Gratuity Confusion: Does Working for Two Companies Under One Employer Count as Continuous Service?

Dear All,

Please help me understand the Gratuity payment in the following case: An employer has two companies. An employee has worked with the first company for 3 years and received his full and final amount, then joined the employer's second company and worked there for more than 2.5 years. Will he be entitled to gratuity for continuous service under the same employer?

Regards,
Sandeep

Dear Sandeep,

In my view, the employee is not entitled to gratuity as his services were not transferred from one company to another. He had already received full and final settlement from the previous company before rejoining.

Thank you.

Thank you for your reply, Malik Sir.

I was reading about frequently asked questions on gratuity. An employee is eligible for their continuous service under the same employer. Sir, there is not a detailed clarification in the rules of gratuity, so it depends on the situation.

Regards,
Sandeep

Eligibility for Gratuity

You are not eligible for gratuity. While the companies may belong to the same group, legally, both entities are different.

Regarding your doubt about the lack of detailed clarification in the rule of gratuity, company law cannot be part of the Payment of Gratuity Act. You may need to refer to the definition of "employer" as provided in Section 2(f) of the Payment of Gratuity Act. Even for that purpose, two different controlling/recruiting authorities in two different companies can be considered as two different employers. Legally, a company is an artificial person deemed to be your employer. Therefore, two different persons (companies) cannot be your employer simultaneously.

An employee worked in two companies, and the employer (the director, one of the partners, or the proprietor) is the same individual. On the condition that the services of the said employee are undisturbed and transferred to the second company, it means that even if the full and final settlement is cleared, excluding gratuity, the said employee is entitled to gratuity. This entitlement applies under the condition that the second company of the promoter is an expansion of the business, and for administrative reasons only, the employee in question was given a transfer.

Regards,
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If the same employer and different companies, once settlement is received and the individual joins another entity, it will be considered as new employment. If the same employer provides a transfer letter stating that the previous entity's service will be carried forward, then the eligibility requirements are met.

Gratuity Payment Responsibility

The new discussion on gratuity is about a principal employer who engages the same employee for two years under one contractor and for another three years under a different contractor. At the end of the 5th year, both contractors claim they are not obligated to pay gratuity, stating that the employee's tenure with each was less than five years. In this context, it is the duty of the principal employer to disburse the gratuity since the employee worked for the same principal employer for the entire five-year tenure. Anyone with a different opinion, please share.

Gratuity Act and Contract Labor Practices

Some of the Principal Employers (PEs) are circumventing the continuing service clause of the Gratuity Act by engaging contract laborers for periods of one year or less than two years under a single contract. They provide a break in service for 30 to 120 days and then re-engage them (not terming it as an appointment, employment, job, or duty but as an engagement) through another contractor for a subsequent period of two years, and so on.

As a result, graduates, engineering graduates, and diploma holders struggle to secure permanent employment.

Discussion on Gratuity Structure in CTC

We need to discuss this subject in detail to find a solution. In my view, the majority of the Cost to Company (CTC) structures include a gratuity component of 4.81% of CTC, which is not paid at the end of each year or at the end of the employment tenure if it occurs before completing five years of service, as per the Gratuity Act. If this is the case, why is the gratuity structure included in the annual CTC, knowing that most employees change jobs well before completing five years?

Exploring Solutions for Gratuity Payments

If PEs are more concerned about their funds and financial issues, they could consider joining a group gratuity scheme by depositing the gratuity payable as an annual premium and linking the gratuity with life insurance companies. Despite this option, PEs seem very intent on finding ways to avoid gratuity payments. Why is there this trend among PEs? If paying gratuity is the only way to address their financial constraints, let's discuss and find a mutually acceptable solution.

Complexities in Inter-Unit Transfers and Employee Benefits

This is a complex problem that has arisen due to the involvement of MBA (HR) and C.A. professionals with a large group of companies under a single powerful, popular, influential, and experienced industrialist like Ambani or Tata. Such industrialists often promote new companies under their banner but separate all units, and the controlling unit does not allow the interchange of units for financial and/or general administrative purposes. Thus, they keep their group intact but with independent units.

Until and unless the situation is legally addressed and the scope of terminal benefits is extended to cover inter-unit transfers, employees will be deprived of benefits like gratuity and other entitlements. However, the Ministry of Law, Ministry of HR, and Chamber of Commerce can jointly seek an amicable solution. It requires empathy, sympathy, and concern for employees, which is currently lacking.

Regards,
G.P. Agarwal, Lucknow
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