PAYMENT OF GRATUITY ACT, 1972 VIS A VIS THE KARNATAKA COMPULSORY GRATUITY INSURANCE RULES, 2024

The Payment of Gratuity Act, 1972, is social security legislation.   Section 4 (a) of the Payment of Gratuity Act 1972, amended in 1987, contains a clause for “compulsory insurance”. The date for implementing this requirement, to compulsorily insure the gratuity liability, was however left to the State Government.

The Government of Karnataka has notified, by their notification in the gazette dated 10^th January 2024 that all existing establishments in Karnataka, covered under Gratuity Act, will be required to compulsorily take an insurance policy, with approved insurance companies, within the next 60 days.

This has come as shock to many employers, as Gratuity was being paid to employees as and when due, that is, on their retirement, death, termination, if they were eligible under this Act. Thus Gratuity was being paid as and when due and employers were aware of it.

Now with the notification of making insurance compulsory with the payment of gratuity has cast a burden on managements of shelling down a huge amount of money to cover the workmen under the

gratuity insurance.  For example, if for 20 years the worker has worked and is scheduled to work for another 15 to 20 years and his salary is 30000/- and Basic and DA would have been 25,000/-(the amount required Basic and DA for calculating gratuity) would have been 10 years’ salary, calculated on the formula Basic and DA monthly salary divided by 26x15x years of service.

In this particular case with Basic and DA at 25,000/-, applying the formula for Gratuity, it works out to(25,000/-divided by 26x15x20 years= 2,88,462/-) this amount would be multiplied by number of workmen engaged by the company, which will have to be deposited with the insurance company to fall in line  with the law. However, this would lead to a lot of negotiations/bargaining/discussions and heartburns for the employers. However, there is a possibility of the employer negotiating with the insurance agents etc to make periodical, amicable settlements of convenient payments.

Basics of application of Payment of Gratuity Act 1972: –

1. The establishments covered under the Payment of Gratuity Act 1972 should have at least 10 workmen, and if once covered and the number of employees fall below 10, the Act will continue to apply.
2. There is no salary limit for coverage of Gratuity and is based only on Basic and DA monthly salary.
3. There is no restriction on the category of employees, be it lowest worker or the director of a company on salary.
4. The maximum amount of Gratuity payable is limited to 20, 00,000/- (twenty lakhs).  This limit was notified on 29/3/2018.
5. Gratuity cannot be withheld for ordinary acts of misconducts and no deductions can be made from the Gratuity payable to the employee.
6.  Gratuity must be paid within 30 days of separation/termination.
7. Section 4 (sub section 6) provides for recovery of amount, from gratuity, in the following cases only:
8. The gratuity of an employee, whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused;
9. The gratuity payable to the employee maybe wholly or partially forfeited:
10. If the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or
11. If the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.

All may note that this compulsory insurance applies also to contractors if they are covered under the Payment of Gratuity Act.  Thus, each contractor will be liable to comply and obtain Insurance.  The Principal Employer is not liable to obtain Insurance on behalf of the Contractor.