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In this edition of the JSA Employment Newsletter, we explore the legal position surrounding a principal employer’s liability towards gratuity for its contract labour, particularly in light of the recent decision by the Hon’ble Supreme Court of India (“Supreme Court”) pursuant to the Oil and Natural Gas Corporation Limited (“ONGC”)’s appeal on this issue and the operationalisation of the labour codes (“Labour Codes”). The newsletter also provides a brief roundup of some key regulatory and legislative developments in the Indian employment law regime for the month of September 2026 including the Labour Codes and discusses some recent judicial precedents across employment legislations.
Gratuity liability for contract labour: principal employer’s exposure under evolving laws
Whether a principal employer can be called upon to discharge a contractor’s gratuity liability towards its contract labour remains a contentious question, and courts have taken divergent views over the years. The Supreme Court has now returned to the issue in Oil and Natural Gas Corporation Limited vs. Suryakand D. Lad and Ors.[1] (“ONGC Case”), holding that a principal employer cannot bear gratuity liability towards contract labour where no employer-employee relationship exists.
The appeals in the ONGC Case arose from gratuity claims by workers engaged through contractors at ONGC’s premises, in which the Bombay High Court (“Bombay HC”) had fastened gratuity liability on ONGC. The Supreme Court allowed the appeals, holding that the Controlling Authority’s jurisdiction under the erstwhile Payment of Gratuity Act, 1972 (“Gratuity Act”) was limited to computing the amount payable to an employee and did not extend to adjudicating a principal employer’s liability where no employer-employee relationship existed (discussed further in the case law ratios below).
Viewed against the operationalisation of the Labour Codes since November 21, 2025, the decision provides a timely occasion to revisit the statutory framework, trace the judicial treatment of this issue, and assess its practical implications for principal employers.
Statutory framework: who is liable to pay gratuity?
Under the erstwhile Gratuity Act, an employer-employee relationship is sine qua non for claiming gratuity. Section 4(1) of Gratuity Act provided that gratuity is payable to an ‘employee’ on termination of employment after 5 (five) years of continuous service. Notably, the Gratuity Act did not define ‘contract labour’ or ‘principal employer’. It only defined ‘employee’ and ‘employer’.
Under Section 21 of the erstwhile Contract Labour (Regulation and Abolition) Act, 1970 (“CLRA Act”), a principal employer was liable to pay ‘wages’ to contract labour in cases where the contractor defaults, with a right to recover the same, either by way of deduction from amount payable to the concerned contractor or as a debt payable by the contractor. However, ‘wages’ under Section 2(h) of the CLRA Act adopted the definition of ‘wages’ under the erstwhile Payment of Wages Act, 1936 (“Wages Act”), which excluded “any gratuity payable on the termination of employment in cases other than those specified in sub-clause (d)”.
Judicial opinion on this exclusion diverged. The Kerala High Court in Cominco Binani Zinc Limited vs. Pappachan[2] held that a principal employer’s obligation under Section 21(4) of the CLRA Act did not extend to gratuity. Conversely, the Madras High Court (“Madras HC”) in Superintending Engineer, Mettur Thermal Power Station vs. Appellate Authority, Joint Commissioner of Labour[3] treated gratuity as falling within the definition of ‘wages’ under the Wages Act covering any sum payable on termination under any law. Accordingly, gratuity was not excluded from the definition, making the principal employer liable in case of a contractor default.
With the operationalisation of the Labour Codes effective November 21, 2025, the statutory landscape has shifted. The Gratuity Act has been subsumed under the Code on Social Security, 2020 (“Security Code”), and the CLRA Act under the Occupational Safety, Health and Working Conditions Code, 2020 (“OSH Code”).
Under Section 53 of the Security Code, the obligation to pay gratuity rests on the ‘employer’. Section 2(27) of the Security Code defines ‘employer’ to expressly include, inter alios, a ‘contractor’. The statutory scheme thus indicates that where a contract labour is employed by a contractor, the contractor bears primary liability for payment of gratuity.
