Introduction:

The Supreme Court has clarified the limits of the jurisdiction of the Controlling Authority under the Payment of Gratuity Act, 1972, holding that the authority cannot adjudicate and fasten liability for payment of gratuity on a principal employer where the workers concerned were engaged through a contractor and there was no established employer-employee relationship with the principal employer.

A Bench comprising Justice Ahsanuddin Amanullah and Justice Manmohan delivered the ruling while considering appeals filed by Oil and Natural Gas Corporation Ltd. (ONGC) in M/s Oil and Natural Gas Corporation Ltd. v. Suryakand D. Lad & Ors., along with connected appeals. The decision, reported as 2026 LiveLaw (SC) 961, arose from a dispute concerning gratuity claimed by workers who had been engaged through a contractor for work connected with ONGC.

The central issue before the Supreme Court was not merely the quantum of gratuity but whether the Controlling Authority appointed under the Payment of Gratuity Act had jurisdiction to determine who was legally liable to pay the gratuity in the first place. The Supreme Court answered this issue in favour of ONGC, holding that the statutory jurisdiction of the Controlling Authority extended to computation of the amount payable to an eligible employee, but did not empower it to adjudicate a disputed question of employer-employee relationship and consequently fasten liability on a principal employer.

The dispute had its origin in proceedings initiated by private respondents who claimed gratuity in respect of their service. The workers had been engaged through a contractor rather than directly appointed by ONGC. ONGC disputed its liability from the outset, specifically contending that the workers were not its employees and that no employer-employee relationship existed between them and the corporation.

Despite this objection, the Controlling Authority proceeded to hold ONGC liable for payment of gratuity. ONGC challenged that determination before the Appellate Authority. The Appellate Authority accepted ONGC’s case and interfered with the Controlling Authority’s order, thereby providing relief to the corporation.

The matter subsequently reached the Bombay High Court. The High Court reversed the Appellate Authority’s decision and restored liability against ONGC. Aggrieved by that order, ONGC approached the Supreme Court.

Before the Supreme Court, the controversy consequently narrowed down to a significant question of statutory jurisdiction. ONGC maintained that the Controlling Authority could calculate gratuity payable to an employee under the Gratuity Act, but could not decide a disputed question concerning the identity of the employer and impose liability on an entity which denied having employed the concerned workers.

The case also required consideration of the relationship between the Payment of Gratuity Act, 1972, the Contract Labour (Regulation and Abolition) Act, 1970, and the Payment of Wages Act, 1936. ONGC argued that the statutory scheme did not permit the principal employer to automatically become liable for gratuity merely because contractual workers performed services at its establishment.

The issue was particularly significant because contract labour arrangements involve three distinct parties: the principal employer, the contractor and the workers engaged by the contractor. The mere fact that workers perform duties at the premises of, or in connection with the business of, the principal employer does not by itself necessarily establish a direct employment relationship between the workers and the principal employer.

The Supreme Court’s decision therefore focused on the statutory limits of the Controlling Authority rather than undertaking a broad adjudication on every possible claim that a contract worker may have against an establishment. The Court ultimately restored the Appellate Authority’s order and held that the proceedings before the Controlling Authority, insofar as they sought to determine ONGC’s liability, were not maintainable.

At the same time, the Court took note of an important practical circumstance. ONGC had already paid the gratuity amount claimed by the workers. Therefore, although the Court ruled in ONGC’s favour on the question of liability and jurisdiction, it directed that no recovery should be made from the workers who had already received the amount.

Arguments of the Parties:

Appearing for ONGC, Solicitor General of India Tushar Mehta submitted that the entire claim against the corporation proceeded on an incorrect assumption that the workers were employees of ONGC. According to ONGC, the workers were engaged through a contractor and there was no direct employer-employee relationship between them and the corporation.

The principal submission was founded on Section 4 of the Payment of Gratuity Act, 1972. The Solicitor General contended that the statutory obligation to pay gratuity arises in respect of an employee covered by the Act. Since the respondents were not employees of ONGC, the corporation could not be treated as the employer responsible for their gratuity merely because they had rendered services through a contractual arrangement.

The argument was that the existence of an employment relationship was foundational to the gratuity claim against a particular employer. Before an authority could determine the amount of gratuity payable by an establishment, it necessarily had to identify the employer liable under the statute. Where that relationship itself was disputed, the Controlling Authority could not assume jurisdiction to decide the issue and then impose liability upon the principal employer.

The Solicitor General further relied upon the statutory framework governing contract labour. Reference was made to Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970. ONGC submitted that the statutory responsibility imposed upon a principal employer under that provision concerned payment of wages in the circumstances contemplated by the CLRA Act. According to the appellant, gratuity was a distinct statutory component and could not simply be treated as part of the principal employer’s responsibility for wages.

