Insights on Gratuity Act, Payment Obligations, and Employment Laws in Factories

Dear Sir,

Our factory has been operating since 2006 and is covered under the Factories Act 1948. I would like to understand the procedure for the applicability of the Gratuity Act.

1. Is it compulsory to insure the workers under LIC or not? We are already covered under the ESI Act.
2. What are the formalities for informing any concerned department?

I have learned that if an employee completes one year of continuous service, we are required to fill out FORM F. What exactly constitutes one year of service? Does it start from the beginning of the factory's operation or after the Act becomes applicable?

Please assist me.

Shalu
HR EXECUTIVE
GURGAON

Your factory will come under the Payment of Gratuity Act if you have been employing 10 or more workers. It is not necessary that your factory should complete 5 years of commencement of operation for coverage under the Gratuity Act. This is because gratuity is payable to the dependents of a deceased employee regardless of his service. That is why nomination is collected from every employee in Form F once they complete one year of service. The year of service does not mean since the factory was established but since an employee joined the company.

It is mandatory that at the end of the year, the projected amount of gratuity should be deposited in LIC's gratuity fund. As per new Accounting Standards, an actuarial valuation of the gratuity liability taking into consideration the gratuity qualifying salary, age of employees, and their service must be done before the accounts are finalized for statutory audit.

Regards,
Madhu.T.K

Dear Friend,

If an employee expires after completion of one year, we have to pay the gratuity to his nominee, calculating up to his retirement period. In this case, there may not be a 5-year completion for eligibility; hence, we have to fill the form and keep it ready.

Regards,
Alphonse

I have a disagreement on the point "If an employee expired after completion of one year, we have to pay the gratuity to his nominee, calculating up to his retirement period." There is no such provision under the Payment of Gratuity Act which makes it mandatory on the part of the employer to pay gratuity in respect of a deceased employee calculated till his date of superannuation. There is a provision that gratuity should be paid for the service (till the date of death) irrespective of whether he has put in five years. At the same time, it is the scheme of Life Insurance Corporation of India with which a gratuity fund is required to be constituted under Section 4A of the Payment of Gratuity Act that provides for death cum gratuity insurance which provides for the payment of gratuity calculated from the date up to his date of retirement subject to a maximum of a sum (I believe it is Rs. 4 lakhs).

Regards, Madhu.T.K

Hello, I need a clarification about the projected amount being deposited to the LIC fund. I don't think that is mandatory; I have not heard of any legislation making this a mandatory requirement. An employer is free to keep the gratuity plan "unfunded", which means they don't have to buy the LIC policy. However, in such cases, they will have to pay gratuity to any eligible employee from their normal business expenditure. And as you have stated, actuarial valuation of gratuity is mandatory under AS15, and they have to report it in their annual reports. This is required in both cases, whether they buy the LIC policy or not.

Thanks,
Ravi

By the projected amount of gratuity, I only meant the gratuity which is likely to be paid in the financial year. I hope you have gone through section 4A of the Payment of Gratuity Act.

Regards,
Madhu.T.K

Sir, we have hired a housekeeping agency. Should we pay the salary of their supervisors?

Dear Senior,

I just want to know if a person has 4 years and 6 months of service, and the company terminates them, are they eligible for gratuity? Kindly help me.

Regards,
Rajesh Verma

Hello,

In order to be eligible for gratuity, a person has to be in continuous service for 5 years. In the 5th year, 240 days are considered to be equivalent to 1 full year of service. In other words, 4 years and 240 days of continuous service are required for gratuity.

Hope this helps.

Thanks,
Ravi

It is true that 240 days in a year will constitute one year of service, but it does not mean that a person who has completed 4 years and 240 days in the fifth year should be eligible for gratuity. It is also true that there are some court verdicts that allowed gratuity to those who have completed 4 years and 240 days, but by those verdicts, no amendment has taken place in the Payment of Gratuity Act. Therefore, 4+240 days cannot be accepted as a general rule. Court verdicts are based on situations.

Regards, Madhu.T.K