Separately, under Section 55 of the OSH Code (successor to Section 21 of the CLRA Act), a principal employer’s liability towards contract labour arises only in respect of unpaid ‘wages’. Section 2(y) of the Code on Wages, 2019 (“Wage Code”) expressly excludes “…. (j) any gratuity payable on the termination of employment”, a flat exclusion with no analogous carve-out. Because ‘wages’ now expressly excludes gratuity, a plain reading suggests that a principal employer’s liability under Section 55(3) of the OSH Code does not extend to payment of gratuity for contract labour. The interpretive ambiguity on which decisions such as Mettur Thermal Power Station (supra) relied therefore no longer exists. The frequently asked questions (“FAQs”) that the Ministry of Labour and Employment (“Labour Ministry”) released on March 16, 2026 also support this argument and provides that the contractor must bear gratuity liability for contract labour.
Accordingly, the Labour Codes appear to bring statutory clarity to an issue that was previously mired in interpretive ambiguity. The question, however, is whether this clarity will prove dispositive in practice, given the welfare-oriented nature of such legislations, and the consistent judicial tendency to adopt purposive interpretations in favour of workers.
Judicial approach: circumstances where principal employers have been liable for payment of gratuity
While the statutory framework under the erstwhile law arguably placed the primary obligation to pay gratuity on the contractor, Indian courts have, in several instances, nevertheless attributed such liability to the principal employer. The case law indicates that courts look principally at the substance of the engagement and the underlying employment relationship, rather than at its contractual characterisation alone.
First, the courts have treated the extent of actual supervision and control exercised by the principal employer over the contractual workforce as a material consideration. In Indian Institute of Technology Bombay vs. Tanaji Babaji Lad[4], the Bombay HC held the principal employer liable to pay gratuity to contract labour who had rendered services for approximately 20 (twenty) to 39 (thirty-nine) years through successive contractors. In reaching its conclusion, the Court attached significance to the fact that officials of the establishment exercised supervision and control over the workers, the workers had remained deployed exclusively at the establishment’s premises, and the contractor’s role was largely confined to routing their salaries. The Bombay HC also considered it material that the relevant work order expressly dealt with employees’ provident fund and employees’ state insurance contributions but was silent on gratuity. Such omission weighed against the principal employer’s contention that gratuity was exclusively the contractor’s responsibility. Where the principal employer’s control has been sufficiently pervasive, including in matters relating to wages, attendance and disciplinary oversight, courts have, in some instances, looked beyond the ostensible contractual arrangement and regarded it as a façade, with the principal employer being treated as the de facto employer.
Second, prolonged continuity of the same workforce at the principal employer’s establishment, notwithstanding changes in contractors, is another significant consideration. In IIT Bombay (supra), the court considered it relevant that the same workers had continued to render services at the establishment for several decades, despite being engaged through successive contractors. In such circumstances, courts been reluctant to impose upon the last contractor the entire gratuity liability attributable to a substantially longer period of continuous service. Separately, in cases involving a contractor’s failure to discharge its payment obligations, certain courts have required the principal employer to satisfy gratuity dues in the first instance, while preserving its right to recover the amount from the defaulting contractor, on the premise that statutory gratuity fell within the ambit of ‘wages’.
Practical considerations for principal employers
The Labour Codes appear to place the primary obligation to pay gratuity on the contractor (as the ‘employer’ under the Security Code) and to exclude gratuity from the principal employer’s residual wage-payment obligation under the OSH Code. The judicial approach discussed above, however, suggests that this statutory allocation of responsibility may not, by itself, provide an absolute shield against liability. Exposure may continue to arise where the facts point to substantial supervision and control by the principal employer, prolonged continuity of the same workforce, or an arrangement that lacks the attributes of a genuine and independent contractor relationship.
Principal employers should therefore continue to treat gratuity exposure in relation to contract labour as an area requiring careful contractual and operational oversight. Judicial scrutiny in this context has underscored the importance of, among other factors, the allocation of statutory liabilities under manpower service agreements; the nature and extent of supervision and control over contract labour; the continued deployment of the same personnel through successive contractors; and the robust mechanisms for monitoring contractors’ statutory compliance. These considerations, coupled with the changed contours of the definition of ‘wages’ under the Labour Codes, make it prudent for principal employers to reassess their existing contractual arrangements, allocation of liabilities and operational practices governing contract labour engagements.
