Contractual Workers’ Gratuity | IIT Bombay
A case has occurred in IIT-Bombay in respect of gratuity eligibility of contractual workers.
The following is a detailed breakdown of the ongoing case, its potential financial burden and other considerations. The outcome of this case has the potential to cause significant financial repercussions with employers having contractual employees.
Background
IIT Bombay (IIT-B) employs close to 1800 contractual workers in capacities such as cleaning, gardening, construction work etc. required on campus.
Raman Garase, one such contractual worker, worked for 39 years as a gardener and attained retirement in December 2019. Garase was expecting to be allowed to work beyond the retirement age as he was of good health, and as IIT-B had made exceptions for contractual workers working beyond their age of retirement.
Upon retirement, Garase claimed gratuity of INR 4,28,805 from IIT-B and was denied on the grounds that as per the prevailing Acts, he was not entitled to Gratuity.
Garase, along with two colleagues (Dadarao Ingale and Tanaji Lad) decided to move to the labour commission in 2020. In January 2022, the Central Assistant Labour Commissioner, who is also the controlling authority under the Payment of Gratuity Act, stated that Garase was entitled to receive INR 4.28 lakh from the institute. Further, his colleagues Lad and Ingale, were also entitled to gratuity as per the order.
IIT-B decided to contest the order. The Chief Deputy Labour Commissioner, who is the appellate authority in the matter, also issued an order in favor of Garase, Lad and Ingale in April 2024, which IIT-B decided to contest in court.
Eventually, Garase lost hope of receiving the gratuity monies and ended his life on 2nd May 2024.
Expected Costs
If IIT – B had decided to pay Garase, Lad and Ingale, it would have to pay the rest of the contractual workers as well. This would constitute a significant amount, especially, given that contractual worker’s gratuity has not been accounted for, since their hiring.
On average, if we conservatively assume a basic pay of INR 15,000 and 30 years of service at the time of retirement for 1800 workers, then IIT-B would end up paying close to INR 46.7 crores only in respect of Gratuity.
Realistically, IIT-B would be looking at an estimated cash outflow of 45 – 60 crores during retirement of these contractual workers. Say, IIT-B decides to provide for their liability in the books, it would not get the benefit of long term discounting as most workers are already nearing retirement. So the provision would be a significant hit to the books.
Gratuity Eligibility
The Payment of Gratuity Act, 1972 (POGA 1972) carries no explicit provisions with respect to contractual workers.
It defines an employee as, “employee” means any person (other than an apprentice) who is employed for wages, whether the terms of such employment are expressed or implied, in any kind of work, manual or otherwise, in or in connection with the work of a factory, mine, oilfield, plantation, port, railway company, shop or other establishment to which this Act applies.”
By this definition, contractual workers are employees of the payroll vendor and are entitled to benefits. In our experience, this is reflected in the current market practice. We have observed that, for contractual workers, provident fund is deducted from their pay, are entitled to time off, despite being on a yearly contract.
Thus gratuity and other benefits if any, are outlined in the contract signed with them, the benefits are due upon retirement, resignation or untimely death. The nature and the quantum of the benefits promised in the contract by the vendor would depend upon the agreement between the employer and the vendor. In any case, the vendor would have the bare minimum benefits as prescribed by the law.
For instance, let us assume the benefits are not promised as per the contract. A typical market practice we have observed is, if a contractual worker becomes eligible for gratuity, the employer pays the gratuity to the vendor and the vendor settles it on a case-to-case basis. However, such a settlement would be at the imperative of the employer.
Accounting of Contractual Workers’ Gratuity
In the case of IIT-B, it is evident that liability, with respect to contractual workers, was not provided in the books as the contractual workers would not fall under the definition of the “employee” as defined in POGA, 1972.
However, para 6 of the Accounting Standard (Revised 2005) is worth considering.
“An employee may provide services to an enterprise on a full-time, part-time, permanent, casual or temporary basis. For the purpose of this Standard, employees include whole-time directors and other management personnel.”
Therefore, from an accounting perspective, gratuity liability with respect to temporary employees are to be provided for in the books. In this situation, the vendor would have to provide for contractual workers’ liability in its books and consequently IIT-B would have to provide for their liability in the books.
Indian Accounting Standard 19 (Ind AS19), an upgraded version of Accounting Standard (Revised 2005), reflects the same in its para 7.
Concluding Remarks
IIT-B has moved to court despite two orders made in favor of the contractual workers. The outcome of the case remains to be seen.
In the interim, a duration-wise analysis of the retirement of contractual workers and their gratuity amounts due at retirement, would help IIT-B to get a year-wise overview of expenses expected to occur in the future. If IIT-B chooses to set some monies aside, it might just hedge the risk partially in case the court favors the contractual workers.
Going simply by the provisions of the accounting standard, IIT-B needs to maintain the necessary provisions in the books in respect of the contractual workers.