Company Closure: Do We Owe Gratuity to Employees Under 5 Years of Service?

If a company is closing down, do we need to pay gratuity to employees who have not completed 5 years of service with us? Experts, please reply.

Closure of a company

Closure of a company results in the termination of employment for all the employees. Therefore, the employer is statutorily required to pay retrenchment compensation under Section 25-F of the Industrial Disputes Act, 1947, to all employees in the cadre of workmen who have completed 240 days of continuous service in the establishment during the 12-month period preceding the date of closure.

Regarding statutory gratuity

All employees, including those who have completed not less than 240 days of service in their fifth year, should be paid gratuity.

I agree with your response except for your last sentence. I beg to differ with you on this, with due respect, though I had decided not to participate in any more discussions on Gratuity for "4 years and ....".

I always enjoy and feel charged up when I interact with you, and I am sure you will bring some clarity to this subject. According to me, in the fifth year of service, i.e., 12 months of service, if 240 days are completed, then it's a totally different case. The employee is entitled to Gratuity as per the Act.

If an employee works for 240 days in the fifth year but does not work up to completing 12 months, according to me, they are not eligible for Gratuity as per the Act, except in Chennai and Kerala jurisdictions.

I am not disregarding the judgments by the High Courts in Madras and Kerala. My point is that these judgments are not binding on other states. You can apply the analogy of judgments by the High Courts in Madras and Kerala, but you cannot treat the judgment by the High Courts in Madras and Kerala as law.

I have discussed all these points in two or three threads during my existence here over the last 3 months, but my views are vehemently disregarded. I am certain, as I reiterate, that you will bring clarity to this matter. If I am wrong, please tell me. I will not feel bad about it. People can have different views, but I believe I have some justifying points logically, which I stated in my earlier posts.

I am also awaiting your kind and expert comment on Akhil Ji's comment. Additionally, I would request other learned members to share their valuable insights. I am also confused about gratuity eligibility matters.

Friends,

Eligibility for Gratuity Under Supreme Court Judgment

The following are self-explanatory in the context:

As per the judgment of the Supreme Court, an employee is eligible for gratuity if they have completed 4 years of continuous service and 240 days of continuous working in the 5th year. On the day they complete their 240 days in the 5th year, they will be eligible for gratuity.

The judgment of the Supreme Court, rendered under the provisions of the Industrial Dispute Act in Surendra Kumar Verma vs. Central Govt. Industrial Tribunal, [(1980) (4) S.C.C.433)] (extract attached), states that it is enough for an employee to have a service of 240 days in the preceding 12 months, and it is not necessary to have completed one whole year's service. As the definition of continuous service in the Industrial Dispute Act and the Payment of Gratuity Act are synonymous, the same principle can be adopted under the act. Hence, an employee rendering service of 4 years, 10 months, and 11 days is considered to have completed 5 years of continuous service under sec.4(2) and is thereby eligible for gratuity.

Now, almost all organizations are paying gratuity if an employee has completed 4 years of continuous service and 240 days of continuous working in the 5th year.

Supreme Court of India Case Reference

Surendra Kumar Verma Etc vs. The Central Government ... on 23 September 1980

Equivalent citations: 1981 AIR 422, 1981 SCR (1) 789

https://www.citehr.com/608431-eligib...shut-down.html

https://www.quora.com/Am-I-eligible-...ays-of-service

https://www.lawyersclubindia.com/for...p#.VxkS5JN94dU

https://www.newzontips.com/employees...of-labor-laws/

The Surendra Kumar Verma's Judgment on Retrenchment

The Surendra Kumar Verma's judgment is on the point of retrenchment as per the ID Act 1947. Here, the law laid down is clear that an employee with more than 240 days of service, if terminated without completing the legal process, would amount to retrenchment. So, it is not of direct applicability in deciding the eligibility for gratuity with 4 years and 240+ days of service.