Labour Codes updates
Union Territory of Ladakh notifies final rules under Occupational Safety, Health and Working Conditions Code, 2020
The Administration of the Union Territory of Ladakh has notified the Occupational Safety, Health and Working Conditions (Ladakh) Rules, 2026 (“Ladakh OSH Rules”), vide notification[5] dated July 30, 2026 (published in the Official Gazette on September 2, 2026), under the OSH Code.
The Ladakh OSH Rules provide the procedural and compliance framework for, inter alia, registration and licensing of establishments, occupational safety and health requirements, medical examinations, safety committees and safety officers, working hours and overtime, maintenance of registers and records, employment of women, contract labour and inter-State migrant workers, factories and hazardous processes, and sector-specific safety requirements. The rules also prescribe requirements relating to reporting of accidents, dangerous occurrences and occupational diseases, annual returns and other employer compliances, with an emphasis on electronic registration, licensing, filings and maintenance of records.
State of Bihar sets up the ‘worker re-skilling fund’
The Government of Bihar, vide notification[6] dated September 3, 2026 (“Bihar Notification”), has established a fund known as the ‘Worker Re-Skilling Fund’ (“Fund”) in exercise of its powers under Section 83(1) of the Industrial Relations Code, 2020 (“IR Code”). The Fund has been constituted for the purposes contemplated under the IR Code, which provisions for financial support towards re-skilling of retrenched workers to facilitate their re-employment. Section 83 of the IR Code empowers the appropriate Government to establish a ‘worker re-skilling fund’ and prescribe the framework for its operation. The Bihar Notification is an enabling measure that formally establishes the Fund in the State of Bihar.
The Bihar Notification, however, does not prescribe the manner of administration of the Fund, the contribution mechanism, eligibility conditions, disbursement process, or other operational aspects. Establishments in Bihar that are covered by the IR Code may need to monitor further notifications, rules or guidelines that may specify such employer-specific requirements and the operational framework for the Fund.
Enhancement in wage ceiling under the Employees Provident Fund regime: Impact on employers and employees
The Labour Ministry, vide a gazette notification dated September 17, 2026[7], has revised the wage ceiling for mandatory provident fund coverage from INR 15,000 (Indian Rupees fifteen thousand) to INR 25,000 (Indian Rupees twenty-five thousand) per month for the purposes of Chapter III of the Security Code. The revision consequently expands the scope of mandatory coverage under the Employees’ Provident Fund, Employees’ Pension and Employees’ Deposit Linked Insurance schemes.
Employees falling within the enhanced wage threshold may accordingly be brought within mandatory social security coverage, while the increased ceiling may also result in higher statutory contributions for certain existing members. In connection with the revision, the Employees’ Provident Fund Organisation (“EPFO”) has also issued FAQs providing operational guidance on its implementation, including the effective date and transitional compliance for September 2026, computation and remittance of contributions, Electronic Challan-cum-Return filing, enrolment and Employees’ Pension Scheme membership of affected employees, treatment of employees contributing on higher wages, and the implications of the revised ceiling for employers and employees.
For a detailed summary, please refer to JSA Prism of September 22, 2026.
Other regulatory and legislative updates
EPFO urges establishments to settle long-pending disputes under VISHWAS, 2026
The EPFO, through a press release dated September 3, 2026 (“Press Release”), has urged eligible establishments to avail the benefits of VISHWAS, 2026 (“VISHWAS Scheme”), which is a one-time dispute resolution scheme introduced to facilitate settlement of long-pending disputes relating to damages levied on delayed provident fund contributions. The VISHWAS Scheme will remain open until December 28, 2026, and eligible employers are encouraged to submit applications within the prescribed timeline.
The Press Release reiterates that the Vishwas Scheme is available in respect of defaults occurring prior to June 14, 2024 and covers cases where: (a) proceedings relating to penalties are pending before courts or tribunals, (b) damages orders have been passed by EPFO but recovery remains wholly or partly pending, (c) a show cause notice has been issued by EPFO but a final order is yet to be passed, and (d) delayed remittances are reflected in EPFO records but no penalty notice has yet been issued. Employers are required to first discharge outstanding interest liability payable on delayed contributions before seeking relief under the VISHWAS Scheme.
