Is Our Shop Liable for Service Compensation and Future Claims After Employee's Exit?

Liability for Service Compensation

The shop owner has two employees in total and has never had 10 or more employees. It pays ESI/PF. Hence, the shop assumed it is not covered under any acts like gratuity, bonus, or service compensation.

The Labour department received a complaint from an employee stating that termination and final settlement were not given. During the conciliation proceedings stage, it was proven that the employee was not terminated but actually absconded and subsequently produced a resignation letter. The complained employee had worked for nine years and joined on a verbal appointment; no appointment letter was ever requested. Now, in the conciliation proceedings, the ACL says the shop has to pay "service compensation" for his nine years of work and settle his FnF. Additionally, the ACL is not deducting the advance amount of 25k from the employee. The employee's salary is 11k.

Future Claims and Documentation

Is the shop liable to pay it?

Can the employee claim other types of dues later, such as gratuity, EL, bonus, or retrenchment compensation after these conciliation proceedings if any payments are made to the employee? (EL has been given by the firm)

What kind of documents should the firm obtain from the employee since no exit documents have been provided, and the employee is requesting payment with just a letter stating they received service compensation? How can the firm protect itself from any future suits by the employee?

I hope this helps clarify the situation. Let me know if you need further assistance.

The Role of ACL in Settlement

The ACL is not a judicial authority; it can only persuade the parties to come to a settlement. Since the shop had only 2 employees, there is no coverage of gratuity, bonus, etc. You will have to pay leave compensation as provided under the Shop & Establishment Act applicable to you. There is no service compensation payable under any labor law.

Dear Vignesh,

In the first place, if what you have mentioned about the suggestion of the Conciliation Officer is true, I think it was due to excessive enthusiasm that the Officer might have made such a suggestion, but it is not correct.

Secondly, the voluntary enrollment of the shop into the ESI and EPF Schemes might have encouraged the employee to claim statutory gratuity as part of his Full and Final settlement, even though the Act is not applicable due to the number of employees, both currently and in the past.

Thirdly, when the employee abandoned his job first and submitted his resignation later, he is not entitled to any "service compensation." If anything, he can only claim wages for the number of days of Earned Leave at his credit, which cannot exceed 45 days as per the Minimum Wages Act, 2017.

If the employer is willing, they can pay a humanitarian amount in addition to the surrender leave salary mentioned and write off the loan amount; that is all. Under these circumstances, the employer is not obligated to pay anything more.

If the employee does not accept this, you can request the Officer to document that the conciliation process failed and issue a certificate to that effect. Then, it is up to the employee to proceed to the Labor Court under Section 2-A (2) of the Industrial Disputes Act, 1947.

How does a shop with 2 employees pay for ESI?

There is no provision for voluntary coverage of ESI.

Dear colleague, Mr. Umakanthan has given sound views on this matter, and I share them but not entirely.

With just 2 employees, no labor laws are applicable except for the State Shops and Establishment Act/Rules. It is unclear why you voluntarily covered them under ESI and PF.

Since the law is on your side, do not yield to pressure from ACL. He has no authority to compel you to accept without your willingness. He can persuade parties for an amicable settlement.

You are not obligated to pay any service compensation. All you need to pay is for earned leave to his credit, if any, and salary for days worked, if at all.

I suggest you use adjusting the loan amount against dues as a bargaining point. But if you are inclined to settle this issue somehow and avoid litigation, forego the loan amount as a last resort and also pay some flat amount as ex-gratia in return for an F&N receipt and no monetary claim in the future whatsoever.

Remember that you are bargaining from a position of strength, and nobody can bend you to his wishes, let alone ACL.

Wishing you good luck.

Regards, Vinayak Nagarkar HR and Employee Relations Consultant

Applicability of Labor Laws with Two Employees

It is not correct to say that no labor laws are applicable with only two employees. The ID Act is applicable. If the employee falls under the definition of 'employee' under the EC Act, that Act will be applicable for employment injury. Check the State S&CE workers' welfare fund Act also.

Dear colleague, you are right; these two and the Shop Act apply. I stand corrected to that extent.

