Dear Sir,
An employee has joined my organization and has been working here for the past 10 years in a contractual role where the contract is renewed annually. Now, he wishes to resign from my organization. Do I need to pay him gratuity or not?
I believe I should not pay because he is a contract staff member, and his contract is renewed annually. Consequently, the date of joining will be renewed annually as well.
Please assist me in resolving this issue with your valuable suggestions. Should I pay gratuity or not? If yes/no, please explain the relevant acts involved in this query.
Thanks/Regards, ARP
From India, Chennai
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An employee has joined my organization and has been working here for the past 10 years in a contractual role where the contract is renewed annually. Now, he wishes to resign from my organization. Do I need to pay him gratuity or not?
I believe I should not pay because he is a contract staff member, and his contract is renewed annually. Consequently, the date of joining will be renewed annually as well.
Please assist me in resolving this issue with your valuable suggestions. Should I pay gratuity or not? If yes/no, please explain the relevant acts involved in this query.
Thanks/Regards, ARP
From India, Chennai
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Dear Prasanna,
I think by "contractual role" what you meant is that the employee was engaged as a fixed-term contract employee initially for a period of one year and the same contract was subsequently renewed year after year up to a span of ten years continuously. So, the contract never came to an end actually but got a new lease of life every year on its renewal. The post indicates the fact that it is the employee who is willing to end the contract by his resignation and not that you are intending to terminate the contract by not renewing it anymore. Therefore, it is only a pseudo contract of employment just facilitating its termination at the option of the parties to it after a predetermined term and not a contract for service. When the initial contract does not meet its automatic termination as agreed but gets renewed continuously until it is finally terminated, the date of joining or its commencement would be the initial date only and not an ever-changing one as you have argued.
In fact, there is not any problem in this issue other than your unwillingness based on your untenable and wrong assumption. The employee has so far served under you for more than 5 years of continuous service and therefore he is eligible to claim gratuity under the Payment of Gratuity Act, 1972 on his resignation any day beyond that period. Gratuity is a terminal benefit of employment based on blemishlessness and continuity of service under the same employer for a certain number of years. A progressive employer like you has to understand the spirit of the Law.
From India, Salem
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6108I think by "contractual role" what you meant is that the employee was engaged as a fixed-term contract employee initially for a period of one year and the same contract was subsequently renewed year after year up to a span of ten years continuously. So, the contract never came to an end actually but got a new lease of life every year on its renewal. The post indicates the fact that it is the employee who is willing to end the contract by his resignation and not that you are intending to terminate the contract by not renewing it anymore. Therefore, it is only a pseudo contract of employment just facilitating its termination at the option of the parties to it after a predetermined term and not a contract for service. When the initial contract does not meet its automatic termination as agreed but gets renewed continuously until it is finally terminated, the date of joining or its commencement would be the initial date only and not an ever-changing one as you have argued.
In fact, there is not any problem in this issue other than your unwillingness based on your untenable and wrong assumption. The employee has so far served under you for more than 5 years of continuous service and therefore he is eligible to claim gratuity under the Payment of Gratuity Act, 1972 on his resignation any day beyond that period. Gratuity is a terminal benefit of employment based on blemishlessness and continuity of service under the same employer for a certain number of years. A progressive employer like you has to understand the spirit of the Law.
From India, Salem
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Dear Prasanna,
It's called Gratuity, not Graduty. Please confirm.
Regarding your query, please note that the definition of an employee under Sec. 2 (e) of the Gratuity Act is not similar to the definition of an employee under the PF Act and ESI Act. The PF and ESI Acts impose the obligation on the Principal Employer to pay contributions for Contract workers. However, the Gratuity Act does not contain any provision imposing such an obligation on the principal employer in respect of contract workers. Therefore, Principal Employers are not liable to pay Gratuity.
Thanks,
Ubaid Raheman.
From India, Mumbai
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It's called Gratuity, not Graduty. Please confirm.
Regarding your query, please note that the definition of an employee under Sec. 2 (e) of the Gratuity Act is not similar to the definition of an employee under the PF Act and ESI Act. The PF and ESI Acts impose the obligation on the Principal Employer to pay contributions for Contract workers. However, the Gratuity Act does not contain any provision imposing such an obligation on the principal employer in respect of contract workers. Therefore, Principal Employers are not liable to pay Gratuity.
Thanks,
Ubaid Raheman.
