Gratuity Dilemma: Does Our Long-term Employee Qualify After Company Transition?

Good evening,

We started a partnership firm in February 2015, and one employee joined in June 2017. The firm had 12 employees until March 2019. In March 2019, instead of converting our partnership firm to a private limited company, we registered a new company with the same name and "Pvt Ltd." appended. We did not issue new offer letters or joining letters to the existing 12 employees from the partnership firm.

Starting from March 2019, all salaries, PF contributions, and health insurance were paid from the private limited company. However, we did not register for gratuity, even after exceeding 15 employees.

Now, in June 2024, the employee who joined in 2017 has resigned and is requesting gratuity since his salary was processed by the private limited company, and he has salary slips and PF records from it. Although he was an employee of the partnership firm since joining and did not receive a new joining letter from the private limited company, he is seeking clarification on the applicability of gratuity.

Could you please advise if gratuity is applicable to him in this scenario?

Gratuity Applicability in Firm Conversion

Unless otherwise communicated to the employees about the service of converting the partnership firm into a company, the joining date of all employees will be the actual joining date in the firm. Therefore, you should pay gratuity to employees who had joined the partnership. Unlike PF and ESI, there is no need to register for gratuity. It is automatic once the number of employees becomes 10.

Hi Madhu - Sorry, I did not understand. For us, the employee is still an employee of the partnership firm, and it has only 4 employees. We have not informed any employees about the conversion from a partnership to a private limited company. Can you please help me understand better?

It's understood that all employees, starting from 2015, have continued without a break. Your firm exceeded 10 employees from March 2019. Since no termination or relieving of any employees occurred, all are deemed to have continued in employment. Whether it was a partnership or a company did not affect the continuity. The reason is that employees have nothing to do with whether it was a partnership or a company, as nothing about it was communicated to the employees concerned. Therefore, any faults cannot be attributed to the employees. If the company is not registered under the PoG Act, it is the company's fault, and the right to gratuity vested in employees under the PoG Act cannot be nullified. Persons who joined in 2017 and resigned in 2024 after completing 5 years of continuous service are entitled to gratuity.

Applicability of the Payment of Gratuity Act, 1972

The Payment of Gratuity Act, 1972 applies to establishments with 10 or more employees working in factories, mines, oil fields, plantations, ports, railways, motor transport undertakings, and shops & commercial establishments.

Partnership firms are not an exception, as the act applies to establishments that have 10 or more employees working.

Mr. Sharma,

You had a partnership company in which you employed some staff (4 people). Then, you transitioned to a private limited company and started paying employees from there. It does not matter if you formally informed them or not; since you are paying the employee from the Pvt Ltd company, he is effectively working for it. As the company has more than 10 employees, it is covered under the Gratuity Act.

Since the ownership remained the same and no termination was issued or involved, the period counts from the time the employee joined the partnership firm, unless there was a specific break in service. The courts will likely reject your argument that the service is different because it is evident that the business and promoters are the same. Therefore, the employee is eligible for gratuity.

Eligibility for Gratuity Payment

Payment of gratuity states that establishments with 10 or more employees who have uninterrupted service of 5 years are eligible for gratuity. Even if you have not issued an offer letter, you are supposed to pay the gratuity amount to avoid any legal disputes.