Can Employees Claim Gratuity if Terminated Before 5 Years Due to Company Shutdown?

Dear Experts,

Can you please tell me if we can get the gratuity amount to be paid in the following case:

Gratuity as Part of CTC

Gratuity is a part of CTC, deducted every month and kept on the employer's side. If an employee has completed only 1 year and the employer terminates them due to layoff, retrenchment, merger, shutdown, or closing the company, what happens?

In the above case, the employee did not resign, but the employer terminated almost 70% of the employees due to shutdown.

Please suggest. I am aware that gratuity is not paid until an employee completes 5 years, but what about the case explained above? Can any victim claim the gratuity in any of the above cases?

Regards,
Mamta

You are not eligible for gratuity since you have not completed 5 years of service. On the contrary, the employer has to provide you with retrenchment benefits only.

This topic has been discussed in the forum several times; kindly do research to have a better idea.

Conditions for Retrenchment

2[25F. Conditions precedent to retrenchment of workmen. —No workman employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until—

(a) the workman has been given one month's notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice;

3[***]

(b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days' average pay 4[for every completed year of continuous service] or any part thereof in excess of six months; and

(c) notice in the prescribed manner is served on the appropriate Government 5[or such authority as may be specified by the appropriate Government by notification in the Official Gazette]].

Your query can be answered in two parts.

Part 1:

Since the employee has not completed 5 years, they are not eligible for gratuity. Also, since their employment or during the course of employment has not resulted in any permanent disability or death, the gratuity cannot be paid (a case where payments are made for having less than 5 years of continuous service).

Part 2:

The employee has completed 1 year of continuous service and hence has been retrenched/laid-off depending upon the nature of the cause of termination. I hope the employer gave prior notice (minimum 1 month) of retrenchment to the employees and had approval from appropriate authorities. In case the retrenchment is valid and not void, retrenchment compensation is paid to the employees in lieu of the notice period at an average of 15 days' salary.

I hope this clears all doubts now.

Regards, Mahwish

I have rendered my service in an organization for 5.8 years. I resigned on 28/02/2013 and was relieved on 8th March 2013. To date, they have not settled my gratuity amount. I have repeatedly forwarded my request through emails and letters. Kindly suggest to me what the next steps to be taken are.

Regards,
Sneha

Have you filled Form-1 as per the act? Please find below the extract.

In case the employee is not paid the due amount of gratuity, they should apply, ordinarily within thirty days, in Form-I to the employer. If an employer fails to pay the due gratuity even after receiving notice in Form-1, the claimant employee or their nominee or legal heir may, within ninety days of the occurrence of the case for the application, apply in Form-IV to the Controlling Authority for issuing directions to the employer. After conducting the inquiry as prescribed, the Controlling Authority will determine the amount payable and direct the employer to make the payment. If the employer fails to comply with the direction, the Controlling Authority can direct the Collector to recover the amount due and pay it to the applicant.

I fully agree with the views expressed by Siji. You may follow his advice to apply for the legitimate gratuity amount.

Regards,
Sibabrata Majumdar
Management Consultants Legal & HR
[Email Removed For Privacy Reasons]

They might have included the gratuity component as part of your CTC. They can't deduct gratuity from your salary. Most private organizations that follow the CTC structure indicate the gratuity component in their CTC, but they are not obligated to pay the gratuity if you have not completed the mandatory 5 years of service.

Regards,
Pon

Dear Experts, I joined a private limited company on 01.09.2009, and my services were terminated on 01.03.2014 (Total Service: 4 years 7 months). Could you please confirm whether I am eligible for gratuity?

Thank you and regards,
Raju

You are not eligible for gratuity under the Payment of Gratuity Act.

Regards,
R. K. Nair

Dear Mamta,

Gratuity is a reward given by the employer for long-term service with a single employer. As per the law, for entitlement to gratuity payment, an employee has to work continuously for 5 years in the same company. However, there is no law that states gratuity or bonus should be merged with CTC. If an employer considers these as part of CTC, then the company must pay it because it is a monthly part of CTC. When you consider it as a monthly part of CTC, you have to pay it.

Regards

Gratuity Eligibility and Exceptions

As per the act, gratuity is payable on completion of 5 years of continuous service. This means there should not be any loss of pay (due to suspension, absenteeism, etc.).

Many companies count a minimum of 5 years, i.e., only on completion of 5 years. A few companies, who care for employees, also consider if an employee has completed a minimum of 4.6 years of service or has completed 240 days in the 5th year, provided there is no loss of pay in the first four years or in the fifth year.

If an employee retires (officially as per the date of birth) even before completing 5 years of service, then gratuity is payable considering that the respective employee had completed 5 years of service. For example, if the retirement age in the company is 58 years and the company hires a candidate at the age of 54 years, if the employee retires after 4 years of service with the company, then in this case, the employee is eligible for gratuity. However, this is not applicable in the case of resignation.

There are a few smart companies that will retire an employee after attaining the retirement age and continue the services as a Consultant/Adviser. In these cases, the gratuity is applicable until the end of service/association with the company and not until the retirement age, as it is counted as continuous service. However, if there was a considerable gap before rehiring the candidate, then gratuity is not payable.

In the case of the death of an employee, the gratuity is payable, calculating for the period worked with the company and for the remaining years of service, considering that the employee was to work until retirement with the same company.

Thanks.

There are different rules for retrenchment and business shutdown (bankruptcy). Organizations are not liable to pay any amount in case of complete bankruptcy (after proper legal formalities, which show that they are truly bankrupt). However, in the case of retrenchment, organizations are in a financially bad condition. But for not paying gratuity or firing any employee, they have to give the employee proper notice and pay them one month's salary in advance.

Regards,
Ram Chauhan

Your query can be answered in two parts.

Part 1: Since the employee has not completed 5 years, they are not eligible for gratuity. Also, since their employment or during the course of employment has not resulted in any permanent disability or death, the gratuity cannot be paid (a case where payments are made for having less than 5 years of continuous service).

Part 2: The employee has completed 1 year of continuous service and hence has been retrenched/laid-off depending upon the nature of the cause of termination. I hope the employer gave prior notice (minimum 1 month) of retrenchment to the employees and had approval from appropriate authorities. In case the retrenchment is valid and not void, retrenchment compensation is paid to the employees in lieu of the notice period at an average of 15 days' salary.

I hope it clears all doubts now.

Regards,
Mahwish

I agree with Mahwish Khan. But if the service period is six months and above, in case of your retrenchment, compensation will be 50% of basic. If service is completed for one year, in that case, your compensation will be 15 days of wages. You are not liable for gratuity before 5 years. Only two cases are not considered in the condition of 5 years: 1. permanent disablement. 2. Death.

Dear Sir, In my opinion, CTC stands for the cost to the company. Most companies base the CTC on the actual cost of the employee. Subsequently, the employer is legally obligated to pay the gratuity after the completion of 5 years of service.

Regards,
Suresh