Claim of gratuity beyond the statutory norms as a matter of right

Query on Gratuity

Company "A" was taken over by Company "B," and the services of all the employees of Company "A" were transferred to Company "B" with a condition that the service conditions would not be less favorable. Company "A" had a provision for the payment of gratuity as per the Act, i.e., 15 days, while Company "B" has more favorable gratuity norms, i.e., 30 days' salary for each completed year of service.

The services of Mr. Ram were transferred to Company "B," and his remaining service was only two years at the time of the transfer of his services to Company "B." His total gratuity eligibility was for 26 years (24 years in Company "A" and 2 years in Company "B").

Company "B" calculated his gratuity for 24 years at 15 days as per the policy of Company "A" and at 30 days for 2 years. Mr. Ram has disputed the calculation of gratuity, demanding gratuity at 30 days for the entire service. Is Mr. Ram's demand legally tenable? Kindly cite some case laws also.

Acquisition and Employee Gratuity

The acquisition of one organization by another is based on the terms and conditions agreed upon between the two entities, which include employee-related issues. In my career, I have experienced two acquisitions. In one instance, a letter was issued to employees who joined the new organization, stating that all service conditions would be governed by the new organization's rules and regulations, which would not be less favorable than those of the existing organization. New employees received letters detailing new remuneration and perks, along with recognition of past service for the purpose of gratuity calculation. The new organization had a gratuity scheme: for the first 10 years, it was based on 15 days; for more than 10 years but less than 20 years, it was based on 21 days; and for 20 years or more, it was based on 26 days. Gratuity was paid according to the new organization's norms, considering past service. The new organization also offered a 3-tier retirement benefit, including PF, gratuity, and superannuation, which was not available in the old organization.

In another case, employees were asked to resign and join the new organization afresh. Unions agreed because the terms and conditions of the new organization were much better than the existing ones.

Gratuity and Legal Tenability

In the current scenario, it is mentioned that the service conditions in the new organization will not be less favorable. If it is not specified that past service gratuity will be honored by the new organization as per its terms and conditions, the new organization may pay a portion of gratuity based on the old organization's method (15 days for each completed year of service instead of 30 days as per the new organization). However, the gratuity payment for the period in the new organization will follow the new organization's norms.

Whether the demand will be legally tenable depends entirely on the terms and conditions of the acquisition, including employee-related matters.

Regards, S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] USD HR Solutions – To Strive towards excellence with effort and integrity

This looks like an assignment given to students to answer, and instead of working on it, they are using this forum as a shortcut to elicit the answer.

Charging Provision in Section 4(2) of the PG Act 1972

The charging provision in Section 4(2) of the PG Act 1972 reads as follows:

(2) For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee. So what is protected as per the Act is the calculation formula of 15 days' wages for every completed year of service and at the rate of the last drawn wages. The calculation based on 30 days' wages for every completed year of service is rather unheard of, and such a claim cannot lie under the PG Act. Such a claim can lie under the Specific Relief Act 1963 and seek a declaratory decree to that effect.

In my opinion, the claim of Mr. Ram is legally maintainable on the following grounds:

1) On the transfer of the services of Mr. Ram from Company A to Company B, he has become a full member of Company B, thus entitling him to all the service regulations in force in that establishment.

2) No establishment can have two sets of rules for the same employee as statutory gratuity is to be computed with reference to the date of termination of employment and the last drawn salary only.

3) The clause relating to parity of service conditions would cover aspects like salary, employment status, leave, holidays, and other applicable items on the date of transfer only. Once the transfer is effected, the future benefits have to be in sync with those of the existing employees of Company B. Superannuation of the transferred employees on a later date is a future event with reference to the date of transfer. Therefore, the combined reading of points (2) and (3) would shift the emphasis of the parity clause among all the employees of Company B when the necessity for payment of gratuity arises on a later date only.

4) The doctrine of the transfer of an employee with continuity of service from one organization to another takes within its fold only the number of years of service rendered in the transferor organization for the purpose of terminal benefits subsequent to the transfer and not the method of their calculation.

5) Section 4(5) of the PG Act 1972 enables better terms of gratuity under an award or an agreement.

When Ram was transferred to Company "B," he was governed by the rules and regulations of Company "B," and such rules, policies, and procedures shall be binding on Ram. Hence, his contention that he should be paid gratuity as per the rules and regulations of Company "B" is fully justified.

I do not appreciate the remarks of KK!HR. The replies posted by Mr. Umakanth and Mr. S. K. Bandyopadhyay are very relevant to the query, and the diverging opinions of both these subject matter experts themselves show the importance of this question.

Mergers and Acquisitions: Addressing Practical Difficulties

In mergers and acquisitions, a lot of such questions and practical difficulties arise, and we should search for the answers to such queries rather than discouraging the questioner, as it always gives a lot of insights to the readers on the subject.

Even if this issue goes to various courts and from the controlling Authority to the Supreme Court, we may expect diverging views of the Court.

Gratuity Calculation: A Debatable Topic

Hence, the question is very interesting and debatable. I personally endorse the reply of Mr. Bandyopadhyay. Gratuity for the last two years can be calculated at 30 days as per the policy of the new Company.

Gratuity Practices in India

For the information of KK!HR, many companies in India, depending upon the length of service, are paying a more favorable gratuity ranging from 21 days to 30 days.

Regards,

Dr. Kamlesh Agrawal

Dr. Kamlesh, Unfortunately, I agree with KKHR. This looks absolutely like an interview question or something that is given as homework in an HR MBA course. The moderators have also noted this trend. Whether to answer or not, of course, is left to individual members.