The Supreme Court has clarified that a principal employer cannot be made responsible for gratuity payable to workers engaged through an independent contractor when no employer-employee relationship exists between the workers and the principal employer.
The ruling came in a batch of appeals filed by Oil and Natural Gas Corporation Ltd. (ONGC) against an order of the Bombay High Court that had fastened gratuity liability on the public sector undertaking.
A bench comprising Justice Ahsanuddin Amanullah and Justice Manmohan held that the Controlling Authority under the Payment of Gratuity Act does not have the jurisdiction to determine the party legally responsible for payment of gratuity.
The Court consequently restored the decision of the Appellate Authority, which had earlier ruled in favour of ONGC.
Dispute over gratuity liability
The workers concerned had been engaged through a contractor at ONGC’s establishment. A dispute arose over payment of gratuity, with ONGC maintaining that the workers were not its employees and that any statutory liability could not automatically be transferred to it merely because the work had been performed at its establishment.
The Controlling Authority nevertheless directed ONGC to pay the gratuity.
The Appellate Authority subsequently overturned that decision. However, the Bombay High Court reversed the appellate ruling, prompting ONGC to approach the Supreme Court.
Before the Supreme Court, Solicitor General Tushar Mehta, appearing for ONGC, argued that Section 4 of the Payment of Gratuity Act contemplates payment to an employee and that the workers in question did not fall within that relationship vis-à-vis ONGC.
The contractual arrangement between ONGC and the contractor was also relied upon. A clause in the agreement expressly described the arrangement as a job contract and stated that it would not create an employer-employee relationship between ONGC and the contractor’s personnel.
The Solicitor General further argued that Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970 concerns the principal employer’s responsibility in relation to wages and does not make the principal employer liable for gratuity payable by the contractor.
Authority’s power confined to computation
A central issue before the Supreme Court was the extent of the Controlling Authority’s jurisdiction under the gratuity law.
The Court accepted ONGC’s contention that the Authority could calculate the amount of gratuity payable to an eligible employee, but could not undertake an adjudication to determine which party was legally responsible for paying it.
The bench observed that the proceedings before the Controlling Authority were therefore not maintainable to the extent they sought to establish ONGC’s liability.
“The adjudication by the Controlling Authority with regard to the liability was beyond its jurisdiction,” the Court held, noting that the statutory power was confined to computing the amount payable to the concerned employee.
The Court also found substance in ONGC’s submissions concerning the Payment of Wages Act and the Contract Labour (Regulation and Abolition) Act.
The bench referred to its earlier ruling in Municipal Council, Nandyal Municipality, Kurnool District, AP v. K Jayaram & Ors. (2025), which dealt with the absence of an employer-employee relationship between contract workers and a principal employer merely because the workers were deployed at the principal employer’s establishment.
The contractor, on the other hand, argued that the financial responsibility should ultimately fall on the principal employer.
The Court did not accept that contention as a basis for sustaining the Controlling Authority’s order.
No recovery from workers
The Supreme Court noted that ONGC had already paid the gratuity claimed by the workers during the course of the proceedings.
While setting aside the Bombay High Court’s order and restoring the Appellate Authority’s decision, the Court directed that no recovery should be made from the workers.
The judgment establishes an important distinction between the power to calculate gratuity and the separate question of determining legal liability for its payment—a question that, according to the Court, could not have been decided by the Controlling Authority in the proceedings before it.
