Change of Ownership: Will Employees Lose Gratuity and Seniority in the Transition?

Change of Ownership and Employee Status

In a certain organization, there were two firms: one was a proprietary firm, and the other was a private limited (pvt ltd) firm. The proprietor of the first firm was also one of the partners of the other firm. Due to some management reasons, the proprietary firm was taken over by the pvt ltd firm, and all the employees of the proprietary firm were asked to resign and were issued fresh appointment letters in the pvt ltd firm.

Since the proprietary firm had been in existence for the last 15 years, there were many employees who had served in the firm for more than 5 years.

Employee Status and Gratuity Concerns

Will the employees be considered as fresh employees in the new firm, and will they lose out on their gratuity? When the change of ownership took place, an MOU was signed declaring that the pvt ltd firm takes over the proprietary firm with all its assets and liabilities. However, nothing to this effect is mentioned in the appointment letter, and all employees have been asked to resign citing personal reasons (the employees are more than 100).

Please advise.

In this entire case, resignation shall play an important role. Just see how it is: if your proprietor firm merges with Pvt. Ltd., then you don't need to take a resignation letter from the employee; their service will automatically be treated as continuing. However, if you do take a resignation, then it shall be treated as the end of employment in one establishment, and accordingly, you need to settle their gratuity as well. Their service shall be treated as continuing with Pvt. Ltd., but they will only be considered as new joiners.

Thank you.

In this case, in a new appointment letter, the employer should mention the clause that gratuity will be payable as per the Payment of Gratuity Act, 1972. For the purpose of gratuity, your date of joining in the previous company and the date of joining of the previous company will be the basis of calculation. Hence, seniority will be considered.

The liability for payment of Gratuity, ESI, PF, or any dues ends from the date of handing over/takeover of the firm based on the conditions mentioned in the MOU. Hence, all employees lose their services, and the liability of payment of Gratuity lies with the old management (proprietary firm). The services will be added from the date of the new joining of employees only.

Thank you.

The proprietary firm's liability for the payment of Gratuity, ESI, PF, or any dues ends from the date of handing over/takeover of the firm based on the conditions mentioned in the MOU. Hence, all employees lose their services. The liability for the payment of Gratuity lies with the old management (proprietary firm). The services will be added with effect from the date of new joining of employees only. Therefore, it is better to settle the Gratuity amount by the Proprietor firm on the date of resignation of employees.

Before answering your question, let me ask you some questions.

On Whose Behalf Are You Asking?

On whose behalf are you asking this question - on behalf of the employees or the management acquiring the proprietary concern?

Employee Concerns and Assurances

When the merger is well-known beforehand and the employees likely to be affected by the merger are well over 100 in number, was there any attempt by the employees, either formal or informal, to ask the Proprietor of the old concern about the settlement of the service of the employees?

If so, was any assurance given by him that all the 100 and more employees would be taken by the Buyer/Acquirer with continuity of service and all attendant benefits?

Oral Assurances and Employee Actions

In case just an oral assurance was given by him and out of trust in the man OR the clause in the MOU REGARDING TAKING OVER OF LIABILITIES BY THE ACQUIRER the employees kept mum, why did no one question about resignation and appointment as fresh employees?

Resignation and Gratuity Concerns

Were the people asked to resign before or after the merger?

Were the eligible people paid their gratuity?

Thank you.

The business is a family-run business, and the proprietor of the first firm in question is also the partner of the second firm along with his wife. The merger was not announced well in advance to the employees; it was done just a few days before the end of the previous financial year, and the merger took effect from the beginning of the current financial year. The employees were not aware of what decision the management would be taking as they had kept their decision pending regarding whether the employees would be transferred or freshly appointed in the new firm.

It is only in June that they were asked to resign from the old firm and were told that they would be issued fresh appointment letters. However, all the employees have expressed their reservations regarding resigning from the old firm and getting a fresh appointment letter. Since April, though anything was not given on paper, the salary of the employees was paid in the name of the new partnership firm.

The management is just giving verbal assurance that they will take care of the employees when they leave, yet the employees are asking for some written confirmation or a mention of the same in their appointment letter, which the management does not want to do. The management is good and ethical, and they have taken care of employees in the past also. Yet with so many changes, the employees are not ready to settle for anything less. The employees are really concerned about their gratuity because PF has been transferred to the new company.

Please advise.

Regards.

Dear Tittli, it is a good indication that, despite being one of the affected employees (I suppose), you still hold your management in high esteem. Your management certainly deserves appreciation. However, when it comes to business decisions made unilaterally by an employer that may negatively impact employees, their past ethical behavior cannot excuse calculated actions that bypass legal provisions in the present.

