Query on Gratuity

Company “A” was taken over by Company “B” and services of all the Employees of Company “A” were transferred to Company “B” with a condition that the service conditions will not be less favourable. Company “A” was having provision of payment of gratuity as per the Act i.e. 15 days while Company “B” is having more favourable gratuity norms i.e @ of 30 days' salary for each completed year of service.

Services of Mr Ram were transferred to Company “B” and his remaining service was only two years at the time of transfer of his services to Company "B". His total gratuity eligibility was for 26 years (24 years in Company “A” and 2 years in Company “B”)

Company “B” calculated his gratuity for 24 years @ of 15 days as per the policy of Company “A” and @ of 30 days for 2 years.
Mr Ram has disputed the calculation of gratuity demanding gratuity @ 30 days for the entire service.
Is the demand of Mr Ram legally tenable? Kindly cite some case laws also.

From India, Delhi
Labour Law & Hr Consultant
Partner - Risk Management
Hr Manager
Ceo-usd Hr Solutions
Management Consultancy


Acquisition of one organization by the other is based on terms and conditions of the acquisition between two organizations which includes the employee related issues also. In my career I had a scope for two acquisition. In one case it had been mentioned to letter issued to the employees of the organization who had joined to new organization that your all service condition would be governed by the rules and regulation of new organization which would not be any way less than your existing organization. All new employees were issued letter mentioning new remuneration and perks along with recognition of past service for the purpose of Gratuity calculation. In new organization there was gratuity scheme for 1st 10 years on the basis of 15 days, more than 10 yrs but less than 20 yrs on the basis of 21 days and 20 yrs or more service on the basis of 26 days. Accordingly gratuity was paid to employees based new organization norms considering past service. The new organization also had 3 tier retirement benefit - PF, Gratuity and Superannuation which was not in old organization both gratuity and superannuation.

IN other case employees were asked to resign and join fresh to the new organization. There were union who agreed as the terms and conditions of the new organizations was much better than the existing one.

In the instant case it is mentioned that in the new organization service conditions will not be less favorable. If it is not mentioned that past service gratuity will be taken care by the new organization as per the terms and conditions of the new organization, then the new organization may pay gratuity a portion based on old organization method (15 days for each completed year of service instead 30 days as per new organization). But the gratuity payment for the period in new organization will be on the basis of new organization norms.

Whether the demand will be legally tenable or not will be absolutely depends on the terms and conditions of the acquisition between the organizations including employee related matter.

S K Bandyopadhyay ( WB, Howrah)
CEO-USD HR Solutions
+91 98310 81531

USD HR Solutions – To Strive towards excellence with effort and integrity

From India, New Delhi

This looks like an assignment given to the students to answer and instead of labouring for it, using this forum as a shortcut to elicit the answer.
The charging provision in Section 4(2) of the PG Act 1972 reads as under:
(2) For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee. So what is protected as per the Act is the calculation formula of 15 days' wages for every completed year of service and at the rate of last drawn wages. The calculation on the basis of 30 days' wages for every completed year of service is rather unheard of and such a claim cannot lie under the PG Act. Such a claim can lie under the Specific Relief Act 1963 and seek a declaratory decree to that effect.

From India, Mumbai

In my opinion the claim of Mr.Ram is legally maintainable on the following grounds:
1) On the transfer of the services of Mr.Ram from company A to company B, he has become a full member of company B thus entitling him to all the service regulations in force in that establishment.
2) No establishment can have two sets of rules for the same employee as statutory gratuity is to be computed with reference to the date of termination of employment and the last drawn salary only.
3) The clause relating to parity of service conditions would cover the ones like salary, status of employment, leave, holidays and the like which applicable on the date of transfer only. Once the transfer is effected, the future benefits have to be in sync with those of the existing employees of the Company B. Superannuation of the transferred employees on a later date is a future event with reference to the date of transfer. Therefore, the combined reading of points (2) and (3) would shift the emphasis of the parity clause among all the employees of company B when the necessity for payment of Gratuity arises on a later date only.
4) The doctrine of transfer of an employee with continuity of service from one organization to another takes within its fold only the number of years of service rendered in the transferor organization for the purpose of terminal benefits subsequent to the transfer and not the method of their calculation.
5) Section 4(5) of the PG Act 1972 enables better terms of Gratuity under an award or an agreement.

From India, Salem

When Ram was transferred to Company "B", he is governed by the rules and regulations of
Company "B" and such rules, policies, procedures shall be binding on Ram.

Hence his contention that he be paid gratuity, as per rules & regulations of Company "B" is fully justified.

From India, Aizawl

I do not appreciate the remarks of KK!HR. The replies posted by Mr Umakanth and Mr S K Bandyopadhyay are very relevant to the query and diverge opinion of both of these subject matter experts themselves shows the importance of this question. In mergers and acquisitions lot of such questions and practical difficulties arise and we should search for the answers to such queries rather than discouraging the questioner, as it always gives a lot of insights to the readers on the subject.

Even this issue goes to the various courts and from the controlling Authority to the Supreme Court we may expect diverge views of the Court.

Hence the question is very interesting and debatable. I personally endorse the reply of Mr Bandyopadhyay. Gratuity for the last two years can be calculated @ of 30 as per the policy of the new Company.

For information of KK!HR many companies in India, depending upon the length of service, are paying more favourable gratuity ranging from 21 days to 30 days.


Dr Kamlesh Agrawal

From India, Delhi

Dr. Kamlesh,

Unfortunately, I agree with KKHR
This looks absolutely like a Interview question or something that is given as homework in a HR MBA course.
And the moderators have also noted this trend.
Whether to answer or not, of course is left to individual members.

From India, Mumbai

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