Change in Management: Does My Friend Lose His Gratuity Benefits from Previous Employment?

Dear Friends,

I have an issue concerning one of my friends who was employed in a firm that was subsequently taken over by a private limited company. The new employer has issued fresh appointment letters to all the employees of the firm. Now, his concern is whether the payment of gratuity is applicable afresh or if his previous service when he was an employee of the firm will also be considered. He was told that any gratuity claim pertaining to earlier employment should be settled with the previous employer and cannot be carried forward for new employment. Is this correct?

Regards,
Ganapa25

Dear Mr. Ganapa25,

I'm Bharti. I've been hearing various suggestions on gratuity laws. Could you please suggest or guide me correctly if teachers are entitled to gratuity or not?

Thank you.

Dear Ganapa25,

When this employer issues fresh appointment letters to the employees, they will not be required to pay gratuity for the employees' previous service.

R.N.Khola

Hello Ganapa,

Normally, takeovers, also known as "mergers of two companies," occur under certain legalities. In such cases, both companies apply to the Honorable High Courts and the Registrar of Companies in their respective jurisdictions for the takeover/merger. The order issued by the High Court clearly states the status of employees of the taken-over/merged companies, outlining the benefits of Provident Fund (PF), Gratuity, and continuity of service. Providing a separate letter of appointment to employees of the merged companies by the new employer does not absolve the new employer of the responsibility to pay gratuity for the period of service rendered with the merged company. This is not a case of employee resignation but a transfer of management only. By checking with your friend, you will discover that PF balances of all employees from the previous company have been transferred to the new company. The employees have not resigned; their services have been transferred to the new management.

However, everything hinges on the wording of the agreement between the two companies regarding the takeover. If the previous employer has agreed to settle gratuity payments upon merger, then the new employer has no responsibility in this regard. I believe the employees of the merged company should discuss the matter with the new management and obtain written confirmation regarding the fate of their gratuity payment for services rendered with the old company.

Dear Mr. Kalyan,

My query is how an employee will know the terms & conditions of the order between two companies? Is there any provision to circulate the order/agreement or its certain portions to employees?

Thanks,

The previous employer can equate some amount as gratuity to those who are eligible (served at least 4 years and 6 months). The new employer need not pay or honor these obligations. If it is a group company, then the second employer can mention the clause that 'Though your date of joining with us is dd/mm/yy, your service period continues without a break for service letter purpose.' Please check it out with your legal cell.

I have issued one such letter when a company was split into two.

There is also one thing, which is retrenchment compensation that should be given by the previous employer. This compensation is necessary because when he closes or merges his firm, he must pay gratuity or R.C.

Payment of gratuity is a statutory requirement irrespective of who owns the establishment. Change of ownership or management doesn't affect this statutory rule.

Dear friends,

Part-IX (Sections 565 to 581) of the Companies Act, 1956 provides for the procedure for the conversion of a partnership firm into a limited company. This can only be followed if the firm has 7 or more partners. In case the number is less, it has to be increased first by amending the Partnership Deed. If this legal procedure is followed by the firm, then the effects will be as follows:

- The Registrar of Companies will issue a certificate of registration under section 574. The words "Private Limited" are added to the company's name under section 573.

- Existing assets and liabilities of the firm will become assets and liabilities of the company as per Sections 575 and 576 by operation of law.

- All employees of the firm will automatically become employees of the company, and their service will continue without any break.

However, from the query, it appears that the firm has not followed this route (possibly due to a lesser number of partners). In that case, the only possibility is that assets are transferred to the company by agreement. The effects will be as follows:

- The new company is first registered.

- The partnership firm enters into an agreement with the company for the transfer of its assets to the new company on the appointed date against payment of consideration.

- Liabilities are retained and settled by the firm since, as per the Contract Act, liabilities cannot be transferred without the consent of all concerned parties (creditors, employees, etc.).

- Full and final accounts are prepared and settled for the employees by the firm until the appointed date (new appointment letters are issued by the company only if the employees are willing to accept the job in the company).

- The company is a separate legal entity and a different employer under the Payment of Gratuity Act in this case, and hence gratuity cannot be claimed from the company for service with the partnership firm.

Thus, where only the assets of the firm are transferred by agreement to the new company and the legal procedure prescribed in Part-IX of the Companies Act, 1956 is not followed, the partnership firm will be liable to pay gratuity, leave encashment, etc., of employees. However, since better terms can be offered to the employees, the company may, at its absolute discretion, provide in the agreement that in the case of employees who have not completed 5 years of service with the firm, their service period with the firm will also be considered when calculating gratuity in the company.

Regards,

Based on the present instance, I have one question which I may request you to answer to help me go ahead with it. During the last year, one employee from one of our sister concerns (being a group company, both are Pvt Ltd companies) has been transferred to our company. He joined the previous company in 2008 and our company in 2012. Upon joining our company, his salary substantially increased, and we have considered his joining date from 2008. This decision was made based on the resolution passed by the board/management of the previous company to consider the service period of the said employee from 2008. The previous company/employer of the said employee agrees to reimburse the cost of gratuity for doing so.

Gratuity Recovery Concern

In view of the above, kindly advise us on recovering the gratuity amount from the previous company for the 4-year period. My concern is that the additional 4 years will always remain, and my company will have to pay gratuity at a higher salary when the employee resigns/retires. Is it necessary/advisable/as per provision to continue recovering the eligible gratuity amount whenever there is a salary hike hereafter? I trust you have understood my query and expect a satisfactory answer for the same.

Understanding Gratuity Payment in Employment Transfers

Gratuity is a one-time lump-sum payment given to an employee upon the termination of their employment. It is based on the last-drawn wages and the number of continuous years of service rendered under the same employer.

When there is a transfer of services from one employer to another, even if both are group companies under an understanding between them, and termination occurs soon after joining the transferee company, it is up to the transferor and transferee to decide the quantum of their contribution to the gratuity amount. This should be done as per the provisions of the Payment of Gratuity Act, 1972.

You can proceed against the previous company to recover their share of gratuity. No recovery is possible from the resigned or retired employee on this score.

Regards