The Press Release further highlights that penalties under the VISHWAS Scheme are payable at substantially reduced rates of 0.25% per month (for delays up to 2 (two) months), 0.50% per month (for delays between 2 (two) and 4 (four) months), and 1% per month (for delays exceeding 4 (four) months), as compared to the penalties ordinarily leviable (up to 37%) for delayed provident fund remittances. The application process has been made digital through EPFO employer portal, and upon verification and payment of recalculated penalties (within 15 (fifteen) days or within 30 (thirty) days, as the case may be), EPFO will issue a digitally signed ‘Settlement Certificate’, following which relevant pending proceedings will stand concluded.
The Press Release also notes that various High Courts, including the Bombay HC, Madras HC and Kerala High Court, have encouraged eligible establishments to avail benefits of the Vishwas Scheme in pending litigations.
Karnataka introduces amendments to the shops and commercial establishments framework
The Government of Karnataka, vide notification[8] dated September 4, 2026, notified the Karnataka Shops and Commercial Establishments (Amendment) Act, 2026 (“Amendment Act”), introducing several amendments to the Karnataka Shops and Commercial Establishments Act, 1961 (“Parent Act”), with the objective of streamlining registration requirements, promoting digitization of compliance processes, and strengthening employee protections.
Prior to the Amendment Act, establishments employing 10 (ten) or more workers (i.e., non-managerial employees) were required to obtain registration and were governed by provisions under the Parent Act. Pursuant to the Amendment Act, establishments employing 10 (ten) or more workers that are already registered under the OSH Code are exempted from the applicability of the Parent Act. It appears that this exemption is expected to apply only to establishments obtaining fresh registration under the OSH Code. The Amendment also clarifies that no separate registration is required for godowns or storage facilities situated within 100 (one hundred) meters of the principal establishment.
The Amendment Act has streamlined compliance by digitising registration framework, reduced the time for issuance of registration certificates by concerned authority from 30 (thirty) days to 7 (seven) days, and removed the need for periodic renewals of registration by clarifying that registrations will remain valid until the establishment closes. The Amendment Act has also introduced employee-friendly measures by requiring employers to provide a service certificate within 7 (seven) days of an employee’s request and prohibiting employers from retaining employees’ original educational, experience or other personal documents. In addition, the Amendment Act has strengthened enforcement framework through enhanced penalties, compounding mechanism and appeal process for challenging compounding orders.
For a detailed summary, please refer to JSA Prism of September 15, 2026.
Case law ratios
Supreme Court reaffirms absence of employer-employee relationship between principal employer and contract labour
The Supreme Court, in Oil and Natural Gas Corporation Ltd. vs. Suryakand D. Lad and Ors.[9], considered whether gratuity payable to contract labour engaged through contractors could be recovered from the principal employer and whether the Controlling Authority under the Gratuity Act had jurisdiction to determine and fasten such liability on the principal employer.
The appeals arose from a common judgment of Bombay HC, which had held ONGC liable to pay gratuity to certain workers engaged through contractors. The workers had approached the Controlling Authority under the Gratuity Act contending that, having worked for ONGC for a considerable period, they were entitled to recover gratuity from ONGC as the principal employer. ONGC challenged these findings on the ground that the workers were employees of independent contractors and that no employer-employee relationship existed between ONGC and the concerned workers. ONGC further argued that the jurisdiction of the Controlling Authority was limited to determining the quantum of gratuity payable to an employee and did not extend to adjudicating disputes concerning liability between a principal employer and a contractor.
Before the Supreme Court, ONGC contended that the: (a) workers were employees of independent contractors engaged under arm’s-length job contracts that expressly did not create any employer-employee relationship; (b) jurisdiction of the Controlling Authority was limited to determining the quantum of gratuity payable to an employee; and (c) Section 21(4) of the CLRA Act pertains to payment of wages and does not impose gratuity liability on a principal employer.
