Will Employees Receive Gratuity If Their Company Goes Bankrupt? Know Your Rights

To prevent employee retirement funds from being lost in corporate bankruptcies, Indian corporations may be required to establish a separate fund to pay employee gratuities. This recommendation was made in a recent report, which was sent to the finance ministry after a research that the government had commissioned. An official from the finance ministry said, “We will study the recommendations. The suggested solution would require businesses to routinely set aside money to cover their gratuity liabilities, which would ringfence the retirement contributions of employees from corporate festivities.”

Companies with more than 10 employees are required to provide a gratuity equal to half a month’s basic pay for each year of service that has been completed. Workers who have served five years of service in the company are liable for the pay. Companies pay this amount to employees when they leave their jobs, whether it’s due to retirement or another reason, as and when necessary. But this pay, as one leaves, greatly increases the danger that employees would lose their benefits in the event if the company goes bankrupt.

The high-profile Satyam affair brought unpaid gratuity liabilities into sharp focus. The assets of employees should be held under a separate trust under the trust law, according to a report by the Noida-based Invest India Economic Foundation (IIEF) and the US-based company AECOM. The Asian Development Bank funded the study.

When it comes to provident fund payments, there is a sufficient system in place to guarantee that savings are safeguarded through an arms-length system and stringent legal guidelines. There is a Gratuity Act that aims to protect such investments, but gratuity payments are not covered by this law. The report now urges employers to make disclosures legally required.

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