How new gratuity insurance rules affect average employee

The risk of uncertainties impacts every business alike – regardless of its size or nature. Quite possibly, a company might grapple with losses or face a financially untoward situation due to an unforeseen challenge. In fact, the situation might get so intense that employees might end up bearing the brunt of it in the form of their payouts being impacted, which includes gratuity. Denial of gratuity payments could come as a severe blow to the employees’ financial planning and goals. 

However, with the recent introduction of the Compulsory Gratuity Insurance Rules 2024 in Karnataka, these challenges are likely to be addressed. These rules put the welfare of the employees first and ensure enhanced financial security for them. To put it simply, if a company is facing any kind of financial challenges which make it difficult for it to deliver on its gratuity commitments to the employees, insurance companies would step in and make sure that employees get paid their dues. 

Understanding gratuity

Among the several benefits that are due to employees, one is gratuity. It is essentially a financial benefit that rewards employees for their long-term service, typically longer than five years. Usually, employees are paid gratuity when they resign, retire or are terminated. The total sum that they receive as gratuity is based on the tenure they served at the company and their monthly salary.

One can say that gratuity is a way that companies recognise the dedication and loyalty of their employees, and reward them for the same. For employees, beyond being a token of appreciation from their employers, it also serves as a strong tool for financial planning.

While the reasons might vary, non-payment of gratuity leads to trust deficit between the employer and the employee, aside from the financial pitfalls. This is especially true for those who dedicate a longer span working for a particular company.

Gratuity insurance to the rescue

As per the latest rules, it is now mandatory for companies in Karnataka to have gratuity insurance. This means that even if a company is struggling with financial losses, the gratuity of the employees would be guaranteed. When the employers opt for an insurance policy, they would have to contribute regularly to an underlying fund. This would create a corpus that can be exclusively used towards gratuity payments of its employees. So this basically adds an additional layer of protection, thereby ensuring that the rights of employees are not compromised even if the company goes through financial turmoil. 

This is a pivotal decision for employee welfare and it won’t be an exaggeration to say that with these rules in place, any concerns of employees about their financial future upon resignation or retirement will be sufficiently addressed. By ensuring that their gratuity payments are guaranteed and backed by insurance, this will also give them confidence in their long-term financial planning.

It is not just the employees who benefit. For employers, getting an insurance policy to cover gratuity will mitigate their risks as well. Before these regulations, it used to be the sole responsibility of the employer to pay gratuity. This often posed a challenge, especially for smaller companies, when they had to pay gratuity to a large number of employees in case of mass layoffs, restructurings or mass resignations. This often led to potential delays, or even denials, in disbursement. Now, they are covered irrespective of their financial situation. Moreover, guaranteed payments for employees will also boost their reputation, thereby fostering trust and positive relations between the stakeholders. The mandate also states that there should be clearly defined by-laws entailing detailed procedures for claim and release of the calculated gratuity amount to those who are eligible. 

To sum it up, the Compulsory Gratuity Insurance Rules 2024 represent a significant milestone in employee-centric policies. While they do not affect the eligibility of an employee for gratuity, they increase the certainty of payout. While these rules are only applicable in Karnataka as of now, other states may follow suit. In any case, it is a welcome initiative and worth emulating in the entire nation.

(The writer is Head, Policybazaar for Business)