Principal Employer Not Liable for Contract Workers’ Gratuity; Controlling Authority Cannot Adjudicate Payment Liability: SC

New Delhi, Sep 21 (KNN) The Supreme Court has held that a principal employer cannot be held liable to pay gratuity to workers engaged through a contractor where no employer-employee relationship exists between the principal employer and the contractual workers.

The Court set aside a Bombay High Court order holding Oil and Natural Gas Corporation Ltd. (ONGC) liable for gratuity payable to workers engaged through a contractor. It held that the Controlling Authority under the Payment of Gratuity Act cannot adjudicate liability for payment and is limited to computing the gratuity amount payable to an employee.

Controlling Authority’s Jurisdiction Limited

The dispute arose after the Controlling Authority held ONGC liable for gratuity despite its objection that the workers were employed by a contractor and that no employer-employee relationship existed between ONGC and the workers.

The Appellate Authority subsequently ruled in ONGC’s favour, but the Bombay High Court reversed that decision. ONGC then approached the Supreme Court.

Solicitor General Tushar Mehta, appearing for ONGC, argued that Section 4 of the Payment of Gratuity Act applies to an “employee” and that the workers were not employees of ONGC. He also submitted that Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970 limits the principal employer’s responsibility to payment of wages and does not extend to gratuity.

The Court also considered the contractual provision stating that the arrangement between ONGC and the contractor was a job contract and did not create an employer-employee relationship between ONGC and the contractor’s workers.

Supreme Court Sets Aside High Court Order

The Bench, comprising Justices Ahsanuddin Amanullah and Manmohan, agreed that the proceedings before the Controlling Authority were not maintainable. It held that adjudicating ONGC’s liability was beyond the Authority’s jurisdiction, as its statutory role was to compute the amount payable to the concerned employee.

Relying on the Court’s 2025 decision in Municipal Council, Nandyal Municipality, Kurnool District, AP v K Jayaram & Ors, the Bench also accepted the submission that a person engaged through a contractor cannot claim an employer-employee relationship with the principal employer merely because they worked at its establishment.

The Supreme Court restored the Appellate Authority’s order in favour of ONGC and held that the Bombay High Court was not justified in reversing it.

As ONGC had already paid the gratuity claimed by the workers, the Court directed that no recovery be made from them.

Impact on MSMEs 

For micro, small and medium enterprises (MSMEs) using contract labour, the ruling provides greater legal clarity and reduces the risk of being held liable for contractors’ gratuity obligations merely because workers operate on their premises. However, gratuity obligations remain, making clear contractor agreements, employment records and documentation of the contractual relationship important, along with ensuring contractors comply with labour laws.

(KNN Bureau)