Confused About Annual Bonuses and Settlements: Is This Practice Legal for Small Textile Units?

Introduction

Ours is a manufacturing (textile) unit set up and running for over a year. Our unit doesn't come under PF or any other acts as we employ fewer than 20 members. We have difficulty setting up a formal employment contract. I have elaborated my questions below. Can someone with knowledge on this shed some light?

Question 1: Annual Bonus and Settlement

Some staff expect a bonus (one month's salary) and a settlement (for 15 to 30 days' salary) to be paid every year as they were paid by their previous employers. I have observed that many employers pay bonuses and other final settlements (15 to 30 days' salary, leave encashment, etc.) every year by Diwali, thereby settling all dues with that employee and starting afresh after the factory reopens following Diwali. I assume this is similar to a fixed one-year contract issuing a new contract annually. Unlike situations where employees are settled when they leave their jobs, this system of full and final settlement every year confuses me. Is this method of employee (permanent or contract) compensation valid or legal?

Question 2: Annual Gratuity Payment

Some say 15 days of salary (in the aforementioned scenario) is paid as gratuity every year. Can employers choose to pay gratuity annually instead of paying in full at the end of employment, regardless of whether the employee completed five years or not? (For contract employees)

Dear Deepak,

The textile business is something unique, especially in TN. There is both organized and unorganized work, involving piece-rate and time-rate systems that have been ongoing for ages. I hope you are familiar with the nature of this industry. Similar conditions exist in the Beedi industry, with thousands of powerlooms operating around the residences of those involved. Some individuals obtain spun yarn from owners and supply finished cloth based on piece rates. While these operations may not fit the traditional definitions of 'industry,' 'factory,' or 'shops,' there are indeed manufacturing activities taking place.

In this setting, the practice of hiring workers for short periods without proper legal pay packages is common. These workers are often settled intermittently, depending on their frequency of mobility, which can vary from short durations to month-to-month or even piece-to-piece settlements. In such circumstances, establishing a standardized remuneration model would be challenging. One could argue that the concept of CTC (Cost to Company) prevalent in the IT/ITES sector should find its roots in this industry.

It's unlikely for considerations like PF, Gratuity, Leave encashment, or bonuses to be part of the compensation structure. These payouts are predominantly determined by the bargaining capacity and skills of the employee, rather than strict legal parameters, as benefits are typically agreed upon on an individual basis, depending on the employee's skill level and workload.

As you mentioned, the legal aspects are limited by the number of employees and their tenure. If employees are considered to be employed for the entire year and settlements are made on an annual basis, offering 15 days' wages could suffice for bonus and gratuity considerations. However, regarding leave policies, it's uncertain. If you are willing to provide gratuity at a rate of 15 days' salary, it would be commendable, as even some MNCs and organized sector firms often fall short for employees with less than 5 years of service.

In conclusion, following the practices observed in your locality or sector could help resolve your current predicament.

Thank you for your insights. As you mentioned, the textile business is mostly an unorganized sector here, except for major factories that employ thousands of workers. Therefore, we have no choice but to follow the local practices, irrespective of the legality surrounding them. It has become a norm, and if we don't follow it, we would end up not having enough workforce. I am not sure why this sector is still allowed to operate in an unorganized manner; that is a different area of discussion.

In this case, can I draft an employee contract, such as a 1-year contract, settle the dues every year, and have them sign a new contract annually? Despite having fewer than 20 staff members, I am striving to make salary, wages, settlements, etc., as organized as possible.

Thanks,
Deepak

I missed the attachment. Please find attached the history of bonuses in India for your information.

Regards.