Can We Pay Gratuity to Employees After 5 Years of Mixed Payroll? Seeking Advice!

Our company provides contractual labor to Fortune 500 companies. We offer fresh recruitments and also take on employees whom our client has shifted from their payroll. Now, one of our clients wants us to provide gratuity to the resources who have completed 5 years with them—2 years on their direct payroll and 3 years as contractual employees routed through our agency. The client will pay us the amount, and we need to pay it to the employee. My question is, can we pay such an amount as gratuity to the resource?

Ideally, you have to give gratuity to employees who have completed 5 years in your organization. If you are saying that they were on your payroll for 3 years, and since their payroll has changed, it means they are no longer associated with your firm. Therefore, you are not supposed to give them any kind of gratuity as they are not part of your organization.

Let's hear from experts what they have to say about it.

Monica is right. Since the employees are on the payroll of the third party (Agency), your company is not liable to pay them gratuity.

Regards,

Gratuity Eligibility for Contractual Employees

The employees are 3 years old on your company rolls, even though they worked for 2 years in the parent company. They are not eligible for gratuity because the continuity of service with your company is 3 years.

If the management is interested, let them pay for 2 years or even for 5 years, but your liability starts after completion of 5 years of service in your rolls.

Thanks and regards,
Kamesh

I don't think "Gratuity" will apply here. However, since the parent company wants to disburse the amount, this could be paid as a bonus.

Also, what is not clear is if the persons concerned are still in employment. Gratuity is applicable only on resignation/termination of a service contract. If they are still employed by your company, no gratuity is applicable. Do note, however, that even if you pay this one-time bonus now, gratuity will kick in on completion of 4 years and 240 days with YOUR company, and that is a liability your company will have to bear in mind.

From your query, it is understood that your client-company continued the said employee with them for 5 years (2 years with them + 3 years with your company, and still the said employee is working with the same Principal Employer through your company). Actually and ethically, the Principal Employer's Company is absorbing contract labor/employees and regularizing them on the Principal Employer's muster roll. Having employment with the principal employer is always better than having employment with contract labor, in all respects. In this case, it is a clear-cut case of UNFAIR LABOR PRACTICE done by the Principal Employer.

Now, ask the Principal Employer to pay the gratuity of 2 years to the said "harassed employee," and when he completes 5 years of service in your organization and then leaves your organization, you pay the gratuity as per the provisions of the said Act for the actual service rendered in your organization.

If the said "harassed employee" wants to resign immediately, then only the Principal Employer is held responsible to pay the complete gratuity to the said employee. If he seeks relief under the law, the Judiciary will not consider your 2+3 years arrangement and will direct the principal employer to pay gratuity for the entire period, i.e., 5 years to the said employee.

Understanding Gratuity Payment Under the Gratuity Act

As per the Gratuity Act, the following needs to be understood for claim and payment:

• Tenure of uninterrupted/continuity (no break by virtue of employer change/service change, unless protected by agreement) service - 5 years.

• Master and servant relationship (employer and employee).

• Any disciplinary action to stop the payment of gratuity.

In the above case, if there is continuity of service, gratuity will be payable to the employee by the current employer on severance. The current employer can demand from the previous employer for the previous period.

Thanks,
Regards,
Mritunjay Nath Sahu
GM (HR)

First and foremost, your question is not clear to me. As one of the respondents suggested, gratuity is a terminal benefit in the event of any type of termination of employment stipulated in the Payment of Gratuity Act, 1972. You have mentioned that you also accommodate the persons on the payroll of your clients as your contract employees when you are told to do so. Keeping aside the ethics of such an act and the vulnerable sentiments of the employees, what has happened is the transfer of service of the concerned employees from the Principal Employer to that of the contractor. Therefore, as the contractor, the concerned employees' services start from the dates of their transfer and are still continued, albeit as contract labor. Hence, where is the question of termination as of now? Even with the Principal Employer on their direct payrolls, it is only two years, and no eligibility for gratuity arises. You have also stated that your client would pay you the amount, ending in a doubting note whether you should pay such an amount as gratuity to the resource. Anyone with common sense and a bit of legal knowledge can easily presume that the entire deal is questionable. I have seen many Principal Employers treating contract labor as a source of regular labor recruitment, but your situation is quite the opposite. I am afraid that at some point, you both may land in trouble, as it is an act of unfair labor practice.

Please let me know if you need further clarification.