Apriori Advisors LLP

Employee Benefits | Non-Life Insurance

Tag: Employee Benefits

  • Karnataka Compulsory Gratuity Insurance Rules, 2024

    Background

    The Payment of Gratuity Act, 1972 (hereinafter referred as POGA 1972) mentions the following in its clauses 1 and 4 of section 4A Compulsory Insurance,

    (1) With effect from such date as may be notified by the appropriate Government in this behalf, every employer, other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall, subject to the provisions of sub-section (2), obtain an insurance in the manner prescribed, for his liability for payment towards the gratuity under this Act, from the Life Insurance Corporation of India established under the Life Insurance Corporation of India Act, 1956 (31 of 1956) or any other prescribed insurer: Provided that different dates may be appointed for different establishments or class of establishments for different areas.

    (4) The appropriate Government may, by notification, make rules to give effect to the provisions of this section and such rules may provide for the composition of the Board of Trustees of the approved gratuity fund and for the recovery by the controlling authority of the amount of the gratuity payable to an employee from the Life Insurance Corporation of India or any other insurer with whom an insurance has been taken under sub-section (1), or as the case may be, the Board of Trustees of the approved gratuity fund.

    In spirit, POGA 1972 wanted employers to fund their gratuity obligations and protect employees’ benefits. The act, however, left it for the states to decide whether they would want to make the funding compulsory.

    The essence of the sub section 1 is that an appropriate government may require an employer to go in for a compulsory gratuity insurance policy with the LIC or any other insurer. The appropriate government, as defined in the definitions, includes state governments as well. The sub section 4 allows a state government to issue a notification to that extent.

    As funding was not mandated by POGA, 1972, there are a significant number of employers who have not opted to fund their obligations and maintain un-funded provision in their books.

    After 52 years, the Karnataka state govt. chose exercise this clause in January of 2024 and mandated compulsory funding of gratuity obligations.

    Karnataka State Govt. Notification 2024

    Some of the key features of the of the notification are as follows:

    • The notification is applicable from 10th January 2024.
    • A new employer will have to obtain an insurance policy within 30 years of from the rules become applicable to it. 
    • An existing employer will have to obtain an insurance policy within 60 days from the date of commencement of the rules. 
    • An employer shall submit an application in Form-I to get the establishment registered with the Controlling Authority of the area within thirty days from the date of obtaining insurance along with the list of its employees insured.
    • An employer shall furnish the details of the employees insured, to the Controlling Authority in Form-III at the time of registration of the establishment and after that whenever there is a change in the employees insured or policies or any other pertinent information.
    • An employer will have to maintain an approved gratuity trust, which will maintain the fund.
      • Contributions to the gratuity fund shall be contributory from the employer and non-contributory for the employees.
      • The out-flow of the gratuity fund shall be only to the eligible employees at the time of their exit from service.
      • The gratuity fund is totally protected fund, and money shall not be withdrawn neither by the employer nor by the gratuity trust under any circumstances for any other purpose other than for the payment of gratuity to the eligible employees.
      • The Board of trustees of the gratuity trust at the time of exit of an employee shall duly send discharge letter and advise Insurance Company or make arrangement of payment of gratuity as per the scheme.
      • The employer shall always maintain the gratuity trust and gratuity fund, as an irrevocable system.

    Employers registered in Karnataka will have to compulsorily set up a trust fund to meet the gratuity obligations. The trust can either opt for group-gratuity scheme offered by insurers or opt for self-management of assets.

    A group gratuity scheme, offered by most life insurers, is essentially an asset management product with an insurance wrapper. It conveniences employers as the insurers takes on the burden of managing the investments in accordance with the Income Tax Act. An employer is required a contribute an annual “premium” to keep the “policy” alive. The annual premium/contribution is allowed as an expenditure/deduction, up to a certain limit, in computation of taxable income.

    Fund management charges, along with administration and policy charges, are deducted from the fund on a monthly (or quarterly) basis.

    In our experience, most employers opt-in for group gratuity scheme offered by insurers and avoid the hassle of managing the monies on their own.

  • Contractual Workers’ Gratuity | IIT Bombay

    Contractual Workers’ Gratuity | IIT Bombay

    A case has occurred in IIT-Bombay in respect of gratuity eligibility of contractual workers.

    The following is a detailed breakdown of the ongoing case, its potential financial burden and other considerations. The outcome of this case has the potential to cause significant financial repercussions with employers having contractual employees. 

    Background

    IIT Bombay (IIT-B) employs close to 1800 contractual workers in capacities such as cleaning, gardening, construction work etc. required on campus.

    Raman Garase, one such contractual worker, worked for 39 years as a gardener and attained retirement in December 2019.  Garase was expecting to be allowed to work beyond the retirement age as he was of good health,  and as IIT-B had made exceptions for contractual workers working beyond their age of retirement. 

    Upon retirement, Garase claimed gratuity of INR 4,28,805 from IIT-B and was denied on the grounds that as per the prevailing Acts, he was not entitled to Gratuity.

