Gratuity for a contractual employee


We have this question, for a contractual employee. Who is responsible to pay gratuity?

Please suggest.



Bonus & gratuity are not part of wages. Hence it is the liability of the contractor to pay the gratuity to the workers (Ref: Cominco Binani Zinc Ltd. vs Pappachan on 28 December, 1988)


Hi @MadhuPR

True agree with @Bharath.

A contractor is liable to enrol the employee into PF, ESI or any other social security.

The employer where actually contractor works - is liable to only ensure the contractor is doing all this, else it’s a violation of law.

So as a company I need to ensure the contractor does all this and as a contractor they are liable to make these payments and enrol employees.


I concur with the views of Bharath and Dinesh. However, since the practice of engaging contract labor is a system of indirect labor and the bills raised by a contractor in respect of his service through contract labor include all the moneys spent by him on such CL and his profits as well by way of reimbursement as agreed in the contract between the PE and himself, I feel a bit more elaboration in legal context is essential in this regard.

The presence of a contract for service between the PE and the contractor and the absence of contract of service between the PE and the CL engaged through the contractor always create confusion in fixing the responsibility for the payment of fringe benefits of such labor.

So far the liability of the payment of gratuity to CL has been certainly in twilight as there are divergent views among the High Courts themselves. For instance the decision of the Kerala High Court [ 1989 LLR 123 ] cited by Bharath whereas the High Court of Madras held in Madras Fertilizers Ltd., Vs the Controlling Authority under the PG Act,1972 [ 2003 LLR 244 ] that the PE can be directed to pay the gratuity to the CL subject to reimbursement by way of recovery from the contractor based on its detailed interpretation of the definition of the term ‘wages’ u/s 2(vi) of the Payment of Wages Act,1936 which appears to be acceptable more in view of the vicarious liability cast upon the PE u/s 21(4) of the CLRA Act,1970.

As of now, it is pertinent to throw some light on this subject-matter as follows in the wake of codification of 44 central labor laws into four Labor Codes whose enforcement is slated to be effective from April, 2021.
The definition of the term ‘wages’ u/s 2(y) of the Code On Wages,2019 excludes gratuity under sub-clause (j) and more particularly excludes its inclusion even in the event of the disparity of the ratio of 50:50 between the components comprising of wages and those of allowances.
The definitions of the term ’ employer’ u/s 2(27) of the Code on Social Security,2020 which subsumes the PG Act,1972 and u/s 2(u) of the Occupational Safety, Health and Working Conditions Code,2020 which subsumes the CLRA Act,1970 include a contractor also in its fold.

Thus, it can be safely concluded that up on the enforcement of new Labor Codes, the liability to pay gratuity to the contract Labor would lie on their contractor only.


@Umakanthan Thanks for expressing such a complicated legal subject matter in a simple manner for the awareness of rest of all. Sir, one more doubt in the context of new labour code - can we expect new ways of registers and return filing, more digital formats?


Hi, Sree,
I am not sure about more digitalisation. But certainly there would be simplification in the forms and their numbers. Let’s await the notification of the final Rules under each Code.


Shram Suvidha Portal allows you to maintain Employee Register ( Annexure -C), Wage register (Anneure -D) and Attendance register(Annexure - D) Annexure -A List of labour laws (43) Annexure - B List of 80 registers/records which are to be maintained under various acts


Hi @MadhuPR

I hope you have an detailed agreement with Contractor.

The agreement should have the Salary Breakup and other benefits and if you can prove in court of Law that as per the Agreement Terms - You have paid the complete cost to Contractor including Statutory liabilities like PF, Leave encashment, Bonus, Gratuity, etc. then it is not the responsibility of Principal Employer.