Principal Employer Liable for Gratuity of Contract Workers, But Can Recover from Contractor: Calcutta High Court

Gratuity Is a Statutory Right—Workers Cannot Be Denied Payment Due to Contractor’s Changing Role - In a crucial judgment Calcutta High Court upheld the liability of Hindustan Petroleum Corporation Limited (HPCL) to pay gratuity to contract workers, clarifying that the principal employer remains responsible for gratuity payments under the Payment of Gratuity Act, 1972, even if the workers were engaged through contractors. The Court ruled that while HPCL must ensure gratuity payments when due, it retains the right to recover such amounts from the contractor.

Dismissing HPCL’s challenge to the Appellate Authority’s ruling, the Court held: "When a worker is continuously engaged with a principal employer, even through multiple contractors, the responsibility for gratuity payments cannot be evaded. The employer-employee relationship cannot be artificially severed through intermediary contracts."

"Contract Workers Remained Employed Under Changing Contractors—Who Bears the Liability for Gratuity?"
The case arose from a gratuity claim filed by 15 workers who were engaged in housekeeping services at HPCL’s Kolkata establishment. These workers were initially employed under M/s. NIS Management Limited through a contract dated February 7, 2019, which was valid until November 30, 2020.

After the contract expired, the workers continued their employment at the HPCL premises under different contractors, but their nature of work and place of employment remained unchanged. Upon seeking gratuity, they first approached their immediate employer, M/s. NIS Management Limited, which denied liability, stating that it was merely an intermediary service provider.

The workers then filed claims before the Controlling Authority under the Payment of Gratuity Act, 1972, which ruled on May 15, 2023, that HPCL was the actual employer for gratuity purposes. The Appellate Authority upheld this ruling on July 29, 2024, prompting HPCL to challenge the decision in the High Court.

"A Permanent Principal Employer Cannot Escape Liability Through Rotating Contractors"
HPCL’s primary argument was that it never directly employed the workers, and since they were formally engaged by the contractor, any liability for gratuity should fall on the contractor. HPCL contended that its contract with M/s. NIS Management Limited explicitly placed statutory responsibilities on the contractor, including compliance with the Payment of Gratuity Act, the Contract Labour (Regulation and Abolition) Act, and other labor laws.

Rejecting HPCL’s claim, the Court ruled: "The use of a contractor as an intermediary does not negate the fact that the workers provided continuous service to HPCL. The principal employer remained unchanged, and the law does not permit shifting statutory obligations onto temporary intermediaries."

Citing Hussainbhai, Calicut v. Alath Factory Thezhilali Union (1978) 4 SCC 257, the Court reiterated: "The true employer is the one who enjoys the benefit of the worker’s labor. If a worker remains engaged at the same establishment despite changes in the contractor, the liability for gratuity falls on the principal employer."

"Gratuity Is a Social Welfare Right—Not a Contractual Obligation That Can Be Avoided"
HPCL relied on Bharat Heavy Electricals Ltd. v. Mahendra Prasad Jakhmola (2019) 13 SCC 82, where the Supreme Court held that to determine an employer-employee relationship, courts must consider factors such as appointment authority, salary payment, dismissal rights, and supervisory control.

The High Court distinguished this case, ruling: "Unlike in Bharat Heavy Electricals Ltd., where the workers were engaged on separate projects, the present case involves workers who continuously served HPCL despite changes in contractual intermediaries. Their employer-employee relationship with HPCL remains intact for gratuity purposes."

The Court also referred to Indian Institute of Technology Bombay v. Tanaji Babaji Lad & Ors. (2024 LLR 400), where the Bombay High Court ruled: "When a principal employer remains constant while only contractors change, gratuity liability cannot be shifted. The long-term association of workers with the establishment is a key determining factor."

"Contractors May Change, but Workers’ Rights Do Not—Principal Employer Bears Ultimate Responsibility"
Emphasizing the protective intent of the Payment of Gratuity Act, 1972, the Court ruled: "Gratuity is not a contractual payment but a statutory obligation. An employer cannot avoid liability by frequently changing contractors while retaining the same workforce."

The Court cited Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970, which states: "If the contractor fails to pay wages, the principal employer is liable to make the payment and recover the amount from the contractor." Applying this to gratuity, the Court ruled: "If a contractor defaults on gratuity payments, the principal employer must pay first and recover later. The workers’ rights cannot be held hostage to commercial agreements between the employer and contractor."

"High Court Modifies Order to Allow Recovery From Contractor"
While affirming HPCL’s liability, the Court modified the Appellate Authority’s order to clarify that HPCL retains the right to recover gratuity payments from the contractor. The Court ruled: "As and when gratuity becomes payable upon cessation of employment, HPCL may recover the amount from M/s. NIS Management Limited or any subsequent contractor."

"Principal Employer Cannot Evade Gratuity Liability—Workers Must Be Paid First"
The High Court’s ruling establishes a clear precedent that contract workers engaged in continuous service under a principal employer cannot be denied gratuity on the pretext of changing contractors. The judgment emphasizes that:

•    Gratuity is a statutory right, and liability ultimately rests with the principal employer.
•    Contractors’ failure to pay does not absolve the principal employer of responsibility.
•    A principal employer may recover the amount from the contractor but cannot withhold gratuity from workers.
Dismissing HPCL’s writ petition, the Court directed it to comply with the gratuity payments when due, ensuring that workers’ rights under social welfare legislation are fully protected.

Date of Decision: 12 March 2025