    Garase, along with two colleagues (Dadarao Ingale and Tanaji Lad) decided to move to the labour commission in 2020. In January 2022, the Central Assistant Labour Commissioner, who is also the controlling authority under the Payment of Gratuity Act, stated that Garase was entitled to receive INR 4.28 lakh from the institute. Further, his colleagues Lad and Ingale, were also entitled to gratuity as per the order. 

    IIT-B decided to contest the order. The Chief Deputy Labour Commissioner, who is the appellate authority in the matter, also issued an order in favor of Garase, Lad and Ingale in  April 2024, which IIT-B decided to contest in court.

    Eventually, Garase lost hope of receiving the gratuity monies and ended his life on 2nd May 2024.

    Expected Costs

    If IIT – B had decided to pay Garase, Lad and Ingale, it would have to pay the rest of the contractual workers as well. This would constitute a significant amount, especially, given that contractual worker’s gratuity has not been accounted for, since their hiring.

    On average, if we conservatively assume a basic pay of INR 15,000 and 30 years of service at the time of retirement for 1800 workers, then IIT-B would end up paying close to INR 46.7 crores only in respect of Gratuity.

    Realistically, IIT-B would be looking at an estimated cash outflow of 45 – 60 crores during retirement of these contractual workers. Say, IIT-B decides to provide for their liability in the books, it would not get the benefit of long term discounting as most workers are already nearing retirement. So the provision would be a significant hit to the books.

    Gratuity Eligibility

    The Payment of Gratuity Act, 1972 (POGA  1972) carries no explicit provisions with respect to contractual workers.

    It defines an employee as, “employee” means any person (other than an apprentice) who is employed for wages, whether the terms of such employment are expressed or implied, in any kind of work, manual or otherwise, in or in connection with the work of a factory, mine, oilfield, plantation, port, railway company, shop or other establishment to which this Act applies.”

    By this definition, contractual workers are employees of the payroll vendor and are entitled to benefits. In our experience, this is reflected in the current market practice. We have observed that, for contractual workers, provident fund is deducted from their pay, are entitled to time off, despite being on a yearly contract. 

    Thus gratuity and other benefits if any, are outlined in the contract signed with them, the benefits are due upon retirement, resignation or untimely death. The nature and the quantum of the benefits promised in the contract by the vendor would depend upon the agreement between the employer and the vendor. In any case, the vendor would have the bare minimum benefits as prescribed by the law.

    For instance, let us assume the benefits are not promised as per the contract. A typical market practice we have observed is, if a contractual worker becomes eligible for gratuity, the employer pays the gratuity to the vendor and the vendor settles it on a case-to-case basis. However, such a settlement would be at the imperative of the employer.

    Accounting of Contractual Workers’ Gratuity

    In the case of IIT-B, it is evident that liability, with respect to contractual workers, was not provided in the books as the contractual workers would not fall under the definition of the “employee” as defined in POGA, 1972.

    However, para 6 of the Accounting Standard (Revised 2005) is worth considering.

    “An employee may provide services to an enterprise on a full-time, part-time, permanent, casual or temporary basis. For the purpose of this Standard, employees include whole-time directors and other management personnel.”

    Therefore, from an accounting perspective, gratuity liability with respect to temporary employees are to be provided for in the books. In this situation, the vendor would have to provide for contractual workers’ liability in its books and consequently IIT-B would have to provide for their liability in the books.

    Indian Accounting Standard 19 (Ind AS19), an upgraded version of Accounting Standard (Revised 2005), reflects the same in its para 7. 

    Concluding Remarks

    IIT-B has moved to court despite two orders made in favor of the contractual workers. The outcome of the case remains to be seen.

    In the interim, a duration-wise analysis of the retirement of contractual workers and their gratuity amounts due at retirement, would help IIT-B to get a year-wise overview of expenses expected to occur in the future. If IIT-B chooses to set some monies aside, it might just hedge the risk partially in case the court favors the contractual workers.

    Going simply by the provisions of the accounting standard, IIT-B needs to maintain the necessary provisions in the books in respect of the contractual workers. 

    Sources

    https://thewire.in/labour/gratuity-stalled-despite-2-favourable-orders-ex-iit-bombay-contract-worker-dies-by-suicide

    https://indianexpress.com/article/cities/mumbai/former-iit-b-contract-worker-dies-by-suicide-in-powai-9304427

    https://article-14.com/post/an-iit-bombay-gardener-s-suicide-reveals-the-spread-of-labour-practices-designed-to-deny-indian-workers-their-rights–664c066f73898

    https://www.hindustantimes.com/cities/mumbai-news/retired-iit-b-employee-dies-by-suicide-101714677429705.html

  • Bond Yields – 31st March 2024

    The ZCYC yields are referred from CCIL (Clearing Corporation of India). CCIL provides exclusive clearing and settlement for transactions in Money, Government Securities and Foreign Exchange and they work with RBI to broaden and deepen the money, debt and forex markets in the country.

    The yields can be procured from here – https://www.ccilindia.com/web/ccil/zero-rates.

    The ZCYC yields are annualized and rounded off to nearest two decimal places for setting the discount rate.