Am I Entitled to Gratuity if My Company Shuts Down Due to Insolvency?

I was working for a company where I worked under a third party, which is a subsidiary of the parent company. Now, the company has become insolvent, and the third party has issued a termination of services letter to the company where I was employed. However, this company has not informed us about the termination of its services.

I joined this company in May 2015, and the company received a termination letter for its services in November 2018. According to my offer letter, Gratuity is part of my CTC. Could you kindly guide me if I am entitled to Gratuity?

If the amount towards gratuity was being deducted from your monthly/annual salary, then you can claim that amount as ex-gratia and not as gratuity. This amount will attract income tax.

Gratuity and Continuous Service: A Critical Examination

Learned members discussed the liability to pay gratuity under the Payment of Gratuity Act concerning employees exiting employment with less than 5 years of continuous service to qualify for gratuity under the Act. You can find more details in this link https://www.citehr.com/602791-if-gra...y-payable.html.

I am perplexed to note that after the advent of the 'liberalisation' era in the early 90s, the concept of 'CTC' has become prevalent in HR practices in India, especially in the IT/ITES sector. We have seen numerous employees deprived of their gratuity, with a dual effect: firstly, components of CTC remain unpaid, and secondly, employees switch employers quickly, thereby forfeiting many years of service in between, making them ineligible due to non-completion of the required continuous service of 5 years (even though the total combined service would have exceeded 5 years). This is a menace that has been overlooked over the last three decades. It is a fact that, although the CTC pattern has been widely practiced for over 30-40 years by MNCs and Indian Companies, there has been no attempt to codify a common law governing this practice to protect the interests of the youth who have been denied benefits due to the lack of proper legislation in India, mainly to address non-payment of gratuity.

There have been numerous judgments that touch upon this subject, but there has been no proper litigation or corresponding judgments from either the High Courts or the Supreme Court specifically addressing CTC. However, the query raised by Sunil has caught my attention repeatedly, and I do not want to dismiss it simply based on the less than 5 years stipulation. In Sunil's case, he is genuinely suffering through no fault of his own as he is being denied gratuity due to the closure of his company, and he did not meet the less than 5 years norm. Whose fault is this if he couldn't complete 5 years as his company closed down? Even if gratuity is part of CTC, he should rightfully be eligible on par with 'death or disability' as per Section 4 of the Gratuity Act.

I attach a couple of judgments which speak about 5 years of 'continuous service' and termination aspects. Members are requested to comment with their inputs justifying 'gratuity on termination' even with less than 5 years of service, followed by suitably amending provisions relevant to closure and retrenchment of the ID Act, granting employees the right to gratuity, as there does not seem to be any proper legislation in the near future.

I hope someone like Sunil seeks justice through legal means by addressing these gratuity issues that are part of the CTC.

Understanding Gratuity Entitlement in Case of Establishment Closure

Learned member Kumar has approached the issue from the perspective of non-completion of minimum qualifying service by the employee due to the orchestrated closure of the establishment wherein the employee was working. He lamented on the CTC-based wage and salary administration practice adopted by many employers of late and the legal lacuna he noticed in the Payment of Gratuity Act, 1972, in pari materia with the existing provisions of retrenchment compensation under the Industrial Dispute Act, 1947. His deep concern about the denial of gratuity to employees falling prey to such feigned closure of establishments is really understandable and hence appreciable.

However, when the closure of the establishment is a genuine one resulting in the services of the employee being coterminous with the closure, if the employee has rendered the minimum five years of continuous service in the same establishment on the date of closure, certainly he would be entitled to gratuity under the PG Act, 1972, along with the other closure compensation. If not, the question of gratuity does not arise. In case the establishment's age is less than 5 years, the same is the position. Of course, I do admit the application of the ratio decidendi of the Mettur Beardsell judgment of the Madras High Court in either case.

Thanks for the remarks of our veteran on our forum, Shri Umakanthan. While everybody understands the intricacies of gratuity act provisions with respect to employees on a common remuneration pattern, my concern is about the CTC optees, especially those affected by sudden closures either under the ID Act or otherwise, who couldn't complete the qualifying service. Without this closure, they would have either continued their service and qualified or would have left based on their choices.

Another aspect I try to stress is the absence of concrete steps to codify the CTC pattern in India.

Dear Colleagues,

Gratuity eligibility and discrimination

I am of the view that gratuity should be made payable after the cessation of employment for any reason and for service in excess of six months, particularly when it is considered as part of CTC. The present law needs a suitable amendment to this effect. In fact, the present provision of eligibility of 5 years' service is discriminatory as similar eligibility conditions are not applicable to fixed-term employees who receive gratuity even for 1 year's service after completion of the fixed-term employment. There is no justification for discriminating one set of employees against another in the matter of gratuity.

Opposition to gratuity deductions

Besides, any practice of deducting gratuity from employees' salaries every month has to be vehemently resisted. Such employers should be brought to book by the aggrieved employee, unions, and social activists.

Regards,
Vinayak Nagarkar
HR Consultant