Merging Sole Proprietorship with Partnership

In essence, the entire process involves merging the sole proprietorship concern with the partnership concern, where the former sole proprietor is now a partner alongside his wife. This merger includes transferring all assets, liabilities, and the services of the employees from the former to the latter entity. If any employees are unwilling to proceed due to personal reasons, they have the option to resign. The management's decision to merge for business purposes such as synergy, delegation of administration, and economy should not disrupt the continuity of employment and service conditions for the previous employees.

As per your statement, there was no formal communication or consultation with you before the merger, yet since April, you have been on the new firm's payroll, receiving payment, and having your P.F accounts transferred to the new employer. This transition implies that all employees from the defunct proprietorship concern are now part of the partnership firm with uninterrupted service since April.

Concerns Regarding Employment Transition

Given this situation, why does the management now require you to resign from the defunct firm? What about your seniority compared to existing employees of the partnership firm? How will the past services of those employees ineligible for gratuity be addressed? Why is the management suddenly spending significant amounts on gratuity settlements for eligible employees and treating them as new hires?

Reflect on these valid questions, setting aside any blind faith in the management based on past experiences. It would be beneficial to approach this issue collectively with the management, and any decisions made should be resolved under the Industrial Disputes Act, 1947.

Thank you.

No full and final settlement is being done from the old company. Only PF is being transferred. As far as gratuity is concerned, nothing has been done. The affected employees are being told that at the time of their leaving the organization, everything will be taken care of, including giving an experience letter in one single form. Kindly advise.

Impact of Firm Transition on Employee Benefits

It is better for management and employees to settle all benefits now. Once the employee has resigned and receives a new appointment order, he will lose his service. His service will take effect from the date of the new appointment only. The old management may provide an experience letter, but they have to mention the end date on which the management (Firm) is changed. Therefore, the employee may lose his experience on one side, and on the other side, they may not be entitled to claim gratuity from the new management.

Regards

This is to confirm that we recently transferred a few employees from our main company to a new company where the directors remained the same. This change was necessary due to certain statutory requirements. We issued a single transfer letter stating that all their employment benefits, job descriptions, and rules remain the same. Additionally, all their benefits, including leaves and gratuity, will continue as per their original date of joining.

No full and final settlement is being done from the old company; only PF is being transferred. Regarding gratuity, no action has been taken yet. The affected employees have been informed that everything, including providing an experience letter in a single format, will be taken care of at the time of their departure from the organization.

Kindly advise.

At last, the cat is out of the bag! In merger cases of companies, the assets and liabilities of the merging company are completely transferred to the merged company. By cross-referencing the contents of your various posts so far, the emerging position appears to me as follows, and you can correct them if found contrary or wrong due to my lack of understanding:

1. With effect from 01-04-2014, the proprietorship company ceases to exist.

2. Without any formal intimation about the merger and the transfer of their services, the employees of the Proprietorship Company were already transferred to the Partnership Company with immediate effect. Therefore, they are the regular employees of the Partnership Company with effect from the date of their transfer.

3. Since they were not given any option in this regard either by the sole proprietor or by the Partnership Company, the transfer of the services of the employees is deemed to be with continuity of their past service.

4. Hence, no necessity for submission of resignation as insisted by the management now nor any experience certificate.

5. In case of termination of any one of the absorbed employees for any reason whatsoever either now or later, the responsibility of settling terminal benefits for the entire length of service rendered in both the companies rests with the Partnership Firm.

Regards.

Greetings, but these things, as mentioned, should be verified. Resignation itself states the end of employment, resulting in losses for the employees. The transfer letters have to be issued to avoid any further apprehensions and ambiguity. The transfer of gratuity involves formalities from LIC. There is a lot of paperwork involved. We have transferred the provident fund and salary accounts of the employees, and the gratuity transfer from one company to another is under process. Please do take this up with the management at the earliest.

Regards

Gratuity Settlement for Employees in Transition

For the new organization, it would be considered as per the Appointment Letter Date.

As for the old proprietary firm, they need to settle the payment of gratuity to all the applicable employees who have completed a minimum of 5 years of service.

Regards,
Dr. Urjit Kavi

Greetings,

Yes, it does so. But what happens to people who are with the company for less than five years?

For this sole reason, our management did not go for a full and final settlement but kept the employment in continuation.

Regards,

Gratuity Eligibility in a Proprietary Firm

Please advise, our management now states that in a proprietary firm, employees are not eligible for gratuity as per the law. Is this true? Does this mean that all employees who have been asked to resign from the proprietary firm will lose out on their gratuity for no fault of theirs? In case this is not accurate, could you please guide me on where I can find evidence stating that as per the Gratuity Act, even employees in a proprietary firm are eligible for gratuity?

