Navigating Continuous Service Conundrum under the Payment of Gratuity Act

[Himanshu and Nandika are students at NMIMS School of Law, Mumbai.]

The recent Bombay High Court’s ruling of Mercedes Benz India Private Limited v. Noshir Nadir Desai [2024 SCC Online Bom 199] (Mercedes), laid down that mere transfer of employment between two companies under the aegis of the same management does not lead to discontinuation of service of the employee. The judgement answers the moot question of gratuity payable to an employee when there is a discontinuity between two spells of services rendered by an employee. It highlights that the transfer of an employee to another company under the same management results in continuity of services for payment of gratuity under the Payment of Gratuity Act 1972 (Gratuity Act).

This ruling sets the ball rolling in the right direction as it regards transfer of employment over two spells of services as a continuance for the calculation of gratuity benefits payable to an employee. Gratuity benefits incentivize employees, ensure greater productivity and enable retention of talent in the company for a longer stretch of time. This judgement demarcates the line between transfer of employment and discontinuation of services by an employee when the continuity of service is disrupted.

This article attempts to explain the concept of continuous service and analyses the judicial exposition of continuous service under Section 2A of the Gratuity Act. It further describes the implications of this ruling, and the authors laud the court for ruling in the right direction.

What Constitutes a Continuous Service?

As per Section 2A of the Gratuity Act, an employee should be in continuous service without interruption throughout the working duration to entitle him to gratuity benefits. This comprises time off because of illness, a mishap, a severance, a protest, interruptions not due to the employee’s fault and so forth. It is imperative for the employer to ascertain whether the employee has been in continuous service to entitle him to various benefits such as gratuity and bonus amount at the time of termination of five years of their continuous service. Section 4 of the Gratuity Act entitles an employee to gratuity after rendering at least 5 years of service on the cessation of their service. Thus, computation of continuous service rendered by the employee is of vital importance to the employer in terms of grant of various benefits to employees, one of them being gratuity.

Judicial Interpretation of Section 2A

This evolution of continuous service has undergone robust interpretation by courts and has now become holistic in nature. Before the Bombay High Court in Ramakant Atmaram Manjrekar v. NTC (MN) Limited, the petitioner contended that he was entitled to gratuity during a textile strike which lasted for a span of more than a year. The court held him to be in continuous service due to no evidence produced by the employer to prove the employee’s absence from work during the said period. It further held that an employee cannot be denied gratuity benefits for no fault of his.

The courts also pay due regard to the intention of the employee to decipher whether the employee’s term of service is deemed to be continuous. In Majnu Saxena v. Union of India, the apex court ruled that voluntary renunciation of services by the employee cannot be termed as continuous service. The intention of the employee could be inferred from the refusal of the employee to accept any of the 4 vacancies offered to the employee at the same pay scale.

The apex court in Netram Sahu v. State of Chattisgarh, held that after regularizing the services of the employee after 22 years uninterruptedly and having extracted work from him at a paltry amount, the state cannot repudiate gratuity payable to the employee. It highlighted the Gratuity Act to be a legislation inclined towards the welfare of the employees who have rendered services to the employer for a long span of time. It further held that the state was duty bound to voluntarily pay the gratuity amount to the employee instead of compelling the employee to move the court of law.

In Balvant Mohan Badve v. Ahmednagar Municipal Corporation, the employee had superannuated after crossing the retirement age. The Bombay High Court granted gratuity benefits to the employee by rejecting the claim of the respondent that the employee was a year overdue at the time of commencement of his service.

Thus, it can be observed that courts have leaped a step forward to compute the exact amount of gratuity payable to an employee by extolling the facts, circumstances and intention of the parties rather than a mere strict interpretation of the statute. However, the anticipation was that an amendment in the Gratuity Act would clear the air surrounding this particular conundrum but the Social Security Code 2020 as well maintains the same definition as the Gratuity Act.

Analysis of the Mercedes Ruling

The Bombay High Court in its ruling held that mere transfer of an employee from one entity to another falling under the same management would not break the service of the employee rendering him ineligible for the claim of gratuity. It took a progressive stance and categorically held that service in the two spells shall remain continuous and thereby granting the exact amount of gratuity commensurate with the days of service rendered by them.

Previously, in a fairly recent case of Terna Polytechnic v. Ravi Bhadrappa Randale, the appellant had challenged an order passed by the Commissioner quantifying the amount of gratuity payable to the respondent. The employee had rendered two tranches of services under Terna Polytechnic and Terna Engineering College managed and owned by the same trust. The respondent worked as a lecturer at Terna Polytechnic and was later appointed as a Lecturer at Terna Engineering College and worked there till 21 July 2011. The appellant contended that the educational institutes were separate legal entities registered distinctly with the Education Department and had disjunct administration and financial control with no commonality between them.

The court ruled that the respondent was under continuous service under the same management from 17 September 1992 to 21 July 2011. It was further held that if two distinct legal entities fell under the control of same management, any transfer from one entity to the other will not amount to a break in service, and gratuity shall become payable for the period of employment in both the entities calculated inclusively.

Similarly, in the case of MC Chamaraju v. Hind Nippon Rural Industrial (Private) Limited, the appellant was appointed as a Supervisor in Poddar Mines at Sira in 1984 where he worked till 1990. Thereafter, he was transferred to other quarry. In total, the appellant worked at 3 sites till 1993. From March 1993, the appellant was neither paid his salary and gratuity nor served with any order of termination or dismissal. Aggrieved by this, the appellant moved to the Controlling Authority which ruled in his favour and ordered the employer to pay the gratuity. Further, the appellant authority and the single judge of the High Court ruled in favour of the appellant; however, the Division Bench ruled against the appellant.

Aggrieved by the decision of the High Court, the appellant moved to the apex court. The court agreed to the reasoning of the Controlling Authority which had found that the 3 companies including the appellant company were run by Shri VK Poddar and hence there was functional integrity among these 3 establishments. It appears that the appellant had been changing the employer-ship of the respondent solely to deprive him of the statutory benefits. The court further opined that a liberal view must be taken while interpreting beneficial statutes such as the Gratuity Act.

Thus, it can be observed that the Mercedes ruling serves as a positive precedent in the realm of labour, employment and benefits thereby upholding the purpose of the legislature.

Way Forward

Payment of gratuity is an incentive to the employees as it enhances productivity and facilitates talent retention. Thus, employers under the garb of transfer to different entities should be restrained from avoiding payment of gratuity to the employees who have rendered long and unblemished service to the employer and thereby contributed to the prosperity of the employer.

The Mercedes judgement plunges a step ahead in endorsing the beneficial nature of the Gratuity Act thus acting in consonance with the spirit of the legislation. The court has succinctly clarified the position in cases of transfer of employees to different companies falling under the same management. With the growth of mergers, amalgamation and restructuring in the post COVID-19 era, transfer of employees from one entity to another under the same management is inevitable. In this regard, the Mercedes judgement comes as a beacon of optimism safeguarding the interests of the employees.

However, it is also imperative for the courts to pay due caution to the fact that the employee was transferred to another company which had functional commonalities with the previous organization and not merely run by the same management. Both the employers may have separate legal entities and the jural relationship of each of these employers with the employee may also vary, hence burdening the employer who hired the individual post transfer from an entity within the same management with gratuity liability that covers the entire span of service with the earlier employer is onerous and should be resorted to only in cases where the two employers are functionally integrated with each other.