Gratuity Rules for Small Companies: Do We Still Need to Comply After Downsizing?

Could someone please inform me if our company still has to follow gratuity rules? We have been registered under the Shops and Establishment Act since 2007 and have just completed 5 years in 2012. When we started, we had only 7 employees. Gradually, we grew to 35, but now we have reduced back to 9 employees. Do we still have to follow gratuity rules?

Thanks and regards,
Djo

All organizations are covered under the Gratuity Act. However, the applicability of gratuity is for employees who have completed 5 years of continuous employment in the same organization.

Thank you for your quick response. Does our company still have to follow the gratuity rules now that we have reduced to only 9 employees?

Thanks and regards,
Daisy

Yes, it is being followed not only by our company but by every company that falls under it.

Regards,
Satish

No, you are not eligible because you are not covered under the Factory Act. As you have only 9 employees, you are not eligible for Gratuity.

Regards,
Satish

This is to amend what has been communicated to you by our members. Your company is eligible for the Payment of Gratuity Act. However, you are required to pay gratuity only if the employee has completed five years of continuous service in your organization.

I hope this clarifies your query.

Regards.

Thank you very much for your valued inputs. I have understood that I need to disburse gratuity to those who complete continuous 5+ years of employment in our organization.

I need one more clarification - if an employee has worked for 4 years and 5 months, can he demand gratuity? Out of the 5 months, 2 months are the notice period.

Thanks and regards,
Daisy

Company policy is not allowing me to proceed. Even though I am in favor of paying, we need to consider precedent as well. Once we implement this for 4.5 years, others might start demanding the same.

Government Policy Inquiry

Is there any policy from the government that I can show the management?

Thanks and regards,
Daisy

The date of completion of 5 years shall be taken from the joining date of the employee until the last date of leaving. The 240 days are counted only for the continuance of service of an employee. Certainly, only a person who has completed 4 years and 240 days of service is thereby eligible for gratuity. In the case specified by you, the employee is not eligible.

P.S: Gratuity is paid only if the employee's date of leaving has completed 5 years.

Regards.

Is it compulsory for all employees claiming gratuity to fill out Form I? Do we have to file Form I with any government department?

Thanks and regards,
Daisy

Dear Ms. Daisy,

Applicability of the Payment of Gratuity Act

Please read Section 1(3)(c) of the Payment of Gratuity Act. According to this subsection, if any shop or establishment to which any law relating to shops and establishments is applicable employs ten or more persons, then the Payment of Gratuity Act is applicable. As your shop/establishment has employed more than 10 persons at some point in time, the Payment of Gratuity Act is applicable to your establishment.

Please also read Section 1(3A) of the Payment of Gratuity Act. This section states that in the case of a shop or establishment which had employed 10 or more persons and in which the number of employees falls below ten at some point, the Payment of Gratuity Act will continue to apply even though the number of employees has become less than ten. This covers the applicability of the Payment of Gratuity Act to your establishment/shop.

For an individual employee to claim the benefit of the Payment of Gratuity Act, this Act should be applicable to the establishment, and the individual employee should satisfy the conditions specified in the PG Act to become eligible to receive gratuity.

With regards,

Payment of Gratuity Act, 1972

As per the provisions of the Payment of Gratuity (PG) Act, 1972, any establishment that employs 10 or more workmen shall be covered under the Act.

Regarding the workmen, the liability to pay gratuity arises when they leave the job either voluntarily (resignation) after completing 5 years or upon superannuation (at the age of retirement, typically 60 or above). Even after the Act covers the establishment, if the number of workmen reduces below 10, the Act shall continue to apply.

As per the Gratuity Act, if the employee strength is more than 10 in any year, then gratuity is applicable. Gratuity is given to those employees who are in continuous service for 4 years plus 280 days of the fifth year.

Thanks,
Narendar Paleti

Gratuity Act Applicability

The Gratuity Act applies to an establishment from the moment it has 10 employed persons. Even if the number of employed persons falls below 10, the Act will continue to apply.

Regards,
Varghese Mathew

There is no need for NOS, but as per the Gratuity Act, one should have to complete a continuous five years of service to be entitled to gratuity.