Regards, Vinayak Nagarkar HR and Employee Relations Consultant

Since my knowledge about the ESI and EPF laws is just rudimentary, I feel that the question raised by Mr. Varghese is contextually valid and needs to be answered by the poster. The poster should clarify whether his mention of ESI deduction is just an inadvertence in the flow of his narrative or actual. If it is factually correct, then there must have been 10 or more employees in the shop at that time, and hence the employee becomes entitled to statutory gratuity, which certainly would form part of the terminal benefits on his resignation. Vignesh, your response please.

Respected Learned Professionals,

I have clarified that the firm is willing to pay the amounts applicable under the law. The firm assumed it was not covered under any acts like gratuity, bonus, etc. I have yet to get details regarding its PF/ESI status. I have already informed the firm that it was wrong not to provide an appointment letter instead of a verbal agreement. The firm wants to understand its mistakes, make amendments, and determine the amount it is liable to pay. Therefore, I have provided the salary details of the said employee.

As you have only two employees, there is no need to worry or panic about the applicability of labor laws. The conciliation officer has instructed you to pay the amount based on the gratuity payment formula. However, the applicability of PF/ESI/Gratuity/Bonus to your shop is nil.

The person who has requested separation from your shop is not entitled to receive any terminal benefits under the aforementioned Acts, except for PL leave encashment.

In addition, considering the services provided by the individual, you may want to consider offering an "ex-gratia" payment to them. This is not mandatory under labor statutes but is purely of an obligatory nature. Although not required under the relevant provisions of the PF/ESI Acts, your shop is covered under these Acts. Therefore, you can assist the individual in receiving their PF dues or arrange for the transfer of their PF dues if they secure employment elsewhere.

Question About Employee Leave Payment

Going through the content, a simple question arises: if the shop or establishment never had 10 or more employees in the past, why was EL even paid previously? The post only mentions the present status of the establishment, not its entire history.

Settlement Agreement and Receipt

The firm reached a settlement during the meeting and agreed to pay the requested amount of 49,500 (service compensation) minus 9,500 (advance), totaling 40,000. A cheque was given to the employee in front of the ACL. The employee provided a receipt for the full and final settlement, stating, "I have received a 40,000 cheque from the firm as my FnF settlement, and I have no further monetary claims." This receipt was signed by the ACL and given to the firm owner. In his notesheet, the ACL noted the case as closed. However, there was no mention of any laws, sections, or how the amount of 49,500 was calculated in the receipt or the ACL's notesheet.

Concerns About Future Allegations

Is the owner and her firm safe from any further allegations? Will the employee create problems again? The owner expressed her desire for peace and not wanting the matter to escalate. She mentioned feeling pressured as the ACL indicated that immediate payment would settle the issue, or else the employee was prepared to go to court, which she wanted to avoid due to potential expenses. She also agreed to the settlement since I informed her that, as ESI is applicable, she would need to pay gratuity, which could be a higher amount than what is currently being asked.

Need for Additional Documentation

I am concerned that no document from the department was provided to her, and the receipt given by the employee is quite vague. Is any other paperwork required since the employee did not provide anything else? If necessary, she will try to connect with the employee to obtain those documents, as it will take a day for the cheque to clear.

The saying "All is well that ends well" is actualizing; this is all you can hope for. As explained by all learned members, you are not covered under the labor legislations, so the employee has no legal rights that he can agitate against you in any judicial forum. You have already given a lump sum compensation of Rs. 49,500 against a salary of Rs. 11,000/-, which appears reasonable and equitable. Even if the employee ventures into any unwanted litigation, you have enough matter to defend. You can apply to the Office of ACL and get a certified copy of all the orders made in the matter.

With the settlement arrived before ACL, put all your worries behind. Since he has earlier given a resignation letter and now an F&N receipt with no monetary claim in front of ACL, who has also signed as a party, I don't believe the employee has a valid reason to agitate. Keep the documents safely for any reference in the future.

Regards, Vinayak Nagarkar HR and Employee Relations Consultant