How to Handle Retrenchment and Gratuity Claims for an Employee After Contract Ends?

Employee Termination and Benefits Query

Our (manpower providers/establishment) employee at the executive level was working at the client's place for three years. The client's financial pressures led to the non-extension of the employee's contract. Consequently, we informed the employee and requested his resignation, as no suitable position was available with us or other clients. We notified him via email about a one-month notice period. Although the employee did not resign, he served the notice period. Our invoicing to the client was based on the employee's CTC, which included Salary, PF, and Gratuity.

Now, the employee has raised the following queries:

1. Retrenchment Benefits Eligibility

The employee is demanding retrenchment benefits due to the termination of his employment. Is he eligible for these benefits, and if so, what should be the calculations?

2. Gratuity Payment Before Completion of 5 Years

He is demanding that since gratuity is part of his CTC (as per the offer letter) and is being paid to us by the client, it should be returned to him in the Full and Final settlement, even though he has not completed five years. What should be the appropriate course of action in this matter?

Additionally, what is the legal standing of this argument, as the employee intends to discuss this with our MD?

Kindly share your valuable inputs.

Thanks,

PLB

The terminal benefit of retrenchment is available only to a person employed in the category of "workman" as defined under sec. 2(s) of the Industrial Disputes Act, 1947. However, designation or quantum of salary cannot decide this factual position. You've mentioned that yours is a manpower provider on a contract basis to your clients. If so, it is to be disclosed whether you have taken up any license under the Contract Labour (R&A) Act, 1970, and whether the post of executive at the client's site is included in the number of contract labor actually supplied. Otherwise, his terminal benefits would strictly be as per the exit clauses of his contract of employment only.

Gratuity under the Payment of Gratuity Act, 1972, in this case, will arise only after his rendering continuous service of not less than five years both at the client's site as well as your establishment. However, in view of your receipt of a gratuity amount already from the client on an actuarial basis, you may consider paying off the same to the individual as it is going to cost you nothing more. So consider these points and put up a note to your M.D. accordingly.

Regards, PLB

Sir, thank you for your kind feedback. I would appreciate further clarification on point 1: He qualifies as a workman under the ID Act. The offer letter stated a maximum contract duration of 2 years, and subsequently, an appointment letter was issued, and he worked for a full 3 years.

Is he eligible for retrenchment, and what would be the calculations?

Section 25F of the Industrial Disputes Act, 1947 may please be referred to. Since the initial contract tenure was over and his services were subsequently extended, and the inevitable retrenchment happened in the middle of the extension period, you have to serve a prior one-month's notice of retrenchment on the workman or one month's wages in lieu thereof. Additionally, pay him, at the time of retrenchment, compensation at 15 days' average pay for every completed year of service.

Most of all, what were the terms of employment and in what capacity did he work at the client's end? Mere designation will not determine whether he was working in a supervisory category under the ID Act.

Gratuity would have been legally payable upon completion of 5 years of service. Now, the gratuity component is included in CTC, and the employee has agreed to it. Though it is not currently payable, and as such, the employee has no legal right to it, it is left to the organization whether to refund the said amount to the employee or not.