The distinction was also sought to be supported by reference to Section 2(vi) of the Payment of Wages Act, 1936. The submission was that gratuity had a distinct statutory character and that the obligations relating to payment of wages under the contract labour legislation could not automatically be expanded to impose liability for gratuity upon the principal employer.

ONGC also relied upon Clause 12.4.1 of its contract with the contractor. The clause expressly described the arrangement as a job contract and stated that it would not create an employer-employee relationship between ONGC and the employees of the contractor.

The Solicitor General described this arrangement as a contract at arm’s length. The submission was that ONGC had entered into a contractual arrangement with an independent contractor for performance of specified work and that the contractor’s workers remained employees of the contractor. Consequently, their statutory employment benefits could not automatically be shifted to ONGC in the absence of a legally established employer-employee relationship.

A further argument concerned the jurisdiction of the Controlling Authority under the Payment of Gratuity Act. ONGC submitted that the authority’s role was essentially to determine or compute the amount of gratuity payable to an employee once the statutory entitlement and liability were established. It was not empowered to decide a larger and disputed question of legal liability between competing entities.

According to ONGC, fastening liability upon the principal employer amounted to adjudicating a substantive dispute concerning the employer-employee relationship. Such an adjudication went beyond the limited statutory jurisdiction conferred upon the Controlling Authority.

The appellant also relied upon the Supreme Court’s decision in Municipal Council, Nandyal Municipality, Kurnool District, A.P. v. K. Jayaram & Ors., decided in 2025. Relying upon that ruling, the Solicitor General argued that a person who is sent to an establishment through a contractor cannot, merely because he works at that establishment, claim that the principal employer is his employer.

The submission was that the legal relationship must be determined from the nature of the engagement and the applicable contractual and statutory framework. Physical presence at the principal employer’s establishment or performance of work connected with its operations cannot, standing alone, establish a direct contract of employment.

The respondents took a contrary position. The contractor submitted that liability for payment of the gratuity could not ultimately be placed upon it and that whatever amount was legally payable would, in substance, have to come from the principal employer.

The respondent’s position therefore sought to maintain the ultimate liability against ONGC despite the contractual arrangement through which the workers had been engaged.

The private respondents who had claimed gratuity did not appear before the Supreme Court during the hearing. The Court nevertheless considered their counter affidavit. It noted that their response essentially emphasised the fact that they had worked for ONGC for a considerable period.

However, the Court found that this factual assertion did not adequately answer the jurisdictional objection raised by ONGC. The length of service or the fact that the workers had performed work connected with ONGC could not, by itself, resolve the legal question concerning the identity of their employer or enlarge the statutory jurisdiction of the Controlling Authority.

The Supreme Court consequently considered the Solicitor General’s submissions on the statutory scheme and the jurisdiction of the Controlling Authority to be unanswered by the respondents.

Court’s Judgment:

The Supreme Court allowed ONGC’s appeals and set aside the Bombay High Court’s order. It restored the order passed by the Appellate Authority, which had interfered with the Controlling Authority’s decision fastening gratuity liability upon ONGC.

The Court made it clear that it was deciding the matter on the specific jurisdictional issue placed before it. The Bench recorded that the appeals were being considered on the “short point of the Controlling Authority not being competent to go into the lis.”

The expression “lis” was important in the context of the dispute. ONGC had not merely disputed the calculation of gratuity. It disputed whether it was the employer responsible for paying gratuity at all. Thus, the dispute was fundamentally about liability and the existence or otherwise of the relevant employment relationship.

The Supreme Court held that the Controlling Authority had exceeded its statutory jurisdiction by adjudicating upon this question.

The Court observed that the only power conferred upon the Controlling Authority under the statute was to compute the amount which may be payable to the concerned “employee”. According to the Court, the authority could not assume jurisdiction to determine a disputed employer-employee relationship and then impose liability upon the principal employer.

This distinction between computation and adjudication of liability formed the core of the judgment.

The Payment of Gratuity Act establishes a statutory entitlement to gratuity for eligible employees who satisfy the conditions prescribed under the legislation. However, the existence of an entitlement under the Act does not necessarily answer the separate question of which entity is legally liable for the payment where the employment relationship itself is disputed.

In the present case, ONGC’s position was that the workers had not been employed by it. They had been engaged through a contractor under a job contract. Consequently, the question whether ONGC could be treated as their employer was a substantive issue rather than a mere mathematical dispute concerning the amount of gratuity.

The Court accepted this distinction.

The Bench also found substance in the Solicitor General’s submissions concerning the Payment of Wages Act and the CLRA Act. The statutory responsibility of a principal employer under the contract labour framework could not simply be extended to gratuity without examining the specific statutory provisions governing that benefit.

Section 21(4) of the CLRA Act was particularly relevant to ONGC’s argument. The provision deals with the responsibility of the principal employer in relation to wages in specified circumstances where the contractor fails to make payment. ONGC’s case was that this statutory mechanism could not be transformed into a general obligation upon the principal employer to discharge every statutory monetary liability owed to contract labour.