From India, Mumbai
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Dear Prasanna,
[A employee joins in my organisation and worked in my organisation for the past 10 years in a contractual role where the contract is renewed annually. Now he wishes to resign from my organisation. Do I need to pay him gratuity or not?]
As per advice from Mr. Umakanthan & Other colleagues, I would like to add something regarding the second last line of Mr. Umakanthan's advice.
Your organization; the employer has engaged this person under a renewed contract for the last 10 years. This implies that you only engaged this person to avoid paying gratuity and other terminal benefits, using the pretext of a contractual role (i.e., a sham contract). You cannot avoid paying gratuity if a dispute is raised before labor officials/court.
Certainly, at first glance, you are responsible for paying his gratuity.
You may choose to pay it from your contractor's account.
Awaiting suggestions/comments from respected members.
From India
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[A employee joins in my organisation and worked in my organisation for the past 10 years in a contractual role where the contract is renewed annually. Now he wishes to resign from my organisation. Do I need to pay him gratuity or not?]
As per advice from Mr. Umakanthan & Other colleagues, I would like to add something regarding the second last line of Mr. Umakanthan's advice.
Your organization; the employer has engaged this person under a renewed contract for the last 10 years. This implies that you only engaged this person to avoid paying gratuity and other terminal benefits, using the pretext of a contractual role (i.e., a sham contract). You cannot avoid paying gratuity if a dispute is raised before labor officials/court.
Certainly, at first glance, you are responsible for paying his gratuity.
You may choose to pay it from your contractor's account.
Awaiting suggestions/comments from respected members.
From India
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The Payment of Gratuity Act 1972 defines an ‘employee’ in clause (e) of section 2 as a person other than an apprentice who is employed for wages ………………………… in any kind of work, manual or otherwise, in or in connection with the work of a factory ……………….. to which this Act applies. The term ‘employer’ is defined in clause (f) of section 2. It also nowhere indicates that the principal employer shall be the employer in respect of the workers engaged by the contractors engaged by them. Section 4 provides that an employee shall be paid gratuity on termination of his employment. It also does not refer to the employees of the contractors.
In the aforesaid judgment of Karnataka High Court reported in 1989 (58) FLR Page 528, It was held that the gratuity will not be payable by the principal employer to the workers of the contractors. The Calcutta High Court in a case reported in 2010 Labour Law Reporter 1970 has held that the contractor is the person who is liable for payment of gratuity to the employees, since he has also undertaken in the contract to meet statutory liabilities. The Calcutta High Court has held in para 16 that the contractor was employing more than 10 persons and he was carrying on business as a sole proprietor, therefore, he fulfills all the pre-requisites for the applicability of the Payment of Gratuity Act u/s 1 of the Payment of Gratuity Act 1972. However, Madras High Court in a case reported in 2013 (136) FLR Page 50 held that if the contractor, who employs the workers, does not pay gratuity to them, then the principal employer shall be liable to pay the gratuity by virtue of section 21 (4) of the Contract Labour (Regulation & Abolition) Act 1970. However, I most respectfully do not agree with this view of the Hon’ble Madras High Court. Section 21 (4) of the Contract Labour (Regulation & Abolition) Act 1970 talks of payment of wages by the principal employer in case the same are not paid by the contractor.
The term ‘wage’ has been defined in clause (h) of section 2 of the Contract Labour (Regulation & Abolition) Act 1970 as the same as defined in clause (vi) of section 2 of the Payment of Wages Act 1936. The definition of wage in the Payment of Wages Act 1936 clearly excludes in sub-section (6) of section 2, any gratuity payable on the termination of the employment in cases other than those specified in sub-clause (d). Sub-clause (d) of clause (vi) of section 2 Payment of Wages Act states that 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 of such sum, whether with or without deductions, but does not provide for the time within which the payment is to be made. Sub-section (3) of section 7 of the Payment of Gratuity Act 1972 provides that the employer shall arrange to pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable.
Gratuity becomes payable to an employee in accordance with section 4 on the termination of his employment if he has rendered continuous service for not less than 5 years, on his superannuation or retirement or resignation or his death or disablement due to accident or disease. Therefore, since a time limit has been provided in law for payment of gratuity, it will not be covered under sub-clause (d) of clause (6) of section 2 of the Payment of Wages Act 1936 and the exclusion in sub-clause (vi) would be applicable and the gratuity will not be treated as ‘wages’ under the Payment of Wages Act 1936 and under Payment of Gratuity Act 1972 also.
