On September 9, 2026, a Supreme Court Bench of Justice Ahsanuddin Amanullah and Justice Manmohan allowed a batch of appeals by Oil and Natural Gas Corporation Limited (“ONGC”) and set aside a Bombay High Court judgment that had fastened liability for gratuity on ONGC in respect of workers engaged through contractors in M/s Oil and Natural Gas Corporation Ltd v. Suryakand D. Lad.

According to Section 4(1) of the Payment of Gratuity Act, 1972, an employee is entitled to a gratuity upon termination of employment following at least five years of continuous service. Section 4(2) establishes the rate at fifteen days' wages for each completed year of service, or portion thereof exceeding six months, which must be paid by the employer. Thus, the question is decided by two definitions. According to Section 2(e), an employee is any person other than apprentices who is paid to perform any type of work in or related to an establishment covered by the Act for establishments owned or controlled by the Central or State Government, the person or authority designated for employee supervision and control (or the head of the Ministry or Department); for local authorities, the designated person or chief executive officer; and in any other situation, the person or authority having ultimate control over the establishment's affairs. The Controlling Authority may decide disputes and order the employer to pay under Section 7(4).

The Contract Labour (Regulation and Abolition) Act, 1970, supplies the competing route. Section 21(1) makes the contractor responsible for wages, while Section 21(4) makes the principal employer liable to pay wages in full, or the unpaid balance, where the contractor defaults, with a right to recover from the contractor by deduction or as a debt. However, the term principal employer or contractor is not mentioned in the Payment of Gratuity Act, 1972. Whether gratuity is included under the definition of "wages" turns on Section 2(vi) of the Payment of Wages Act, 1936, which includes sums payable on termination under any law but excludes gratuity.

The petitioners worked on ONGC premises through successive contractors and their engagement ended in 2006 when they accepted a Goodwill Package Scheme. Gratuity was not paid. The Controlling Authority directed ONGC to pay, with liberty to recover from the contractor, but the Appellate Authority reversed the decision of the Controlling Authority. In writ proceedings, the Bombay High Court restored the Controlling Authority's order in August 2023. Before the Supreme Court, the Solicitor General argued that gratuity is payable only to an "employee", that Clause 12.4.1 of the contract disclaimed any employment relationship, that Section 21(4) covers wages and not gratuity, and that the Controlling Authority's jurisdiction is confined to computing gratuity.

The Court held that the Controlling Authority had no jurisdiction to adjudicate liability against ONGC, because the only power conferred by the statute is to compute the amount payable to the concerned "employee".  It added that, under the Payment of Wages Act, 1936 and the Contract Labour (Regulation and Abolition) Act, 1970, the Solicitor General’s contentions were “sustainable”, but without giving reasons, and it did not formally decide the workers’ status (it called them “so-called employees”). The appeals were allowed “on the short point” of the Controlling Authority’s competence: the High Court’s order was set aside and the Appellate Authority’s order revived. As the gratuity had already been paid under the Court’s order of December 15, 2023, no recovery is to be made from the workers.

The Payment of Gratuity Act, 1972 and the Contract Labour (Regulation and Abolition) Act, 1970, have been replaced by the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020 on November 21, 2025, and the ONGC dispute, which arose in 2006, was decided under the old statutes. Section 53 of the Code on Social Security, 2020 reaffirms the five-year rule, with pro rata gratuity for fixed-term employees. The FAQs published on the website of Ministry of Labour and Employment on March 16, 2026 state that, for contract labour, the contractor is responsible for payment of gratuity after five years of continuous service. Section 55(3) of the Occupational Safety, Health and Working Conditions Code, 2020 retains the default liability for wages and recovery from the contractor as was provided under Section 21(4). Since section 2(y)(j) of the Code on Wages, 2019 excludes gratuity payable upon termination, the question of whether gratuity qualifies as "wages" for that purpose is now less ambiguous than it was previously. However, there hasn't yet been a significant court decision on the matter.

The Supreme Court’s decision in ONGC v. Suryakand D. Lad strengthens the position of principal employers by holding that the Controlling Authority under the Payment of Gratuity Act, 1972, cannot adjudicate and fasten gratuity liability on a principal employer in proceedings under that Act. The distinction between gratuity and wages due in the event of a contractor's default is further supported by the Court's findings about the Payment of Wages Act, 1936 and the Contract Labour (Regulation and Abolition) Act, 1970. However, the ruling should not be seen as definitively establishing a major employer's substantive liability for gratuities owing to contract workers because the appeals were granted on the narrow ground of jurisdiction.

The new Labour Codes provide additional statutory support for such a distinction that gratuity is excluded from the definition of “wages” under the Code on Wages, 2019, while Section 55(3) of the Occupational Safety, Health and Working Conditions Code, 2020 imposes default liability on the principal employer for unpaid or underpaid wages to the contract labourers. However, the courts have not definitively decided how these statutes apply to gratuities. Principal employers should not see the ONGC verdict as total protection, but they do have a stronger foundation to challenge automatic liability for gratuity. They should make sure that the contract signed with the contractor explicitly assigns gratuity-related duties, offers suitable indemnity and recovery procedures, demands proof of gratuity funding, and maintains service records throughout contractor changes.

About the authors: Antra Ahuja is an Associate Partner and Abhishek Malhotra is a Senior Asssociate at Saga Legal.

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