Summary

Two recent rulings change how employers should approach gratuity at the edges. The first concerns eligibility: who has served long enough to qualify. The second concerns liability: who must pay when the worker was engaged through a contractor. The rulings address one question each. Both set aside orders of gratuity authorities in the employer’s favour, and both are short orders whose reach is narrower than their outcome suggests.

• Who qualifies: The Karnataka High Court denied gratuity to an employee who resigned after 4 years, 9 months and 12 days, although he had crossed the 4-years-240-days mark at which most employers, labour authorities and gratuity insurers treat eligibility as reached. The order binds the gratuity authorities in Karnataka; High Court authority in Tamil Nadu and Kerala points the other way.
• Who pays: The Supreme Court held that the Controlling Authority cannot decide whether a principal employer must pay gratuity to workers engaged through a contractor; its power is limited to computing the amount payable to an employee. The ruling applies across India.
• Neither ruling calls for a blanket policy change: Borderline eligibility claims are best decided state-wise and case by case. The Supreme Court ruling protects principal employers only where the contracting arrangement is genuine.
• What remains open: Both were decided under the Payment of Gratuity Act, 1972, which the Code on Social Security, 2020 replaced on 21 November 2025, and the same questions are likely to arise under the Code.

1. Who Qualifies: The Five-Year Rule

In Bengaluru Metro Rail Corporation Limited v. Nandeesh H.V. and Others (WP No. 35414 of 2025, order dated 29 June 2026), the employee joined on 9 June 2017 and resigned on 19 March 2022. The Controlling Authority allowed his gratuity claim on 22 October 2024, and the Appellate Authority upheld it on 22 September 2025.

The High Court set aside both orders, holding that gratuity is payable on resignation only after continuous service of not less than five years, and directed that any amount deposited be refunded to the employer.

The outcome cuts across a long-standing practice. Employers, labour authorities and insurers have generally treated four years and 240 days as sufficient, relying on the deeming provision under which 240 days of actual work in a year (190 days where the establishment works fewer than six days a week) counts as a full year, and on decisions of the Madras and Kerala High Courts applying it to an incomplete fifth year.

The order does not engage with any of this. The deeming provision is not discussed, no earlier decision is cited, and the operative reasoning is a single sentence recorded at a preliminary hearing. It binds the gratuity authorities in Karnataka, but its persuasive weight elsewhere is limited, and an appeal remains possible.

Position by Jurisdiction

2. Who Pays: Workers Engaged Through Contractors

In M/s Oil and Natural Gas Corporation Ltd v. Suryakand D. Lad & Ors. (2026 INSC 1019, decided on 9 September 2026), workers deployed at ONGC through contractors claimed gratuity from ONGC on the strength of their long service.

The Controlling Authority held ONGC liable; the Appellate Authority reversed that finding; and the Bombay High Court, by order dated 23 August 2023, restored ONGC’s liability. The Supreme Court allowed ONGC’s appeals and revived the Appellate Authority’s order.

The Supreme Court’s Reasoning

The appeals were decided on a “short point”: the only power the Act gives the Controlling Authority is to compute the amount payable to an “employee”, so deciding whether ONGC was liable for the contractor’s workers was beyond its jurisdiction.

The Court also found sustainable ONGC’s submission that a principal employer’s liability under Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970 extends only to unpaid wages, and that gratuity payable on termination is, with a narrow exception, excluded from “wages” under the Payment of Wages Act, 1936.

As ONGC had already paid the gratuity under an interim order, no recovery was directed from the workers.

Limits of the Ruling

Here too, the ruling is narrower than it may first appear. The Court did not examine whether the contracting arrangement was genuine, and did not find it necessary to rely on an earlier decision on whether contract workers can claim an employer-employee relationship with the principal employer.

The ruling protects a principal employer from being made to pay by the gratuity authority; it does not rule out a finding, in proper proceedings before a competent forum, that a contract is a sham and that the workers are in fact the principal employer’s employees.

3. Reading the Rulings Together, and the Position Under the Code

Taken together, the rulings give employers firmer ground to contest gratuity claims at the margins, both on eligibility and on liability, but neither offers a settled rule. Each turns on a narrow point, and the strength of any contest is likely to depend on the state, the facts and the forum.

In our view, neither ruling, on its own, warrants a blanket change to existing gratuity practice.

Gratuity Under the Code on Social Security, 2020

For separations on or after 21 November 2025, gratuity is governed by Chapter V of the Code on Social Security, 2020.

The Code retains the five-year requirement for superannuation, retirement and resignation, and carries forward the 240-day and 190-day deeming rule unchanged, so the question left open in Karnataka arises equally under the Code.

The Karnataka ruling has no bearing on fixed-term employees, who are entitled to gratuity pro rata without a five-year condition, or on exits due to death or disablement.

The ONGC ruling was decided under the 1972 Act, the 1970 Act and the 1936 Act, all since replaced by the Labour Codes; the Court did not consider the Codes, and its reasoning should not be assumed to carry over automatically.

4. Points for Consideration

Depending on their workforce and states of operation, clients may wish to consider:

• Service near the five-year mark: Whether service for exits close to the five-year mark is computed precisely from date of joining to date of relieving, and whether attendance records for the fifth year would allow a 240-day (or 190-day) claim to be tested on the facts.
• State-specific eligibility assessment: Whether borderline claims are better assessed state by state, rather than through a uniform change to the existing 4-years-240-days practice, bearing in mind that a single unreasoned order may not by itself warrant revisiting claims already paid or group gratuity funding.
• Contractual promises: Whether appointment letters, policies, standing orders or settlements promise gratuity on terms more favourable than the statute, as such promises may remain enforceable regardless of the statutory position.
• Contractor agreements and indemnities: Whether contractor agreements clearly place gratuity obligations on the contractor, with suitable indemnities, and whether contractors’ compliance for long-serving deployed workers can be evidenced.
• Genuine employment arrangements: Whether day-to-day practice in hiring, attendance, pay and supervision is consistent with the contractor being the employer, since the protection offered by the ONGC ruling rests on the arrangement being genuine.

C-Quel would be glad to discuss how these rulings bear on your organisation.

Warm regards,
C-Quel Management Services Private Limited