<p>The ecotoxicological impact of petroleum refinery oily sludge (OS) on earthworms and their ecological functional dynamics is still unclear. As soil is the ultimate repository for the petroleum industries wastes, therefore, understanding the impact of OS on ecological indicator such as earthworms is crucial. This study evaluates the impact of OS on <i>Eisenia fetida</i> and its ecological functional dynamics under stress. For this, <i>E. fetida</i> was exposed to varying concentrations (10–100%) of OS mixed with cow dung and the growth parameters of the earthworms were assessed. Besides, soil health indicators in the earthworm processed OS substrates such as the activities of cellulase, phosphatase, amylase, urease, and dehydrogenase were assessed along with changes in bacterial numbers. The findings revealed that increasing concentration of OS significantly reduced the growth rate (1.54 ± 0.18 to − 5.76&#xa0;mg wt worm⁻¹&#xa0;day⁻¹), survivability rate (53.3% to 16.7%), and cocoon production capacity of the earthworm. Additionally, earthworms activity enhanced the bacterial population (total heterotrophic count, N₂ fixing bacteria, P and K solubilizing bacteria) and increased the activities of cellulase, phosphatase, amylase, urease and dehydrogenase by up to 3.8-fold and 3.5-fold, respectively in the substrate mixtures. Principal component analysis and canonical correlation analysis confirmed the role of earthworm in enhancing the enzyme activities and bacterial profiles. Finally, this study highlights the potential of incorporating ecological functional dynamics of the earthworm into ecotoxicity assays as a reliable indicator for pollutant tolerance.</p>