Interpretation of Service Duration for Gratuity

When the PGA defines that 240 days plus service would mean one year of service, the legal interpretation is that it applies everywhere, and so there is no exclusivity in its applicability in computing the five years of service. The interpretation given by Kerala & Tamil Nadu judgments has not been distinguished by other High Courts. Though for other High Courts it is not stare decisis (meaning binding precedent), yet it would guide, and when it is brought on record, such Court can disagree with it only after recording reasons.

Eligibility for Gratuity Payment

Eligibility for gratuity payment for 4 years of continuous service with completion of 240 days or above in the 5th year still holds good, and companies are complying with the above condition for determining "continuous services" as defined under section 2(c) of the Payment of Gratuity Act, 1972.

Please review the case - (LALAPPA LINGAPPA & ORS V. LAXMI VISHNU TEXTILE MILLS LTD., SHOLAPUR [1981] RD-SC 29 (11 February 1981).

CITATION: 1981 AIR 852 1981 SCR (2) 796 1981 SCC (2) 238 1981 SCALE (1) 268

It was observed by the Hon'ble Supreme Court that:

QUOTE The expression 'continuous service' has been defined in section 2(c) of the Act in these terms: 2. (c) "continuous service" means uninterrupted service and includes service which is interrupted by sickness, accident, leave, lay-off, strike, or a lockout or cessation of work not due to any fault of the employee concerned, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act. Explanation I.- In the case of an employee who is not in uninterrupted service for one year, he shall be deemed to be in continuous service if he has been actually employed by an employer during the twelve months immediately preceding the year for not less than- (i) 190 days if employed below the ground in a mine, or (ii) 240 days, in any other case, except when he is employed in a seasonal establishment. Explanation II.- An employee of a seasonal establishment shall be deemed to be in continuous service if he has actually worked for not less than seventy-five per cent of the number of days on which the establishment was in operation during the year. UNQUOTE

Thanks.

Friends, going by what has been revealed in this link, the central government is poised to revise the eligibility clause to qualify for gratuity payment, reducing the 5-year (4+240 days) criteria down to 1 year. With all these different interpretations, reluctance is bound to be blown off.

I wish that lakhs of freshers/youth switching their jobs frequently will benefit from this boon. The only question that might still trigger anxiety is whether it is going to have a retrospective or prospective effect. All the very best, folks.

https://www.newzontips.com/employees...of-labor-laws/

Dear Akhil, soon after your counter-query, I thought of an immediate response, but I purposely waited for the response of our learned friends because this issue resurfaces regularly whenever someone looks at it with fresh eyes.

In fact, the focus of the argument shifts from the interpretation of the term to the binding effect of a High Court judgment on a specific legal question beyond its territorial jurisdiction. I admit that one High Court's decision does not necessarily bind another High Court, especially if it contradicts the decision of the home state's High Court. In such cases, subordinate judicial authorities should follow the decision of their home state's High Court.

However, when a High Court decision aligns with the ratio decidendi of a Supreme Court ruling in a similar case, I believe that decision should take precedence over a conflicting decision by the home state's High Court, especially when there is no relevant decision from the home state High Court on an issue related to a Central Law like the PGA, 1972.

Given that the definitions of "continuous service" under Section 25-B of the IDA, 1947, and Section 2-A of the PGA, 1972 are similar, the Supreme Court's ruling in the Surendrakumar Verma case regarding the calculation of continuous service starting backward from the termination date applies to gratuity claims based on the total service period of not less than 4 years + 240 days or 4 years + 190 days in the 5th consecutive year. The key is completing 240 days of continuous service within the preceding 12 months, rather than continuous service throughout the entire 12-month period.

Therefore, I believe that the judgments of the Madras High Court in the Mettur Beardsel Ltd case and the Kerala High Court in Sreeja's case can be confidently followed when determining the issue of continuous service under Section 2-A of the PGA, 1972, as they offer a more favorable interpretation that secures gratuity benefits for employees.