The Supreme Court accepted ONGC’s submissions and held that the Controlling Authority had exceeded its statutory jurisdiction. The Supreme Court observed that the powers conferred on the Controlling Authority under the Gratuity Act are limited to determining and computing gratuity payable to an ‘employee’. The authority is not empowered to adjudicate disputes concerning whether liability rests upon a principal employer or a contractor, particularly where the existence of an employer-employee relationship itself is disputed. Accordingly, the Supreme Court held that the Controlling Authority could not have determined and fastened gratuity liability on ONGC.
The Supreme Court further noted that the contractual arrangements expressly excluded any employer-employee relationship between the ONGC, and the workers engaged by the contractors. While referring to its earlier decision in Municipal Council, represented by its Commissioner, Nandyal Municipality, Kurnool District, A.P. v. K. Jayaram[10], the Supreme Court reiterated that individuals engaged through contractors cannot, merely on account of having worked at the establishment of a principal employer, claim an employer-employee relationship with such principal employer.
Accordingly, the Supreme Court set aside Bombay HC’s judgment and restored the order of the Appellate Authority, which had ruled in favour of ONGC. However, considering that the gratuity amounts had already been paid to the workers concerned pursuant to an interim order of the Supreme Court, it directed that no recovery should be made from them.
Madras HC establishes that knowledge is essential to establish suppression of criminal antecedents at the time of appointment
In The Member Secretary, Tamil Nadu Uniformed Services Recruitment Board vs. P. Manikandan[11], the Madras HC considered whether the candidature of a candidate for appointment as a Sub-Inspector of Police could be rejected on the ground of suppression of a criminal case when there was no evidence that the candidate was aware of the registration of such criminal case at the time of submitting his application.
The respondent had applied for recruitment to the post of Sub-Inspector of Police pursuant to a notification issued by the Tamil Nadu Uniformed Services Recruitment Board. He successfully cleared all the processes. However, his candidature was subsequently rejected on the ground that he had failed to disclose his involvement in a criminal case. The respondent challenged the rejection before a single judge of the Madras HC, who allowed the writ petition. The recruitment authorities appealed the decision.
Before the Division Bench, the authorities contended that recruitment to a uniformed service requires a high standard of integrity and that the respondent had suppressed a material fact, while the respondent submitted that he had no knowledge of the criminal case, which related primarily to a dispute involving his brother, and that the police had exonerated him and deleted his name from the accused list in the final report.
Madras HC reiterated that candidates seeking appointments in police and other uniformed services are expected to maintain high standards of honesty, integrity, and trustworthiness, but observed that the issue is not merely whether a criminal case existed, but whether there was a deliberate suppression or false disclosure by the candidate, which requires knowledge of the relevant fact to be attributable to the candidate. Madras HC noted that the recruitment authorities had rejected the candidature solely on the assumption that a criminal case was pending, without inquiring into whether he was aware of it or considering his subsequent exoneration, and had mechanically treated the existence of the First Information Report as sufficient proof of suppression, contrary to the principles laid down by the Supreme Court in Shatrughn Yadav vs. The Fertilizers and Chemicals Travancore Limited (F.A.C.T.) and Ors.[12] (for a detailed summary of this judgment, please refer to the JSA Prism dated September 30, 2026).
Finding no evidence that the respondent had knowingly suppressed any material fact and noting that the authorities had failed to conduct the requisite inquiry mandated by the Supreme Court, the Madras HC upheld the single judge decision and dismissed the appeal.
Karnataka High Court orders an interim stay on government circulars withholding payment of salaries basis the minimum wages notification of May 22, 2026
Continuing from the previous JSA Newsletter – July and August 2026 edition, which discussed the minimum wages notification dated May 22, 2026 (“May Notification”) released by the State Government of Karnataka, the Karnataka High Court (“Karnataka HC”) on September 19, 2026 granted an interim stay on the circular issued by the Karnataka State Audit and Accounts Department on July 29, 2026. The circular had directed various government departments to withhold payment of wages at the revised minimum wage rates prescribed under the May Notification. Pursuant to this circular, the Departments of Municipal Administration and Rural Development and Panchayat Raj had also issued separate directions to local bodies, instructing them to withhold payment of wages at the revised rates and instead continue paying wages at the pre-revision rates until further instructions were issued.
