Case Note & Summary
The petitioners, Anil Govind Ganu and Ashwini Anil Ganu, were the founders and directors of Innovative Technomics Pvt. Ltd. They claimed gratuity for their service from 1993/1996 to 2012, relying on salary slips and a balance sheet provision for gratuity. The Controlling Authority under the Payment of Gratuity Act rejected their applications, holding that they were in control of the company and thus not 'employees' under Section 2(e) of the Act. The Appellate Authority affirmed this decision. The petitioners challenged both orders by way of writ petitions before the Bombay High Court. The High Court dismissed the petitions, upholding the concurrent findings that the petitioners were employers, not employees. The court applied the 'control test' and found that the petitioners had absolute control over the company's affairs, including appointment, remuneration, and management. The mere fact that they drew salary or that a provision was made in the balance sheet did not make them employees. The court distinguished the definition of 'employee' under the ESI Act, which is wider, and held that the Payment of Gratuity Act requires a master-servant relationship. The court also noted that the petitioners' names were not in the LIC Group Gratuity Scheme, and the Share Purchase Agreement contained an indemnity clause against pre-closing liabilities. The court found no perversity in the concurrent findings and declined to interfere under Article 226/227.
Headnote
A) Payment of Gratuity Act - Definition of Employee - Section 2(e) - Control Test - Founders and directors who were in absolute control of the company's affairs and had power to appoint themselves, fix remuneration, and manage day-to-day operations are not 'employees' under the Act, as they lack the element of subordination and control by an employer. The mere drawing of salary or inclusion in balance sheet provision does not confer employee status. (Paras 1-51)
B) Payment of Gratuity Act - Better Terms of Gratuity - Section 4(5) - Agreement for Better Gratuity - An agreement for better terms of gratuity under Section 4(5) must be a valid contract between employer and employee; where the claimant is not an employee, such agreement is unenforceable. The balance sheet entry alone does not constitute a binding agreement. (Paras 4-51)
C) Payment of Gratuity Act - Director as Employee - Distinction from ESI Act - The definition of 'employee' under the ESI Act is wider and includes directors, but the Payment of Gratuity Act requires a master-servant relationship. Directors in control are not employees under the Gratuity Act, unlike under the ESI Act where the definition is broader. (Paras 5-51)
D) Writ Jurisdiction - Concurrent Findings of Fact - Scope of Interference - Under Article 226/227, the High Court will not interfere with concurrent findings of fact by the Controlling Authority and Appellate Authority unless they are perverse or based on no evidence. The findings that petitioners were employers and not employees are based on evidence and not perverse. (Paras 1-51)
Issue of Consideration
Whether ex-promoters and directors of a company, who were in control of its affairs, can be considered 'employees' under Section 2(e) of the Payment of Gratuity Act, 1972 and thus entitled to gratuity.
Final Decision
Both writ petitions are dismissed. The orders of the Controlling Authority dated 6 December 2018 and the Appellate Authority dated 10 July 2023 are upheld. No order as to costs.
Law Points
- Definition of employee under Section 2(e) Payment of Gratuity Act
- 1972
- Control test for determining employer-employee relationship
- Director as employee under ESI Act distinguished
- Better terms of gratuity under Section 4(5) Payment of Gratuity Act
- Concurrent findings of fact
- Scope of writ jurisdiction under Article 226/227
Case Details
2024 LawText (BOM) (8) 205
Writ Petition No. 160 of 2024 and Writ Petition No. 161 of 2024
Mr. Kiran Bapat, Senior Advocate i/by Mr. Gaurav Gawande and with Mr. J.M. Joshi for the Petitioner; Mr. Prashant P. Kshirsagar a/w Mr. Aniruddha M. Sanap, i/by Sarvadnya Legal Associate for the Respondents
Anil Govind Ganu and Ashwini Anil Ganu
Innovative Technomics Pvt. Ltd. and Ors.
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Nature of Litigation
Writ petitions under Article 226/227 challenging orders of Controlling Authority and Appellate Authority under the Payment of Gratuity Act, 1972 rejecting gratuity claims of ex-promoters/directors.
Remedy Sought
Petitioners sought payment of gratuity amounts of Rs. 94,26,923/- and Rs. 27,69,231/- respectively, and setting aside of the impugned orders.
Filing Reason
Petitioners claimed gratuity for their service as employees of the company, which was denied by the authorities on the ground that they were employers in control.
Previous Decisions
Controlling Authority-cum-Labour Court, Pune rejected applications PGA Nos. 10/2015 and 11/2015 on 6 December 2018. Appellate Authority-cum-Industrial Court, Pune dismissed appeals (PGA No. 1/2019 and 2/2019) on 10 July 2023.
Issues
Whether the petitioners were 'employees' under Section 2(e) of the Payment of Gratuity Act, 1972.
Whether the petitioners were entitled to gratuity under the Act or under an agreement for better terms under Section 4(5).
Whether the concurrent findings of the authorities were perverse and liable to be interfered with in writ jurisdiction.
Submissions/Arguments
Petitioners argued that they drew wages, produced salary slips, and a balance sheet provision was made for gratuity, thus they were employees. They relied on BCH Electric Ltd. v. Pradeep Mehra and ESIC v. Venus Alloy to argue that directors can be employees.
Respondents argued that petitioners were in absolute control of the company, appointed themselves, fixed their own remuneration, and were not employees. They pointed to absence of appointment letters, lack of name in LIC Group Gratuity Scheme, and indemnity clause in SPA.
Ratio Decidendi
A person who is in control of the affairs of a company, with power to appoint themselves, fix remuneration, and manage day-to-day operations, does not satisfy the definition of 'employee' under Section 2(e) of the Payment of Gratuity Act, 1972, as there is no master-servant relationship. The control test is determinative, and mere drawing of salary or balance sheet entries do not confer employee status. The definition under the ESI Act is wider and not pari materia with the Gratuity Act.
Judgment Excerpts
Petitioners founded the Company 'Innovative Technomics Private Limited' and were its Directors.
The Controlling Authority-cum-Labour Court passed orders dated 6 December 2018 rejecting the applications filed by the Petitioners, inter-alia, holding that they were in control over the affairs of the Company and therefore did not fit in definition of the term 'employee'.
Mr. Bapat would rely upon the judgments of this Court in Ramchander's Coaching Institution Pvt. Ltd. Versus. Rakesh Ramchandar Nanda in support of his contention that this Court has dealt with an almost identical case where a Director of the Company was sought to be denied gratuity by erroneously treating him as employer.
Procedural History
Petitioners filed applications PGA Nos. 10/2015 and 11/2015 before Controlling Authority-cum-Labour Court, Pune on 29 September 2015. The Controlling Authority rejected them on 6 December 2018. Petitioners appealed to Appellate Authority-cum-Industrial Court, Pune via Appeal (PGA) No. 1/2019 and 2/2019, which were dismissed on 10 July 2023. Petitioners then filed the present writ petitions on an unspecified date, which were reserved on 31 July 2024 and pronounced on 20 August 2024.
Acts & Sections
- Payment of Gratuity Act, 1972: Section 2(e), Section 4, Section 4(5), Section 4A
- Employees' State Insurance Act, 1948: Section 2(9) (definition of employee), Section 2(22) (definition of wages)
- Employees' Provident Funds and Miscellaneous Provisions Act, 1952: Section 2(f) (definition of employee)
