling in favour of ONGC. Later, the high court reversed the appellate decision, following which ONGC approached the Supreme Court.
Arguments
Solicitor General Tushar Mehta, representing ONGC, argued that Section 4 of the Gratuity Act applies strictly to direct employees, whereas there was no employer-employee relationship between ONGC and the contractor’s personnel in this case. He contended that under Clause 12.4.1 of the agreement, the arrangement is defined as an arm’s-length job contract. He further highlighted that Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA Act) covers only wages, which explicitly excludes gratuity under the Payment of Wages Act, 1936.
On the other hand, the counsel for the respondents argued that the ultimate financial liability rested on ONGC. Meanwhile, the workers’ affidavits relied mainly on the long duration of service with ONGC.
Supreme Court’s Observation
The Supreme Court observed that the controlling authority has exceeded its statutory mandate as it passed judgment in an employer-employee dispute and assigned the payment liability.
The Bench observed, “The adjudication by the Controlling Authority with regard to the liability was beyond its jurisdiction, as the only power conferred on the Controlling Authority under the statute was to compute the amount which may be payable to the concerned “employee”. The Appellate Authority, before whom the appellant succeeded, had rightly interfered in the matters and we find that the reversal of the order of the Appellate Authority by the High Court vide the impugned order was not justified.”
The Supreme Court further found ONGC’s legal contentions under the Payment of Wages Act and CLRA Act sustainable, reinforcing that statutory gratuity remains legally distinct from standard wages.
Court’s Judgment
The Supreme Court allowed ONGC’s appeal and set aside the high court’s order and revived the appellate authority’s decision on the controlling authority’s jurisdictional incompetence. However, it directed no monetary recovery of the already paid gratuity from the workers in compliance with the order dated December 15, 2023.