The petitioner unions contended that the impugned circular had been issued based on “oral instructions” from the Finance Department and was therefore legally unsustainable. They further argued that, prior to the issuance of the circulars, the concerned authorities had already disbursed wages to employees in accordance with the revised minimum wage rates. The petitioners also submitted that the May Notification had been validly issued by the State Government under Sections 5(1)(a) and 5(1)(b) of the Minimum Wages Act, 1948.
After considering the submissions made by the parties, the Karnataka HC stayed the operation of the impugned circulars until the next date of hearing and directed issuance of notice to the State Government and the concerned departments.
Rajasthan High Court restates the importance of application of mind by disciplinary authorities in internal inquiries
In Deepak Meena vs. The Chairman-cum-Managing Director, Jaipur Vidyut Vitran Nigam Limited and Ors.[13], the Rajasthan High Court (“Rajasthan HC”) considered whether a minor penalty imposed in disciplinary proceedings could be sustained where the disciplinary and appellate authorities merely stated that the employee’s reply had been ‘considered’ without providing any reasons demonstrating an application of mind.
The petitioner, a junior engineer employed with Jaipur Vidyut Vitran Nigam Limited was issued a charge-sheet alleging irregularities in relation to the failure of a power transformer, which purportedly resulted in potential financial loss to the corporation. The petitioner submitted a detailed response disputing the allegations and provided explanations and supporting material to demonstrate that the transformer failure could not be attributed to his conduct. Thereafter, the disciplinary authority imposed a minor penalty of withholding one annual grade increment without cumulative effect. The petitioner’s departmental appeal was subsequently rejected.
Before the Rajasthan HC, the petitioner contended that neither the disciplinary authority nor the appellate authority had objectively considered the explanations raised by him. Although both orders recorded that the reply and relevant documents had been ‘considered’, the orders did not analyse the petitioner’s submissions, discuss the evidence on record, or provide any reasons for rejecting his explanation and arriving at a finding of guilt.
The Rajasthan HC examined the scope of the disciplinary authority’s obligation in cases involving minor penalties, where a detailed departmental inquiry is often dispensed with and the employee’s written reply constitutes the primary defence. Relying on various Supreme Court decisions, the Rajasthan HC reiterated that the expression ‘consider’ requires active application of mind to all relevant material and cannot be reduced to a mere formality. It observed that the requirement to record reasons is an integral component of fairness, transparency, and natural justice.
The Rajasthan HC further held that a valid disciplinary order must reflect why the employee’s explanation was accepted or rejected and how the authority arrived at its conclusions, especially in summary proceedings for minor penalties, since the delinquent employee is generally afforded only a limited opportunity to defend himself.
Accordingly, Rajasthan HC held that both the disciplinary order and the appellate order were vitiated by non-application of mind and the absence of reasoned findings. Therefore, the orders were quashed and consequential benefits to the petitioner were directed.
This Newsletter is prepared by:
|
Gerald Manoharan |
Sonakshi Das |
Lijin Varughese |
Devika Sreekumar |
Mayank Jain |
Shreeya Sucharita |
For more details, please contact km@jsalaw.com.
[1] 2026 SCC OnLine SC 1976 (September 9, 2026)
[2] (1989) ILLJ 452 Ker (December 28, 1988)
[3] 2012 SCC OnLine Mad 5357 (July 18, 2012)
[4] 2024 SCC OnLine Bom 3183 (October 4, 2024)
[5] Notification no. S.O. 238
[6] Notification no. S.O. 210
[7] Notification no. S.O. 5109(E)
[8] Notification no. DPAL 32 SHASANA 2026
[9] Civil Appeal arising out of Special Leave Petition (C) No. 498/2024 (September 9, 2026)
[10] Special Leave Petition (Civil) Nos. 17711-17713 of 2019
[11] W.A(MD)No.2011 of 2023 and CMP (MD) Nos.12317 of 2026, 15781 of 2023 and 11351 of 2024 (September 3, 2026)
[12] (2026) INSC 829, (August 11, 2026)
[13] S.B. Civil Writ Petition No. 6305/2026 (September 23, 2026)
