The Supreme Court has held that a principal employer cannot be made liable to pay gratuity to workers engaged through a contractor unless an employer-employee relationship is shown to exist between them, setting aside a Bombay High Court ruling that had gone the other way.
The dispute arose when workers supplied to Oil and Natural Gas Corporation Ltd. (ONGC) through a contractor sought gratuity directly from ONGC. A Controlling Authority under the Payment of Gratuity Act initially ruled against ONGC, an Appellate Authority reversed that finding, and the Bombay High Court then reversed the Appellate Authority — prompting ONGC's appeal to the Supreme Court.
A bench of Justice Ahsanuddin Amanullah and Justice Manmohan, in its order dated September 20 (2026 LiveLaw (SC) 961), sided with ONGC. The Court reasoned that gratuity under Section 4 of the Payment of Gratuity Act applies only where an employer-employee relationship exists, and that Section 21(4) of the Contract Labour (Regulation and Abolition) Act limits a principal employer's liability for a contractor's default to payment of wages — not gratuity.
"The adjudication by the Controlling Authority with regard to the liability was beyond its jurisdiction."
The bench held that contractual workers "cannot claim an employer-employee relationship with the principal employer" merely by performing work at the principal's premises under an arm's-length contractor agreement. The ruling gives companies that engage contract labour — a common arrangement across India's public sector undertakings and large private employers — clearer ground to resist direct gratuity claims, while leaving workers to pursue their actual contractor-employer for such dues.