Labour Codes: Social Security Code: Gratuity for Contract/Fixed Term Workmen – Legal Perspective

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 Labour Codes: Social Security Code: Gratuity for Contract/Fixed Term Workmen – 

                                                            Legal Perspective  

 

Applicability of Gratuity Act & Eligibility

Payment of Gratuity Act:

 

·         The term “employee”  includes any person (other than an apprentice) employed for wages and include a person, inter alia,  employed in connection with the work of an establishment

·     Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service of not less than five years,- 

(a) on his superannuation, or    
(b) on his retirement or resignation, or 
(c) on his death or disablement due to accident or disease


Provided further, that the completion of continuous service of five years shall not be necessary in the event of death or disablement.

Applicability to Contract/Fixed Term Employee –

FTC Employee is also eligible for gratuity, provided the above conditions are fulfilled and their tenure satisfies the term Continuous Service as defined in the Act.  Hence, for the purpose of determination of the eligible criteria, the contract of appointment is the key factor. Wherever a person is engaged on fixed term for multiple periods, each fixed term contract is considered to be an independent contract, determining the terms of the conditions including payments as set out in the relevant fixed term contract.          Therefore, even in the instances where the FTC is employed by a contractor under separate fixed term contracts, the onus is on the employee to establish his continuous service. There has been judgements with conflicting views on this point, by various High Courts.           

               
Liability of Principal Employer

Even in the instances where the FTC employee is eligible for gratuity, the obligation of payment of gratuity is by the Contractor. While the Contract Labour Act, provides that in the event the Contractor fails to pay any wages to contract employees, the Principal Employer should pay such wages and may recovered the same from the Contractor.  As per clause 2, definitions of the CLRA, wages shall have the meaning assigned to it under the Payment of Wages Act. The definition of wages under the PW Act, specifically excludes gratuity from such liability, unless any law/contracts provides to the contrary.

Common practice /manpower agreement with staffing agencies

Generally the industry, including certain public sector enter into an agreement with the contractors basis are Cost+ model whereby the Principal Employer agree to pay/reimburse the contractor with due wages as per law.  Though the terms of the FTCs are one year or so, the practice is to renew or issue fresh contracts for longer period(s). Even in certain cases where the contractors are changed or manoeuvred, the contract workers are transitioned to the new contractor(s) and many of them remain to work for the benefit of the Principal Employer. Therefore, ultimate liability for the obligations under the Gratuity Act is fastened upon the PE.

 Impact of Labour Codes

The  Labour Codes, have included the fixed term employment as a part of the code(s) and inter alia, has provided under the Social Security Code, that the  Fixed Term Employees are eligible for pro rata gratuity, on termination of his contract period under the FTC, thereby obviating the hitherto criteria of continuous service of five years.

The Government has advised that the rules relating to the labour codes are finalised and as proposed the labour codes may be implemented by April 2021.


The impending Code mandates establishment of such fund/trust/insurance covering FTCs as well. The Code also revised the definitions of Principal Employer/Contractor and introduced a wide definition to redefine the contractor also as an Employer. Therefore, post implementation of the Code, the Contractor/3P Agencies have to comply with this requirement and confirm compliance thereof to the Principal Employer.

Advisory

·         In order to adapt the impending mandated gratuity process, it is advised that wherever the FTC workmen/associates have become eligible for gratuity as on date 31st March, 2021 (or prior period date of implementation of the Codes, by the Government), ensure discharge of this obligation by one time settlement.

·         On and from the effective date of implementation of the Codes, organize issue of a new FTC contract to those contract workmen/employees who have to continue in the system whereby the gratuity amount is also included as part of CTC and paid on closure/discontinuation of the contract, as the case may be.  As the Wage structure require overhaul restructure complying with the redefinition of “Wages” under the labour code, this will ensure minimal costs besides discharging the obligations and starting a clean slate for an effective and  robust compliance mechanism.

 

This is an abstract article for a detailed opinion basic specific pattern of agreement/arrangement, please write to viswanathanvasudevan159@gmail.com

 

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