Introduction:

To create a more secure and supportive work environment, section 4A of the Payment of Gratuity Act, 1972 (“PG Act”) requires employers of establishments with ten or more employees to obtain insurance to cover their gratuity liabilities to eligible employees or their nominees. However, this obligation to secure gratuity insurance only applies if the relevant state government issues rules through a notification to enforce this section.

In a significant move aimed at enhancing employee benefits, several Indian states, including Andhra Pradesh and Telangana, have already enacted mandatory gratuity insurance rules. With an intention designed to provide greater financial security to employees by ensuring timely and adequate gratuity payments, Karnataka Government has introduced new gratuity insurance rules called the Karnataka Compulsory Gratuity Insurance Rules, 2024 (“KCG Rules”) through a notification dated January 10, 2024. The KCG Rules mandate employers to adopt insurance policies that cover gratuity liabilities, thereby safeguarding the interests of the workforce.

Appropriate Government:

The KCG Rules apply exclusively to employers, shops, and commercial establishments located in Karnataka, and consequently, the KCG Rules do not apply to, shops and establishments with offices, branches or establishments situated outside Karnataka. However the KCG Rules will apply to all factories, regardless of any branches.

Employer compliances:

Step-1: Obtaining Insurance Policy

Existing employers must obtain a valid gratuity insurance policy within six months from the commencement date of the KCG Rules. New employers are required to secure a valid gratuity insurance policy within 30 days from when the KCG Rules become applicable to them. Since the KCG Rules came into effect on January 10, 2024, the deadline for obtaining the insurance policy is July 10, 2024.

Step-2: Registration

After obtaining an insurance policy, the employer must submit the below documents to the jurisdictional labour office:

• an application for registration of an establishment in Form-I (the due date for filing Form I is August 10, 2024 for establishments existing on January 10, 2024).
• a copy of insurance policy and
• Form III with details of the employees insured

Step-3: Renewal

The employer must renew the insurance annually by paying the premium and notify the jurisdictional labour office within fifteen days of the policy renewal. Any changes in employee details, policies, or other relevant information must be reported to the authority as soon as they occur.

Step-4: Payments:

he gratuity fund is fully protected, and neither the employer nor the gratuity trust is permitted to withdraw money under any circumstances, except for the payment of gratuity to eligible employees.

Penalty or Consequence:

The Controlling Authority is authorized to recover the gratuity amount payable to an employee, as determined by the employer or as decided by the authority in case of a dispute, from the insurance company. Section 4-A(6) of PG Act imposes punishment with fine up to Rs. 10,000/- and in case of continuing offence with fine of Rs. 1000/- per day.

Incorporation/continuation of Approved Gratuity Fund

Employers who already have established an approved gratuity fund in respect of employees or has 500 or more persons can opt to continue or adopt this arrangement by submitting an option to continue under existing insurance scheme in Form II and is required to ensure that the approved gratuity fund covers the entire liability of all the employees of the establishment.

Conditions for Gratuity Trust:

As per the KCG Rules, he essential criteria for a Gratuity Trust to qualify as an Approved Gratuity Fund include-

1. The Approved Gratuity Fund must be registered with five representatives, ensuring an unequal number of representatives from both the employer and the employees.
2. The Gratuity Trust must be registered with the authority designated under the Indian Trust Act, 1882, or any other applicable law, and must ensure compliance with the provisions of the Income-tax Act, 1961, as well as any other relevant legislation.
3. The Gratuity Trust can be managed privately, by an insurance company, or jointly, with periodic calculations of the amount to be allocated to the approved gratuity trust fund.
4. The Gratuity Trust will maintain a separate gratuity fund. Contributions will flow in from the employers, and the fund will be disbursed only to eligible employees. The gratuity fund must be protected, and employers are not permitted to withdraw money from it.
5. The bye-laws should outline detailed procedures for claiming and releasing the calculated gratuity amounts to eligible employees.
6. The Gratuity Trust must adhere to the Indian Accounting Standard on Employee Benefits.
7. The Board of Trustees of the Gratuity Trust shall issue a discharge letter and advise the insurance company or arrange for the payment of gratuity as per the scheme when an employee exits.
8. The Gratuity Trust and the insurance company are jointly and severally responsible for fulfilling liabilities under the Act.

Conclusion

In conclusion, the KCG Rules offer enhanced security for employees, mitigating risks and defaults from employers while providing legal assurance. These rules also assist employers in meeting legal compliance, offering financial protection and reducing liability. Overall, the KCG Rules foster a positive relationship between employers and employees, ensuring guaranteed gratuity payments for employees and streamlining the administrative process for employers.