Is a Gratuity Trust Mandatory for Small Software Companies Like Ours?

Hi all, I wanted to understand if it is mandatory to have a trust for gratuity. We are a 100-people software development company. We don't have a gratuity trust as such, but we pay gratuity to our employees who have worked for a minimum of three years with us (upon their exit).

Regards,
CJ Patel
[Email Removed For Privacy Reasons]

It is not mandatory for the employer to form a trust for gratuity.

Regards,

As Mr. Harikrishnan has stated above, it is not mandatory for the employer to form a trust for gratuity. Since your company employs approximately 100 employees, according to the provisions of the Payment of Gratuity Act, it is mandatory for the employer to pay gratuity to an employee who has completed 5 years of service with the employer. The company can obtain a policy for the benefit of gratuity from the Life Insurance Corporation of India to avoid further liability for the employer.

Regards

Thank you, Mr. Harikrishnan and Mukesh, for the quick response. We are currently paying gratuity to employees who have worked with us for a minimum of three years. However, we do not have any policy with either LIC or any other agencies managing the Gratuity Funds. Is that acceptable?

Regards,
CJ Patel

Any rule or regulation formulated by the employer for the payment of gratuity that is more beneficial than the provisions of the Payment of Gratuity Act is valid and legal. In your case, the minimum service to be rendered by the employee is three years, which is less than the five years prescribed by the Payment of Gratuity Act. Therefore, there is nothing illegal in this. However, your scheme or rule or regulations should not be contrary to the provisions of the Payment of Gratuity Act regarding other conditions like the time of payment, circumstances under which gratuity could be forfeited, etc. If it is, then only those conditions/provisions which are less favorable than the provisions of the Payment of Gratuity Act will not be applicable, though the three-year rule will continue to be in force.

With regards,

Formation of a Gratuity Trust or Gratuity Insurance Policy

Formation of a gratuity trust or a gratuity insurance policy from an insurance company is a way to mitigate the risks involved and fulfill the financial and legal obligations under adverse situations as well, though they are not mandatory.

Imagine a situation: a company with 1,000 employees, where 60% of them have completed 5 years of service. In normal circumstances, the company may be required to pay gratuity to 10 to 15 employees every year. Due to favorable economic or business situations, the company has no problem settling these gratuity claims. However, envision a scenario where due to losses or unfavorable economic and market situations, the company has to downsize or close down. In such cases, there will be a need for substantial funds to settle gratuity claims for many employees at once. Under such circumstances, a trust or policy helps in settling claims without any problem or delay.

In the establishment referred to by Mr. Patel, the condition of five years of continuous service to become eligible to receive gratuity has been modified in favor of the workers to three years. If the employer is willing to pay gratuity to an employee even if they have only completed three years of continuous service, then the law will not prevent it from happening.

Regards

One of my colleagues, who has recently joined us, worked with her previous employer from 1st September 2006 to 15th June 2011. Please let me know if she is eligible for gratuity, and if so, could anyone please send me the rules under the Gratuity Act.

Thanks,

Regards,
grettapl

It is not mandatory to have a Gratuity Trust. However, there are definite benefits to opting for a Trust with the LIC.

Understanding Gratuity Payment

As per the Payment of Gratuity Act, gratuity is payable to employees who have put in continuous service of 5 years or more. This qualifying criterion does not apply in the case of death. For a complete understanding of the payment of gratuity, please read the said Act.

Best Wishes,
Vasant Nair