Therefore, on the basis of the above analysis, it becomes clear that firstly, even under the Contract Labour (Regulation & Abolition) Act 1970 (section 21(4), the contractor is the person responsible for making the payment of gratuity. The principal employer becomes liable to pay only wages if the contractor does not pay. But, since gratuity is also not wages under the Contract Labour (Regulation & Abolition) Act 1970, the principal employer cannot be held liable for payment of gratuity even in case the contractor does not pay gratuity.
Thanks,
Ubaid Raheman.
From India, Mumbai
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In the aforesaid judgment of Karnataka High Court reported in 1989 (58) FLR Page 528, It was held that the gratuity will not be payable by the principal employer to the workers of the contractors. The Calcutta High Court in a case reported in 2010 Labour Law Reporter 1970 has held that the contractor is the person who is liable for payment of gratuity to the employees, since he has also undertaken in the contract to meet statutory liabilities. The Calcutta High Court has held in para 16 that the contractor was employing more than 10 persons and he was carrying on business as a sole proprietor, therefore, he fulfills all the pre-requisites for the applicability of the Payment of Gratuity Act u/s 1 of the Payment of Gratuity Act 1972. However, Madras High Court in a case reported in 2013 (136) FLR Page 50 held that if the contractor, who employs the workers, does not pay gratuity to them, then the principal employer shall be liable to pay the gratuity by virtue of section 21 (4) of the Contract Labour (Regulation & Abolition) Act 1970. However, I most respectfully do not agree with this view of the Hon’ble Madras High Court. Section 21 (4) of the Contract Labour (Regulation & Abolition) Act 1970 talks of payment of wages by the principal employer in case the same are not paid by the contractor.
The term ‘wage’ has been defined in clause (h) of section 2 of the Contract Labour (Regulation & Abolition) Act 1970 as the same as defined in clause (vi) of section 2 of the Payment of Wages Act 1936. The definition of wage in the Payment of Wages Act 1936 clearly excludes in sub-section (6) of section 2, any gratuity payable on the termination of the employment in cases other than those specified in sub-clause (d). Sub-clause (d) of clause (vi) of section 2 Payment of Wages Act states that 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 of such sum, whether with or without deductions, but does not provide for the time within which the payment is to be made. Sub-section (3) of section 7 of the Payment of Gratuity Act 1972 provides that the employer shall arrange to pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable.
Gratuity becomes payable to an employee in accordance with section 4 on the termination of his employment if he has rendered continuous service for not less than 5 years, on his superannuation or retirement or resignation or his death or disablement due to accident or disease. Therefore, since a time limit has been provided in law for payment of gratuity, it will not be covered under sub-clause (d) of clause (6) of section 2 of the Payment of Wages Act 1936 and the exclusion in sub-clause (vi) would be applicable and the gratuity will not be treated as ‘wages’ under the Payment of Wages Act 1936 and under Payment of Gratuity Act 1972 also.
Therefore, on the basis of the above analysis, it becomes clear that firstly, even under the Contract Labour (Regulation & Abolition) Act 1970 (section 21(4), the contractor is the person responsible for making the payment of gratuity. The principal employer becomes liable to pay only wages if the contractor does not pay. But, since gratuity is also not wages under the Contract Labour (Regulation & Abolition) Act 1970, the principal employer cannot be held liable for payment of gratuity even in case the contractor does not pay gratuity.
Thanks,
Ubaid Raheman.
From India, Mumbai
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Dear All,
Thank you all for your valuable suggestions regarding this query related to Gratuity, which have been very helpful to me.
I believe I am the principal employer. Therefore, the contractor is liable to pay Gratuity for the employee. However, my main concern is that the contractor claims to renew the contract annually, resulting in the employee's Date of Joining being updated each year. This situation does not constitute continuous service for more than five years as the Date of Joining changes annually. In light of this, I question how the contractor can be held responsible for paying gratuity in this scenario.
Thanks/Regards,
Prasanna
9840882279
From India, Chennai
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Thank you all for your valuable suggestions regarding this query related to Gratuity, which have been very helpful to me.
I believe I am the principal employer. Therefore, the contractor is liable to pay Gratuity for the employee. However, my main concern is that the contractor claims to renew the contract annually, resulting in the employee's Date of Joining being updated each year. This situation does not constitute continuous service for more than five years as the Date of Joining changes annually. In light of this, I question how the contractor can be held responsible for paying gratuity in this scenario.
Thanks/Regards,
Prasanna
9840882279
From India, Chennai
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Contract employee & Principal employer 2017.pdf