Retrenchment and Gratuity: Are Employees Eligible Before 5 Years of Service?

Dear Seniors, In case of retrenchment, if the employee is retrenched before completing 5 years of continuous service, is the employee eligible for gratuity? If yes, for how long is he eligible for gratuity?

Thanks in anticipation.

Regards,
Prashant
[Phone Number Removed For Privacy Reasons]

There is only one thumb rule in gratuity, which is "paid only after completion of 5 years of service." No matter what the reason for leaving the organization is, whether it be termination, self-resignation, or retrenchment.

Nipuna, is this your own opinion, or do you have any supporting documents for your statement?

As per Section 4 of the Payment of Gratuity Act, 1972, gratuity shall not be payable to an employee on termination of employment unless he has rendered continuous service of not less than 5 years. However, it is also provided that the completion of continuous service of five years shall not be necessary where the termination of employment is due to death or disablement.

Legal Position on Gratuity Eligibility

It is not an opinion. It is indeed the legal position. As has been pointed out under the Payment of Gratuity Act, an employee is eligible only on completion of five years. The only exceptions are the death of an employee or cessation of employment due to disablement arising out of an employment injury.

Historically, the Industrial Disputes Act was legislated in 1947, and the Payment of Gratuity Act was legislated in the year 1972. Lawmakers in 1947 did not contemplate gratuity. When the Payment of Gratuity Act was enacted, lawmakers intentionally did not include retrenchment.

Then I think, is it possible for an employer to evade Gratuity Liability by retrenching employees before the completion of 5 years of continuous service?

Will you please read Sec 2(oo) of the ID Act conjunctively with its Sec 25F? As I understand, retrenchment is the act of an employer terminating the services of an employee for any reason other than as a punishment by way of disciplinary action, subject to the conditions stipulated in Sec 25F. If you further analyze the four exceptional types of termination of employment of a workman occurring in clauses (a), (b), (bb), and (c) of Sec. 2(oo), you will find that the first one is purely on the volition of the workman, the second and the third as an automatic result of the contract of employment coming to an end, and the fourth one, of course, by the employer emanating from the impossibility of the continuation of employment as a result of continued ill-health of the employee. So, an employer can resort to retrenchment for whatever other reasons. However, if the conditions stipulated in Sec. 25F are not fulfilled, it will not be construed as 'retrenchment' and its legal consequences you know well. The retrenchment compensation provided for under cl (b) of Sec. 25F is independent of other terminal benefits the workman is entitled to at the time of his retrenchment. Hence, the entitlement of a retrenched employee to gratuity is to be decided only as per the provisions of the Payment of Gratuity Act, 1972, notwithstanding the hypothetical consideration, if any, that but for the retrenchment the employee would have been in service. I, therefore, think that the assertion of Nipuna is correct and self-explanatory too. Hope I've answered your second query also.

Evasion is unethical. Discussing something unethical in an open forum like this may not be correct. I have personally handled a few retrenchment situations involving less than five years. Invariably, I have recommended payment of gratuity even for those employees with less than 5 years, and the managements have agreed to my recommendation.

Understanding the Spirit of Legislation

Understand the spirit behind these legislations rather than just understanding the letter of the law. This will surely help in making ethical decisions.

If an organization really cannot afford to pay, then it is a different issue. But trying to save some money by evading the law is unethical.

Thanks

I must appreciate Prashant for asking a good brainstorming query on the Industrial Disputes Act. In another query, he has expressed his apprehension that it is possible for an employer to evade Gratuity Liability by retrenching employees before completion of 5 years of continuous service. I totally disagree with him on this point, the reason being that the Industrial Disputes Act has very well covered such cases where the employer resorts to retrench his employees.

Conditions Under the Industrial Disputes Act

Chapter VA (where an industrial establishment employs less than 50 workmen) and Chapter VB (where an industrial establishment employs less than 100 workmen) deal with the conditions which make it mandatory for an employer to follow before resorting to retrenching his employees. One of the conditions is that the workman will be entitled to receive, at the time of retrenchment, compensation equivalent to fifteen days' average pay for every completed year of continuous service or any part thereof in excess of six months. You will agree that the legislators have very well thought about your apprehension and incorporated the clause so that an employer does not evade the liability.

