Clarification on Applicability of ESI, PF, and Gratuity for Outsourced Canteen Staff

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A hospital with over 4,000 employees, already covered by ESI, PF, and Gratuity Acts, is considering outsourcing its canteen. The management proposed that if the contractor employs fewer than 10 people, they wouldn't need to contribute to these benefits for their staff. However, guidance clarifies that the Payment of Gratuity Act applies if the establishment (hospital) has 10+ employees, regardless of the contractor's workforce size. While the contractor is primarily liable for compliance, the principal employer (hospital) is responsible if the contractor fails to enrol staff or make contributions, potentially facing direct liability for statutory benefits.

Avinash Jeevan Dsouza

Avinash Jeevan Dsouza (Querist)
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04 September 2025 We are a hospital with more than 4,000 employees. Our institution is already covered under labour laws, including ESI, PF, and the Payment of Gratuity Act.

Our management is exploring the option of outsourcing some departments, such as the hospital canteen, to an outside agency. That agency may employ fewer than 10 people. The proposal is that since the contractor has less than 10 workers, they will not contribute to ESI, PF, or gratuity for their staff. Payments would be made to them on a contract basis.

We need clarity on the following points:

Since our hospital is already covered under ESI, PF, and gratuity, will the canteen workers (contract workers with fewer than 10 people) also fall under the coverage of these Acts?

Does the size of the contractor’s workforce matter, or does the fact that they are deployed within our covered establishment automatically make them eligible for ESI, PF, and gratuity?

In case the contractor does not comply, will the liability fall on us as the principal employer?

Your expert guidance on this matter will help us advise our management properly.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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04 September 2025 The Payment of Gratuity Act applies to every establishment in which 10 or more persons are employed, including contract labor, if overall employee count meets the threshold, regardless of the individual contractor's employee numbers.
The liability for enrolling contract workers in ESI, PF, and gratuity primarily falls on the contractor, but the principal employer is responsible for ensuring compliance.
If the contractor fails to make the required contributions or enroll employees, the principal employer can be held responsible for compliance and may be liable to pay statutory benefits directly to workers.
The law recognizes that contract labor deployed in covered establishments must receive the same statutory protections as regular employees regarding ESI, PF, and gratuity.
Ensure that contracts with outside agencies explicitly require statutory compliance for ESI, PF, and gratuity regardless of subcontractor workforce size. Include provisions in service agreements to withhold payments until statutory obligations are satisfied.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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20 September 2025 Good Luck..

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