Supreme Court Clarifies Gratuity Act: Controlling Authority Can Compute Gratuity, But Cannot Fasten Liability on Principal Employer
The Supreme Court has ruled that the Controlling Authority under the Payment of Gratuity Act, 1972 cannot adjudicate a disputed question of liability and direct a principal employer to pay gratuity to workers engaged through a contractor when no employer-employee relationship with the principal employer has been established. The judgment was delivered in appeals filed by Oil and Natural Gas Corporation Ltd. (ONGC).
A Bench comprising Justices Ahsanuddin Amanullah and Manmohan set aside a Bombay High Court order that had fastened gratuity liability on ONGC for workers who had been engaged through contractors. The Supreme Court restored the order of the Appellate Authority, which had earlier interfered with the Controlling Authority’s decision.
The dispute arose after workers engaged through contractors claimed gratuity in connection with their work at ONGC establishments. The Controlling Authority had proceeded against ONGC and treated the public sector corporation as liable for payment. ONGC challenged the determination, maintaining that the workers were employees of the contractor and not of ONGC.
The Supreme Court focused on the jurisdiction of the Controlling Authority rather than simply on the calculation of gratuity. It held that the authority’s statutory power was confined to computing the amount that may be payable to an eligible “employee”. It could not enter into a larger disputed question concerning who was legally liable to make the payment.
“The adjudication by the Controlling Authority with regard to the liability was beyond its jurisdiction,” the Court held, explaining that the authority’s statutory power was to compute the amount payable to the concerned employee.
The Court consequently held that proceedings before the Controlling Authority, insofar as they sought to determine and fasten gratuity liability on ONGC, were not maintainable. The Bombay High Court was therefore not justified in reversing the Appellate Authority’s order in favour of ONGC.
ONGC had argued that Section 4 of the Payment of Gratuity Act concerns gratuity payable to an “employee” and that the contractual workers involved in the case were not its employees. It also relied on the contractual arrangement with the contractor, which expressly stated that the contract did not create an employer-employee relationship between ONGC and the contractor’s employees.
Another important issue concerned Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970. The arguments before the Court distinguished obligations that may arise under the Contract Labour Act from liability under the Payment of Gratuity Act. The Supreme Court accepted ONGC’s submissions concerning the statutory framework and the limits of the Gratuity Authority’s jurisdiction.
The case also follows the Supreme Court’s earlier approach that a person sent to an establishment through a contractor does not, merely because of that arrangement, acquire an employer-employee relationship with the principal employer. The Court referred to its decision in Municipal Council, Nandyal Municipality v. K. Jayaram, decided in December 2025.
The Bombay High Court’s earlier 2023 judgment had itself examined the limits of the Controlling Authority and noted that determining liability under the Contract Labour Act could require inquiries outside the statutory jurisdiction conferred by the Payment of Gratuity Act.
The Supreme Court’s ruling therefore draws an important distinction between calculating an employee’s gratuity entitlement and adjudicating a separate dispute over which entity is legally responsible for paying it. The latter question cannot simply be decided by the Controlling Authority by treating a principal employer as the liable employer under the Gratuity Act.
The judgment does not mean that contractual workers are categorically excluded from gratuity benefits. Rather, the ruling concerns the jurisdiction of the Controlling Authority and the specific question of whether liability can be imposed on a principal employer where the workers were engaged through a contractor and an employer-employee relationship with the principal employer was not established.
An additional practical aspect of the judgment is that ONGC had already paid the gratuity claimed by the workers. Taking note of this, the Supreme Court directed that no recovery should be made from the workers.
The decision in M/s Oil and Natural Gas Corporation Ltd. v. Suryakand D. Lad & Ors., reported as 2026 INSC 1019, thus clarifies the statutory boundaries of the Controlling Authority under the Payment of Gratuity Act. Its central holding is that the authority may compute gratuity payable to an employee, but cannot use those proceedings to adjudicate a disputed liability and impose payment obligations on a principal employer outside the employer-employee relationship contemplated by the Act.