This benefit is in addition to the payment of gratuity if he fulfills the eligibility criteria of five years under the Payment of Gratuity Act, 1972. My colleague Sh. Umakanthan.M has also explained the implication of retrenchment.

Regards,
BS Kalsi
Member since Aug 2011

Actually, after completing 5 years, there is an option for a person's nominee to receive gratuity if the individual dies in a factory accident after 4 years and 6 months. I mention this because a case was heard in 2011 in a Chennai court.

Dear All Seniors,

Thanks for your kind inputs and remarks. Let me please clarify that I am not of the opinion of evading any Gratuity Liability but wish to understand, with in-depth knowledge from community members, if we consider the definition of "Continuous Service." Any interruption not due to the fault of the employee should be covered under the definition of continuous service. So, I am interpreting that Gratuity should be paid for the period at the time of retrenching an employee.

Looking forward to your further kind inputs.

2A. CONTINUOUS SERVICE

For the purposes of this Act:

(1) An employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service, including service which may be interrupted on account of sickness, accident, leave, absence from duty without leave (not being absence in respect of which an order treating the absence as a break in service has been passed in accordance with the standing order, rules, or regulations governing the employees of the establishment), lay-off, strike, or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act.

Good afternoon, this is contributed by Subir Chatterjee.

Mettur Beardshell Ltd Vs. RLC 1996 Decision

In the case of retrenchment, an employee who has completed 4 years, 10 months, and 18 days continuously without any break is eligible for gratuity under the Act.

Please read the document attached that he shared.

Regards,

Though I appreciate your efforts in raising the initial query, which I termed as brainstorming, I must point out that I have an objection to your statement in your email. You mentioned that you are trying to understand or judge the depth of knowledge of community members and posed a question for further discussion regarding whether the interruption of work, not due to the fault of the employee, should be covered under the definition of 'Continuous Service' under Section 2A of the Payment of Gratuity Act.

Upon careful reading of the definition, it is evident that the period which is interrupted, not due to the fault of the employee, is already taken into consideration when computing the 240 days. There should be no doubt on this point. It is important to note that the Payment of Gratuity Act and the Industrial Disputes Act are two separate Acts, each with its own set of eligibility criteria to avail benefits.

Under the Industrial Disputes Act, the minimum period for receiving retrenchment compensation is 240 days, whereas under the Payment of Gratuity Act, a minimum period of 5 years is prescribed. When comparing the definitions of 'Continuous Service' under Section 2A of the Payment of Gratuity Act and Section 25B of the Industrial Disputes Act, both are found to be identical.

Regards,
BS Kalsi
Member since Aug 2011

Everyone knows that after the completion of 5 years, an employee is eligible for the Payment of Gratuity. However, it is also mentioned in the act that if a person completes 4 years and 6 months of service in a continuous manner, they are also eligible for the same.

I agree, there is a thumb rule as mentioned by Nipuna and agreed upon by others. However, another question arises: nowadays, many companies consider gratuity as part of CTC. When an employee resigns before completing 5 years, the company does not pay or refund the money deducted towards gratuity. In such cases, what is the legal stance? Could you all please highlight this point?

Thanks and Regards,
Sampat Tidke

Gratuity is a terminal benefit payable by the employer. There is no harm, nor is it wrong, to include it in the CTC. For financial and administrative convenience, periodic payments to gratuity schemes instituted by insurance companies are adopted. No contribution is required from the employee in this regard. Completion of five years of continuous service under the same employer is the criterion set by law as the basic norm for eligibility for gratuity.

Because of a judgment by a particular High Court, in a different context of continuity of employment of the employee under the same employer beyond five years, many people think that the definition of continuous service alone should be taken into account and not the five years literally. It is also correct in one way, i.e., we have to accept the judgment of the High Court when it is not controverted by another High Court or the Supreme Court. In case of refusal of settlement of gratuity through the outside insuring agency, please verify the contract between the employer and the insurer.