Background

Gratuity, payable under the Payment of Gratuity Act, 1972, is a gratuitous payment required to be made by an employer to his employee at the time of termination of services of the employee or upon such employee’s death.

Section 21 (4) of the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA), mandates that a principal employer is responsible for the payment of ‘wages’ to a contract employee in the event of a contractor’s failure to pay within the stipulated timelines or in the event of a contractor making a short payment. The principal employer then has the ability to recover the amount paid as 'wages', from the contractor. Section 2(h) of the CLRA defines the term 'wages' as all remuneration (whether by salary, allowances or otherwise) expressed in terms of money or capable of being so expressed, which would if the terms of employment, expressed or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment and includes, among others, "(d) any sum which by reason of the termination of employment of the person employed is payable under any law, contract or instrument which provides for the payment...". However, it excludes "(6) any gratuity payable on the termination of employees in cases other than those specified in (d)." The judgment below has now held that gratuity payable under the Payment of Gratuity Act, 1972 falls within this definition of 'wages'.

Superintending Engineer, Mettur Thermal Power Station, Mettur vs. Appellate Authority, Joint Commissioner of Labour, Coimbatore & Anr, 2012 LLR 1160

The Madras High Court, in its recent judgment in the case of Superintending Engineer, Mettur Thermal Power Station, Mettur vs. Appellate Authority, Joint Commissioner of Labour, Comimbator & Anr, was called upon to decide on an issue dealing with the payment of gratuity to an employee of the Mettur Thermal Power Station, Mettur, (Power Station) whose services were terminated in 2003. The employee concerned worked at the Power Station between 1988 and 1999, as a contract employee. In 1999, the employee was directly hired by the Power Station and he continued to be so employed till 2003. Upon termination of his services, the employee claimed gratuity payments for a period of sixteen years, between 1988 and 2003. The Power Station claimed that its responsibility to pay gratuity would lie only in respect of the period during which the employee was employed directly by the Power Station (i.e., 1999 – 2003) and not for the period when he was a contract employee. The Madras High Court held that gratuity, being a termination payment required to be paid under a law, would constitute ‘wages’ under the CLRA and in accordance with section 21(4) of the CLRA, the Power Station (being the principal employer for the period between 1988 and 1999) would be responsible for the payment of gratuity to the contract employee.

Analysis

The Madras High Court relied on a decision rendered by it earlier in the case of Madras Fertilizers Limited vs. Controlling Authority under Payment of Gratuity Act and Others1 and held that 'gratuity' payable under the Payment of Gratuity Act, 1972, were wages for the purposes of the CLRA. Consequently, by virtue of section 21 (4) of the CLRA, the onus of payment of gratuity would lie on the principal employer in the event of a contractor’s failure to pay.

While interpreting the definition of wages, the court held that, "the very language of Sub-clause (6) suggests that any gratuity which is not covered by Clause (d) is excluded from the term 'wages'. This would presuppose that Clause (d) covers some gratuity. Which that gratuity would be is the moot question to be answered. The answer is to be found in the plain language of Clause (d) which opens with the words 'any sum which by reason of the termination of employment of the person employed is payable under any law'". The Court held that 'gratuity' payable under the Payment of Gratuity Act, 1972 is a sum which by reason of the termination of employment of the person employed is payable under a law and accordingly would fall within clause (d) of the definition of ‘wages’ (quoted above).

Conclusion

This decision reiterates that a contract employee, working for a principal employer at the time of termination of his services by a contractor, may have a strong claim for the payment of gratuity directly from the principal employer in the event of a contractor’s failure. Therefore, it is advisable for all principal employers engaging contract labour through man power agencies and other contractors, to not only focus on ensuring contractor compliance towards routine payment of wages and benefits, but also towards terminal payments (such as gratuity) when a contract employee is exited during the period of his or her engagement.