Kind Regards, [Your Name]

I wish to clarify the point of the judgment in the Lalappa Lingappa case decided by the Supreme Court on February 11, 1981, which has been referred to above:

The Issue of Continuous Service

The issue was based on Section 2(c) as it existed then.

(c) "continuous service" means uninterrupted service and includes service which is interrupted by sickness, accident, leave, lay-off, strike, or a lock-out or cessation of work not due to any fault of the employee concerned, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act.

Explanation I: In the case of an employee who is not in uninterrupted service for one year, he shall be deemed to be in continuous service if he has been actually employed by an employer during the twelve months immediately preceding the year for not less than:

(i) 190 days, if employed below the ground in a mine, or

(ii) 240 days, in any other case, except when he is employed in a seasonal establishment.

Explanation II: An employee of a seasonal establishment shall be deemed to be in continuous service if he has actually worked for not less than seventy-five percent of the number of days on which the establishment was in operation during the year.

Amendment to the Payment of Gratuity Act

The Payment of Gratuity Act was amended in the year 1984 by Act No. 26 of 1984 with effect from February 11, 1981, i.e., the date on which the Supreme Court judgment was rendered in the case of Lalappa Lingappa v. Laxmi Vishnu Textile Mills. The definition of 'continuous service' under Section 2(c) and the meaning of 'continuous service' under Sections 2A are as follows:

2(c) "continuous service" means continuous service as defined in section 2A:

Section 2A reads as follows:

For the purposes of this Act:

(1) An employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service, including service which may be interrupted on account of sickness, accident, leave, absence from duty without leave (not being absence in respect of which an order treating the absence as a break in service has been passed in accordance with the standing order, rules, or regulations governing the employees of the establishment), lay-off, strike, or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act.

(2) Where an employee (not being an employee employed in a seasonal establishment) is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer:

(a) For the said period of one year, if the employee during the period of twelve calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than:

(i) One hundred and ninety days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and

(ii) Two hundred and forty days, in any other case;

(b) For the said period of six months, if the employee during the period of six calendar months preceding the date with reference to which the calculation is to be made, has actually worked under the employer for not less than:

(i) Ninety-five days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and

(ii) One hundred and twenty days, in any other case.

Impact of the Lalappa Judgment

The Lalappa judgment addressed two core points at that time: for a permanent employee to be eligible for gratuity, they must have actually worked for at least 240 days in that year, and badli employees are eligible for gratuity in the years in which they have worked for not less than 240 days. The days in which they did not work or were not provided work would have to be excluded.

Purpose of the 1984 Amendment

The 1984 amendment was to repair the damage caused by the Lalappa judgment. Now, for a permanent employee, their entire uninterrupted service has to be counted for gratuity calculation. Even where there is an interruption in service, the process has to be completed to disentitle an employee to the gratuity.

For more clarification, please see the Gujarat High Court judgment in Mafatlal Fine Spinning & Manufacturing Co vs. Ramachhar Benimadhav Mishra (1997) ILLJ 475 Guj, decided on June 25, 1996.

Understanding Gratuity Payment

Yes, sir. In the 5th year, 240 days are enough for the payment of gratuity. First, everyone should know the meaning of gratuity. It is the regard and gratitude shown by the company towards its employees. Payment guidelines are only for reminding the courtesy of the company. I have seen some companies pay their employees beyond the existing norms of the Payment of Gratuity Act. So think liberally, not to go letter by letter of the Act. Think liberally in paying your workers.

Recent Changes in Gratuity Limit

Recently, the gratuity limit time has been reduced from 5 years to 2 years by the central government in the process of amending the Act.

Thank you for your response. I respect your view even though it contradicts my own. I want to reiterate that I have never disrespected or disregarded the views of other learned members. I have simply been expressing my viewpoints logically. However, when we need to consider a more favorable interpretation to ensure employment benefits, we should think liberally and not adhere strictly to the wording of the Act, as suggested by our learned friend Gannahope.