The Supreme Court found this submission sustainable.

The Court’s approach also reflects the distinction between an employee of the contractor and an employee directly engaged by the principal employer. Contract labour arrangements operate through a contractual relationship between the principal employer and contractor, while the contractor separately engages workers to perform the contracted work.

The existence of such an arrangement does not, without more, convert the workers into direct employees of the principal employer.

The Supreme Court’s reliance upon the 2025 decision in Municipal Council, Nandyal Municipality, Kurnool District, A.P. v. K. Jayaram & Ors. reinforced this principle. The appellant had relied on that decision to submit that a person sent to an establishment through a contractor cannot claim an employer-employee relationship with the principal employer merely on that basis.

The Court accepted the relevance of the submission in the context of the jurisdictional dispute before it.

Another significant feature was the contractual clause between ONGC and the contractor. Clause 12.4.1 expressly provided that the agreement was a job contract and did not create an employer-employee relationship between ONGC and the employees of the contractor.

Although contractual terms cannot invariably determine statutory rights in every situation, the clause was relevant to ONGC’s specific contention that the workers were not its employees. There was no finding before the Supreme Court establishing a direct employment relationship sufficient to justify the Controlling Authority’s assumption of jurisdiction against ONGC.

The Court therefore concluded that the Controlling Authority could not have proceeded to determine ONGC’s liability in the manner it did.

The Appellate Authority had correctly interfered with the Controlling Authority’s order. The Supreme Court held that the Bombay High Court was not justified in reversing that appellate decision.

The judgment consequently restores the position that existed after the Appellate Authority’s intervention and removes the finding that ONGC was liable for payment of gratuity to the workers in question.

Importantly, the Supreme Court did not direct the workers to return the gratuity amount. The Court took note of the fact that ONGC had already paid the gratuity claimed by the workers.

Having regard to this circumstance, the Bench expressly directed that there should be no recovery from the workers.

This part of the order gives the judgment a practical dimension. While the Court found that the authority had exceeded its jurisdiction and that ONGC could not be saddled with liability in those proceedings, it did not seek to unsettle the amount already received by the workers.

The judgment therefore distinguishes between determining the correct legal liability and recovering money from workers who had already received the amount. The Supreme Court resolved the former in favour of ONGC while protecting the latter from recovery.

The decision is significant because it clarifies the limits of proceedings before the Controlling Authority under the Payment of Gratuity Act. The authority is not a general forum for deciding every dispute concerning employment status and liability between a principal employer, contractor and workers.

Where the fundamental question is whether a particular entity is actually the employer responsible for gratuity, that issue cannot simply be assumed or decided as an incidental part of calculating the gratuity amount.

The judgment also reinforces the importance of identifying the precise statutory source of liability. A principal employer may have obligations under labour legislation, but those obligations cannot automatically be expanded from one statutory field into another. Responsibility concerning wages under the CLRA Act, for example, cannot by itself establish responsibility for gratuity where the statutory scheme governing gratuity requires the claimant to be an employee of the concerned employer.

At the same time, the judgment should not be understood as laying down that contract workers can never claim gratuity. The Supreme Court’s ruling turned on the absence of an established employer-employee relationship with ONGC and, more specifically, on the lack of jurisdiction of the Controlling Authority to adjudicate and fasten such liability upon the principal employer in the proceedings before it.

The judgment therefore operates within the statutory framework and factual setting of the case.

The distinction is particularly important in industrial and labour disputes because the mere existence of a contractor does not by itself answer every question concerning statutory benefits. The precise terms of engagement, the identity of the employer, the applicable legislation and the jurisdiction of the adjudicating authority can all become relevant.

In the present matter, however, the Controlling Authority had moved beyond computation and entered into the substantive question of liability. The Supreme Court found that this was impermissible.

The Court’s decision ultimately rests on a straightforward statutory principle: an authority can exercise only the jurisdiction granted to it by the legislation. The Controlling Authority under the Payment of Gratuity Act could compute the gratuity payable to an employee, but it could not use that jurisdiction to decide a disputed employer-employee relationship and impose liability upon a principal employer that denied being the employer.

The Supreme Court therefore allowed the connected appeals, set aside the Bombay High Court’s order and revived the Appellate Authority’s order in favour of ONGC. At the same time, since the gratuity had already been paid, the workers were protected from any recovery.

The ruling in M/s Oil and Natural Gas Corporation Ltd. v. Suryakand D. Lad & Ors. thus provides an important clarification on the jurisdiction of gratuity authorities and the legal distinction between a principal employer and a contractor’s employees. It emphasises that the liability to pay gratuity cannot be imposed merely because workers have performed services at or for the benefit of a principal employer. Where the employer-employee relationship itself is disputed, the Controlling Authority cannot assume jurisdiction to decide that substantive controversy under the limited power to compute gratuity.