How Should Gratuity Be Calculated for Former Employees in a Changing Company Structure?

Hello everybody,

The organization started as a Proprietorship in 1990, then converted to a Partnership in 1996, and finally transformed into a Private Limited Company in 2006. Now, some former employees are inquiring about their Gratuity amounts. How should Gratuity be calculated? Someone is suggesting to consider LIC's scheme - what is the better option? Provision is also required for former employees who have completed an employment period of 5 years.

Experts are requested to provide guidance.

Rajendra

Formula for gratuity
Gratuity = Monthly salary x 15 days x No. of years of service.
Insuranace
The Payment of Gratuity (Amendment) Act, 1987 has laid provisions for compulsory insurance to cover employer's liability towards payment of gratuity under the Act from the Life Insurance Corporation of India establishment under the Life Insurance Corporation of India Act,1956 or any other prescribed Insurer.

Dear Rajendra,

The change in the constitution of your company from that of a Proprietorship Firm to that of a Private Limited Company is a cosmetic change only and it cannot alter the rights of the employees to gratuity if they are qualified based on their length of service and mode of termination of their employment. This is equally applicable to all ex-employees if they are eligible and left out to be paid gratuity soon after their termination.

Clarification Needed on Gratuity and Employment Continuity

Here, there are a few points to be clarified:

1. Rajendra is asking this query - isn't it on behalf of the company or for employees, both who have left and those who are continuing? Are you from the Finance/Accounts department of this company? This is required to clarify what the employer is required to do and what is in store for the employees.

2. Is there any document to show that the continuity of employment (continuous service) is ensured despite the change in the status of the firm, i.e., from Proprietorship to Partnership to Company to Limited Company?

3. What understanding/assurances were given by the administration for those employees who left these entities from time to time?

4. What is the mode of operation in the past, present, and for the future that the administration is following with regards to gratuity?

5. How has the gratuity for the employees who have left been managed so far? Is the Gratuity Act applicable to all employees at present? What is the status of those not covered by the act?

6. Was/Is there any 'gratuity fund' created and left to a company's trust to administer?

7. Since it is presently a Limited Company, the provisions of the Companies Act, 1956 are attracted. Therefore, a provision for statutory compliance in accordance with the Actuarial valuation method (certified by an Actuary) has to be created in the Accounts of the company. Failing which, the Auditor will not certify your Accounts or make a qualification in their Report to the Board/Shareholders mentioning the amount involved.

8. Have you/your company discussed these issues with LIC? If so, what is their proposal?

Regards, Rajendra