No Loss of Gratuity! - Bombay High Court Recognizes Continuity of Service for Overseas Transfers

The recent ruling by the Bombay High Court in the case of Mercedes Benz India Private Limited v. Noshir Nadir Desai[1] has provided significant clarity on the issue of gratuity payments under the Payment of Gratuity Act, 1972[2] (“Gratuity Act”). This landmark judgment besides clarifying how to interpret employment agreements and calculate benefit like gratuity, addresses the critical question of whether the transfer of employment between two companies under the same management results in a discontinuity of service, affecting an employee's entitlement to gratuity.

Background

In the case at hand, Mr. Noshir Nani Desai (Mr. Desai) was in service of Mercedes Benz India Pvt. Ltd (Mercedes-Benz) during the period 1996 to 2004. Mercedes-Benz decided to post him on foreign assignment with its group company Daimler AG in Germany (Host Company). Accordingly, an Agreement of Assignment of Contract of Appointment was executed between Mercedes-Benz and Mr. Desai, by which his services were placed with the Host Company w.e.f. 1 March 2004 wherein Mr. Desai continued to work in terms of the said agreement upto to 25 June 2012 when he came to be relieved by the Host Company, consequent to the resignation tendered by him on 5 April 2012.

The dispute arose on account of payment of gratuity in respect of the services rendered by Mr. Desai during 1996 to 2012 as Mercedes-Benz refused to treat Desai’s relationship with Mercedes Benz upon assignment of his service with Host Company. Aggrieved, Mr. Desai filed an application before the Controlling Authority under the Gratuity Act. The Controlling Authority proceeded to allow the application and directed that gratuity demanded by him of Rs. 16,51,652/- be paid. Mercedes-Benz filed appeal before the Appellate Authority, which remanded the proceedings before the Controlling Authority for determination of exact amount of gratuity payable to Mr. Desai by recordings certain findings that there is continuity between two spells of services, that then cap of Rs. 10,00,000[3] under Gratuity Act would apply, etc.

Mercedes-Benz then challenged the order of the Appellate authority before Bombay High Court to the extent of treating two spells of services as continuous and making it liable to pay further amount towards gratuity over and above Rs.559,292 already paid by it. On the other hand, Mr. Desai filed cross petition being aggrieved by the Appellate Authority’s Order as it sought to set aside the Controlling Authority’s Order.

Key Issues

1. Continuity of Service: The core issue before High Court was whether a transfer of employment between two companies under the same management constituted a discontinuation of service under the Gratuity Act.

2. Entitlement to Gratuity: The second issue was computing the exact amount of gratuity payable to the employee.

   
   

Court’s Findings

The Bombay High Court ruled in favour of the employee, Noshir Nadir Desai, emphasizing that the mere transfer of employment between two companies under the same management does not lead to a discontinuation of service.

Though, Mercedes-Benz contended that the two Companies were different and therefore there was no continuity in service, the Court rejected the said argument based on plain reading of the Agreement which was titled as ‘Supplementary Agreement for an International Assignment (Transfer Long Term)’. The Agreement undoubtedly showed that Mercedes-Benz continued to remain “Home Company” whereas Daimler AG was merely ‘Host Company’. The Agreement clearly provided that the then existing Supplementary Agreement executed with Mercedes-Benz was to operate even during currency of the long term transfer/assignment with the Host Company.

Mercedes-Benz relied upon Clause-5.6 of the Agreement dealing with termination and reintegration and argued that at the end of the assignment with the Host Company, reintegration into Mercedes-Benz was not automatic and the Agreement provided that merely efforts would made for reintegration into Mercedes-Benz. The Court rejected the argument by holding that said clause cannot be read in isolation as in Clause-1 of the Agreement there was a specific stipulation that “the provisions of the existing employment contract with the Home Company shall continue to apply unless this Supplementary Agreement provides otherwise”. Thus, there was a specific Clause in the Agreement under which Mr. Desai’s employment contract with Mercedes-Benz continued to operate even during his assignment/long term transfer with the Host Company.

The Court concluded that there could be no doubt to the position that Mercedes-Benz continued to be the parent employer even during assignment/long term transfer to Daimler AG. Furthermore, use of the words ‘assignment’ and ‘long term transfer’ in the title of the agreement clearly suggested that the service of Mr. Desai was merely transferred with the Host Company.

The Court further observed that the ultimate management between both the companies was same, which possibly was the reason why Mr. Desai was ‘transferred’ to the host company. It was not a fresh recruitment with the host company and Mr. Desai never resigned from services of Mercedes-Benz. Thus, mere transfer between two establishments owned by same management does not result in break in service and the services in the two spells remain continuous within the meaning of Section 2A of the Gratuity Act.

On the second issue, the High Court held that the gratuity is required to be determined as per the definition of the term ‘wages’ under Section 2(s) of the Gratuity Act which would mean emoluments earned by an employee including Dearness Allowance but excluding the other allowances. The Court then directed the Controlling Authority to accordingly determine the exact emoluments that were drawn by him at the time of cessation of his services within the meaning of Section 2(s) of the Gratuity Act

Key points of the Judgment:

1. Same Management Clause: The Court while clarifying how to interpret employment agreements highlighted that when an employee is transferred to another company that is under the same management, the continuity of service is maintained. This interpretation ensures that employees are not unfairly deprived of their gratuity rights due to organizational restructuring.

2. No Break in Service: The judgment underscored that such transfers, when managed under the aegis of the same management, should not be considered as a break in service. Therefore, the period of service in both companies should be combined for the purpose of calculating gratuity.

3. Legislative Intent: The Court reiterated the legislative intent behind the Gratuity Act, which is to secure financial stability for employees post-retirement. Disregarding the continuity of service in cases of intra-management transfers would undermine this objective.

Implications of the Judgment

This judgment has far-reaching implications for employers and employees alike:

1. Employer Compliance: Employers will likely need to standardize transfer agreements between affiliated companies to clearly define expectations regarding service continuity and benefit calculations as the same can help avoid future disputes. This may necessitate revisions in employment contracts and HR policies.

2. Potential Cost Implications: Employers may face increased costs if transfers are seen as continuous service. This could lead to higher gratuity payouts and potentially affect other benefits tied to service length.

3. Employee Rights: Employees can be assured that their rights to gratuity are protected, even when they are transferred within different entities under the same corporate umbrella. Employees can now make stronger arguments for uninterrupted service continuity in cases of transfers within the same management group. This strengthens their position when claiming benefits like gratuity, Provident Fund (PF), and earned leaves, which are calculated based on total service length besides enhancing job security and financial stability for employees.

4. Legal Precedent: The ruling sets a significant legal precedent, guiding future cases involving similar disputes. It ensures uniformity in the interpretation and application of the Gratuity Act, particularly in the context of organizational restructurings and employee transfers.

Anhad Law’s Perspective

The Bombay High Court’s decision is a landmark ruling that reinforces the protection of employee rights under the Gratuity Act. By affirming that transfers within the same management do not constitute a break in service, the Court clarified a critical aspect of gratuity law by setting a robust precedent for future cases, ensuring fair and consistent treatment of employees in the Indian corporate landscape.

[1] Writ Petition No. 12202 of 2023

[2] The Gratuity Act mandates that gratuity be paid to employees who have rendered continuous service for at least five years upon the termination of their employment. The Gratuity Act defines "continuous service" and specifies conditions under which it is deemed to be uninterrupted, despite certain interruptions.

[3] Limit stands revised to INR 20,00,000.