Thanks & Regards,
Tittli

All along, my answers to your questions were given with an undercurrent of abundant caution, not to sow the seeds of distrust in the minds of the employees whose loyalty to the employer is great and unquestionable, and to avoid spoiling their otherwise smooth relationship with the new management, in which the erstwhile proprietor happens to be a partner too. That's why I chose to answer in a very generalized way.

The fact that, although the employees number 100 and the merger is certain and well thought-out by the family running both companies, there was not even a formal discussion with them on this matter, and one fine morning they were suddenly in the employment of a new firm, indicates something messy utilizing the blind loyalty of the employees and their virtual lack of representation. This could be the outcome of some wrong advice to the management or their come-what-may tendency. Your latest post informing the forum about the new management's version of non-eligibility of proprietary firm's employees to gratuity reveals that the entire operation of the en masse transfer of the services of the employees of the defunct firm without any authentication either by the transferor or the transferee is a schematic exercise to circumvent the provisions of Section 25FF of the Industrial Disputes Act, 1947, and the Payment of Gratuity Act, 1972.

Eligibility for Retrenchment Compensation

Sec. 25FF stipulates that every workman with not less than one year of service in an undertaking shall be paid compensation as per Sec. 25F, as if he has been retrenched when the ownership or the management of the undertaking is transferred either by agreement or operation of law. So, you are all eligible for retrenchment compensation on merger at 15 days' wages last-drawn, apart from gratuity.

However, this will not be applicable when:
1. The service of the workmen has not been interrupted by such transfer.
2. The service conditions after transfer are not less favorable.
3. The new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer.

When the employees transferred are kept in the dark about the terms of transfer, how can they stake their claims either for retrenchment compensation or gratuity now or later against the Partnership Firm?

Don't believe everything told by the management in blind faith and loyalty and become a simpleton.

Better, first raise a formal issue with the management through some efficient and sincere Trade Unionist, and if not fruitful, then raise a dispute under Sec. 2k of the Industrial Disputes Act, 1947.

Regards.

Thank you to all members, especially Umakanthan sir, for patiently answering my questions. Just one more clarification is needed: are members of a proprietary firm eligible for gratuity? I am repeating this question because after reviewing the gratuity act, I did not find any mention that gratuity is applicable only for partnership/pvt ltd firms. Could you please clarify?

Hi, please let me know whether an employee can claim gratuity if the employer asks them to resign. The work period of the employee is more than 5 years. After 2 months of my resignation, I received my salary and incentive for that particular month, but I did not receive my gratuity amount. I need your help on how to claim gratuity. I would request you to provide me with suggestions on this and also help me with your contact number.

Regards,
Avinash Kaur Dhingra

As far as gratuity is concerned, nothing has been done. Please help me; I really need your help.

In a certain organization, there were two firms: one was a proprietary firm, and the other was a private limited (pvt ltd) firm. The proprietor of the first firm was also one of the partners of the other firm. Due to some management reasons, the proprietary firm was taken over by the pvt ltd firm, and all the employees of the proprietary firm were asked to resign and issued fresh appointment letters in the pvt ltd firm.

Since the proprietary firm had been in existence for the last 15 years, there were many employees who had served in the firm for more than 5 years.

Employee Status and Gratuity Concerns

Will the employees be considered as fresh employees in the new firm, and will they lose out on their gratuity? When the change of ownership took place, an MOU was signed declaring that the pvt ltd firm takes over the proprietary firm with all its assets and liabilities. However, nothing to this effect is mentioned in the appointment letter, and all employees have been asked to resign citing personal reasons (The employees are more than 100).

Please advise.

The employees can take their full and final settlement with gratuity for the said period legally, as this is the proprietary firm's liability, and the pvt ltd firm will pay it accordingly to the MOU.

Dear Members, none of you have replied to my question: is gratuity applicable in a proprietary firm?

Thank you.

I believe that inadvertently, you missed some of the contents of my reply dated 20-07-14. The Payment of Gratuity Act, 1972 applies to all establishments enumerated in Sec.1(3)(a), (b), and (c) of the Act, irrespective of their constitution, such as proprietorship, partnership of any type, private limited, public limited, government corporations, etc.

Thank you so much, Umakanthan sir, for this new idea being communicated to employees. They were informed that as they were part of a proprietary firm, they are not eligible for gratuity. However, after reviewing the Gratuity Act, I could not find any reference stating that gratuity is not applicable in a proprietary firm. I just wanted to confirm. Thanks once again.