Supreme Court Clarifies Gratuity Liability for Contract Workers: Implications for Principal Employers

Introduction

In M/s Oil and Natural Gas Corporation Ltd. v. Suryakant D. Lad and Others, 2026 INSC 1019, dated September 9, 2026, the Supreme Court of India considered whether the Controlling Authority under the Payment of Gratuity Act, 1972, could determine a disputed employer–employee relationship between a principal employer and workers engaged through an independent contractor and consequently impose gratuity liability on the principal employer. 

The Court held that the Controlling Authority could not adjudicate a disputed employer–employee relationship of this nature. It also examined the scope of the principal employer’s liability under Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970. 

The judgment is relevant to employers engaging contract labour and highlights the importance of distinguishing contractual arrangements from the actual nature of the employment relationship. 

Background of the Dispute

Oil and Natural Gas Corporation Limited (ONGC) had engaged independent contractors to execute specific job contracts during the period from 1988 to 1995. Workers engaged through these contractors subsequently applied to the jurisdictional Controlling Authority under the Payment of Gratuity Act, 1972, seeking gratuity from ONGC in its capacity as the principal employer. 

By an order dated July 17, 2017, the Controlling Authority directed ONGC to pay gratuity to the applicants. The Appellate Authority set aside the order, holding that the Controlling Authority had exceeded its jurisdiction by determining whether ONGC was the principal employer liable to pay gratuity. 

The Bombay High Court subsequently reversed the Appellate Authority’s decision on August 23, 2023. ONGC challenged the High Court’s decision before the Supreme Court. 

Supreme Court’s Findings on the Controlling Authority’s Jurisdiction

The Supreme Court held that the Controlling Authority’s jurisdiction under the Payment of Gratuity Act, 1972, did not extend to adjudicating a disputed employer–employee relationship between a principal employer and workers engaged through an independent contractor. 

The Court observed that the statutory framework governing gratuity contemplates payment to an eligible employee but does not confer jurisdiction on the Controlling Authority to establish an employment relationship with a principal employer where that relationship is disputed. 

In examining the contractual arrangement between ONGC and the independent contractors, including the relevant contractual provisions, the Court noted that the engagement was structured as an independent, arm’s-length job contract. The arrangement did not, by itself, establish an employer–employee relationship between ONGC and the contract workers. 

Scope of Principal Employer Liability Under the Former Contract Labour Framework

The Court also considered Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970. This provision required the principal employer to pay unpaid wages where the contractor defaulted in making such payment, with a corresponding right to recover the amount from the contractor. 

The Court held that this obligation was confined to wages within the meaning of the Payment of Wages Act, 1936. Section 2(vi) of that Act expressly excluded gratuity payable upon termination of employment from the definition of wages. 

On this basis, the Court concluded that gratuity did not fall within the principal employer’s payment obligation under Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970. 

The ruling must, however, be read in the context of the specific statutory provisions and facts considered by the Court. It does not establish a blanket exemption from gratuity liability for every principal employer engaging contract labour. 

Implications for Employer Gratuity and Contract Labour Compliance

The judgment highlights the importance of accurately documenting contractor arrangements and assessing the actual nature of employment relationships. 

Employers engaging contract workers should review their arrangements to ensure that contractual terms reflect the manner in which work is allocated, supervised and remunerated. They should also consider whether their agreements appropriately address responsibility for statutory employment benefits, including gratuity, and provide for relevant compliance-monitoring and record-maintenance mechanisms. 

Contractual provisions alone may not be conclusive where the actual working arrangement indicates a different employment relationship. Employers should therefore periodically review long-standing contract-labour arrangements rather than rely exclusively on the form of the contract. 

The Payment of Gratuity Act, 1972, and the Payment of Wages Act, 1936, have since been subsumed under the Code on Social Security, 2020, and the Code on Wages, 2019, respectively. Employers should assess the implications of the judgment alongside the applicable Labour Code provisions, commencement notifications and transitional arrangements. 

Conclusion

The Supreme Court’s decision clarifies the limits of the Controlling Authority’s jurisdiction in gratuity disputes involving a disputed employment relationship and examines the scope of principal employer liability under the former contract labour framework. 

Employers should review their contract-labour arrangements, statutory benefit allocation and compliance records in light of the judgment. The decision should be applied with reference to its specific statutory context and should not be treated as removing all potential gratuity liability from principal employers. 

Last Updated on 27 October, 2026