Umakanthan53
Labour Law & Hr Consultant

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Our company is a proprietorship company. Now owner decided to create a new Pvt Ltd company in new name with his family members.
Both companies will continue working for some time and after around one-year proprietorship will close and all business activities will conduct in Pvt Ltd. Company and entire staff slowly will shift to new Pvt. Ltd. Co.
My question is about gratuity.
Whether we should pay gratuity in proprietorship company or take over entire staff to new Pvt. Ltd. Company without payment of Gratuity?
Management is ready to pay and ready to take over the entire staff in new entity without payment.
Please share your legal opinion on this.

Dear Ajay,
What you have described is transfer of employees from one undertaking to another and the compensation, if any payable to the employees is discussed u/s 25FF of the Industrial Disputes Act,1947.
There are two ways of settlement:
(a) On the final closure of the proprietorship entity or the transfer of the services of any employee to the Pvt Ltd concern, the ownership concern may treat the separation as retrenchment and pay him retrenchment compensation as per sec.25F of the Act and the gratuity for the service if any rendered so far upto the date of transfer. His tenure in the Pvt Ltd concern thereafter would be a fresh service.
OR
(b) The services of the employees may be transferred to the newly formed entity. In such a case the conditions of service in the new entity should not be less favourable to the employees and the entire service rendered in the proprietorship entity should be carried forward. It would require an agreement between the two entities and the employees concerned to avoid any future dispute.

The advantage if the services of employees (service continuity) continued from Proprietorship Company to newly formed Private Limited Company.
The Payment of retrenchment compensation plus one month notice pay, payable under the Industrial Disputes Act, and Gratuity payable under the Payment of Gratuity Act, by the private company is avoided now.
The newly formed Private Limited Company has to make a Board resolution, and minute a clause, that they undertake the services continuity of the employees transferred from the erstwhile proprietorship company, and thus taken the liability of paying a higher insurance premium to LIC towards Gratuity. If already an insurance policy is available in Proprietorship firm, towards payment of Gratuity under the Act, the same can be endorsed with board resolution and change to Private Limited Company.
The Payment of Gratuity is based on the last drawn salary / wages. When transferred to the Private Limited Company, at the time of retirement / resignation of employees from Private Limited Company the quantum of Gratuity to employees will be more, as the calculation is based on the last drawn salary / wages with service continuity they put in private limited company.

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