Regards,
Rajvir

Applicability of the Gratuity Act

It is applicable to all shops or establishments where 10 or more employees are employed on any day of the preceding twelve months. It shall continue to be covered even if at a later date the number of employees is reduced. The Gratuity Act has a wide application; the only condition is having 10 or more employees.

If an employee has completed 5 years and 6 months of continuous service, that 6 months should be calculated as 1 year. You should calculate gratuity based on the total years of service, which in this case would be 6 years.

Regards,
Gayatri

The employee needs to fill Form I. You have to fill Form J when giving his gratuity. None of them needs to be given to the government. Keep it for your own records.

If you go through the definitions about the applicability, in my opinion, gratuity is applicable in your case even if the number is less than 10 today, subject to the completion of 5 years of service by the individual. Look at the definitions:

An Act to Provide for a Scheme for the Payment of Gratuity

An Act to provide for a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops, or other establishments and for matters connected therewith or incidental thereto. BE it enacted by Parliament in the Twenty-third Year of the Republic of India as follows:

Section 1: Short Title, Extent, Application, and Commencement

(1) This Act may be called the Payment of Gratuity Act, 1972.
(2) It extends to the whole of India:
Provided that in so far as it relates to plantations or ports, it shall not extend to the State of Jammu and Kashmir.
(3) It shall apply to:
(a) every factory, mine, oilfield, plantation, port, and railway company;
(b) every shop or establishment within the meaning of any law for the time being in force in relation to shops and establishments in a State, in which ten or more persons are employed, or were employed, on any day of the preceding twelve months;
(c) such other establishments or class of establishments, in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf.
(3A) A shop or establishment to which this Act has become applicable shall continue to be governed by this Act notwithstanding that the number of persons employed therein at any time after it has become so applicable falls below ten.
(4) It shall come into force on such date as the Central Government may, by notification, appoint.

Section 3(b) clearly says "ten or more persons are employed or were employed." It is better to make the 5-year completed employees eligible to avoid further legal consequences.

Regards,
Ulhas Chandratre
Sr. HR Professional, Pune

Applicability of the Payment of Gratuity Act

The Payment of Gratuity Act is applicable to all employees working in factories, oil fields, mines, plantations, ports, railway companies, and every shop & establishment employing 10 or more persons on any day of the preceding 12 months. It further stipulates that once a shop or establishment comes under the purview of this Act, it shall remain within the ambit of this Act even if the number of employees falls below 10. However, the Central Government can exempt any establishment from the applicability of this Act.

Eligibility for Gratuity

In order to become eligible to receive gratuity, the concerned employee has to fulfill the requirement of "continuous service" as defined in the Act. Furthermore, it is payable only under the circumstances specified in the Act and not otherwise, for example, in the case of retirement, superannuation, resignation, death, etc.

Non-payment of gratuity is a serious offense and may lead to the payment of additional penal interest along with other consequences. Therefore, please take actions in accordance with the provisions of the Act mentioned above.

Applicability of the Payment for Gratuity Act

Please understand that the Payment for Gratuity Act is applicable to the following organizations:

1. Every factory (as defined in the Factories Act), mines, oil fields, railways, ports, etc.
2. Every shop or establishment (as defined in the Shop Establishment Act of a state) where 10 or more employees are employed on any day during the year.
3. Every establishment employing 10 or more persons.
4. Once the Gratuity Act applies to any establishment, it will continue to apply even if the employee strength falls short of 10 employees.

In view of the above, your organization still has to follow the Gratuity Act even if your total strength has become 9. Therefore, you must continue to make contributions towards gratuity for all those employees who have completed 5 years of continuous service with your organization.

For any queries, please revert back.

Thanks & regards,
Suman Yadav

Coverage Under the Payment of Gratuity Act

All factories, mines, plantations, oil fields, railway companies, ports, and shops & establishments in which 10 or more persons are employed are covered by the Payment of Gratuity Act. Once a shop or establishment comes under the purview of the Payment of Gratuity Act, it shall continue to be within the ambit of this Act even if the number of employees falls below 10.