Compulsory Gratuity Insurance: Karnataka Govt Notifies Rules

The State Government notified the Karnataka Compulsory Gratuity Insurance Rules, 2024, on January 10, 2024. Pursuant to such notification, every new employer (other than an employer or establishment under the control of the Central Government or a State Government or exempted by the appropriate Government) shall, within a period of thirty days from the date on which the rules become applicable to the establishment, obtain a valid insurance policy for his liability for payment towards the gratuity to all eligible employees under the Payment of Gratuity Act, 1972, from the Life Insurance Corporation of India or any other insurance company incorporated in accordance with the provisions of the Insurance Act, 1938, the Companies Act, 2013, the Insurance Regulatory and Development Authority of India Act, 1999, or any other law which is applicable to the insurance company in this regard. An employer of an existing establishment to which the rules apply is required to comply with this requirement within 60 days of the commencement of the rules i.e., March 10, 2024.

Previously a similar notification was issued by the Andhra Pradesh Government in the year 2011, notifying the Andhra Pradesh Compulsory Gratuity Insurance Rules, 2011, and by virtue of Telangana G.O. Ms. No. 45, Law (F), dated June 1, 2016, the said rules were deemed to have been adopted in the State of Telangana.

Applicability

The provisions would generally be applicable to the factories, mines, oilfields, plantations, ports and railway companies, and shops and establishments in which ten or more persons are employed, not belonging to, or under the control of, the Central Government or the State Government.

Employers’ obligations under the Karnataka Compulsory Gratuity Insurance Rules, 2024

The obligations of employers under the rules are as follows:

  • Ensure that timely payments of premiums are made, and the insurance policy is renewed as and when required.
  • Notify the controlling authority within 15 days of renewal of the policy. Also, it has to be ensured that the process for renewal is initiated prior to the lapse of the policy.
  • Apply for the establishment’s registration to the controlling authority of the area within thirty days from the date of obtaining insurance along with the list of employees insured and also furnish the details whenever there is a change in the employees insured or policies or any other pertinent information. The controlling authority is required to take action for registration when the employer complies with its obligation of filing the requisite form.

Exemption from obtaining insurance for payment of gratuity

If the employer already has an approved gratuity fund in respect of his employees and wants to continue such an arrangement or in case the employer is employing five hundred or more persons, the employer may continue with the same after notifying the authority. However, this is subject to the condition that the existing approved gratuity fund covers the entire liability of all the employees of the establishment.

Obligations in respect of gratuity trust

In case of circumstances mentioned above, the gratuity trust and the associated fund will have to be maintained such that it is irrevocable, and will have to be registered with five representatives from amongst both employer and employees. The gratuity trust is to be managed privately, or by the insurance company or jointly by paying the calculated amount to the approved gratuity trust fund periodically by the employer. In case the trust is managed privately, the investment of funds should be by the Board of Trustees as per provisions of the Income Tax Act, 1961, and the entire administration of the gratuity trust including actual valuation will be the responsibility of the Board of Trustees. In case it is a group gratuity scheme provided by insurance companies, the employer should obtain a group gratuity scheme which has approval under the Income Tax Act, 1961. The trust should maintain a separate fund and the contributions to the gratuity fund should 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. No withdrawals will be permitted except the permitted withdrawals for payment of gratuity to the eligible employees who are exiting. The trust should have separate bye-laws with detailed procedures including performance for claiming and releasing of the calculated amount of gratuity to each of the eligible employees on their exit from service. Also, the employer gratuity trust and the insurance company are jointly and severally liable under the provisions of the 1972 Act.

Takeaways

While news reports hint at the possibility of de-criminalisation of the provisions of the Payment of Gratuity Act, 1972, the law as it stands places employers at risk of being imprisoned for non-payment of gratuity. The introduction of the requirement to mandatorily obtain an insurance policy, for the employers’ liability for payment towards gratuity, from LIC or other insurance companies who are eligible to offer this scheme will allow better financial planning and easier compliance by the establishment with the provisions of the said Act, thereby lowering the likelihood of employers facing penal action such as imprisonment.

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Photo by AndreyPopov on Canva

While news reports hint at the possibility of de-criminalisation of the provisions of the Payment of Gratuity Act, 1972, the law as it stands places employers at risk of being imprisoned for non-payment of gratuity. The introduction of the requirement to mandatorily obtain an insurance policy, for the employers’ liability for payment towards gratuity, from LIC or other insurance companies who are eligible to offer this scheme will allow better financial planning and easier compliance by the establishment with the provisions of the said Act, thereby lowering the likelihood of employers facing penal action such as imprisonment.

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