SC Rules Principal Employers Not Liable For Gratuity Of Contract Workers Without Employment Link

The Supreme Court has ruled that a principal employer cannot be held liable for gratuity payments owed to workers hired through a contractor if there is no direct employer-employee relationship between the two parties.

A bench of Justices Ahsanuddin Amanullah and Manmohan overturned a Bombay High Court order that had made Oil and Natural Gas Corporation (ONGC) responsible for gratuity payments to contract workers.

The apex court restored the decision of the Appellate Authority, which had earlier ruled in favour of ONGC.

Court limits authority under Gratuity Act

The dispute arose after the Controlling Authority under the Payment of Gratuity Act initially held ONGC liable for gratuity payments. The Appellate Authority reversed the decision, but the Bombay High Court later restored the original order, following which ONGC approached the Supreme Court.

The Supreme Court observed that the Controlling Authority had exceeded its powers by deciding liability rather than merely calculating the gratuity amount payable to an employee.

"The adjudication by the Controlling Authority with regard to the liability was beyond its jurisdiction," the court said, according to LiveLaw.

The court held that proceedings seeking to establish ONGC’s liability were not maintainable, as the authority’s role under the law was limited to computation of gratuity.

No direct employment relationship with ONGC

Solicitor General Tushar Mehta, representing ONGC, argued that gratuity under the Payment of Gratuity Act applies only to employees and the workers engaged through contractors were not employees of the company.

ONGC also cited provisions of the Contract Labour (Regulation and Abolition) Act, 1970, stating that the principal employer’s obligations towards contract labour do not extend to gratuity payments.

The Supreme Court accepted these arguments and relied on its earlier judgment in Municipal Council, Nandyal Municipality, Kurnool District, AP v K Jayaram & Ors (2025), which held that contractual workers cannot claim an employer-employee relationship with a principal employer.

The court ruled that the Appellate Authority had correctly overturned the Controlling Authority’s order and that the Bombay High Court had erred in restoring it.

The case was M/s Oil and Natural Gas Corporation Ltd v Suryakand D Lad & Ors. The court also noted that ONGC had already paid the gratuity amount and directed that no recovery be made from the workers.