India: Karnataka High Court Grants Interim Relief to Employers Failing to Pay the Compulsory Gratuity Insurance Premium
Authors: Avik Biswas, Ivana Chatterjee, Snehal Walia
On 28 April 2025, the Karnataka High Court passed an interim order restricting the Government of Karnataka from taking any coercive steps against employers failing to pay the gratuity insurance premium stipulated under the Karnataka Compulsory Gratuity Insurance Rules 2024.
On 10 January 2024, the Government of Karnataka notified the Karnataka Compulsory Gratuity Insurance Rules, 2024 (“Gratuity Insurance Rules”) under Section 4A of the Payment of Gratuity Act, 19721 (“Gratuity Act”). The Gratuity Insurance Rules primarily require all employers in Karnataka to obtain insurance cover for their monetary liability under the Gratuity Act as per the specifications prescribed under law.
On 19 March 2024, a writ petition was filed before the Karnataka High Court (“High Court”) challenging the constitutional validity of the Gratuity Insurance Rules on various grounds.2 The Bruhat Bangalore Hotels Association and others (“Petitioners”) broadly argued that the Gratuity Insurance Rules (a) compulsorily require employers to pay a gratuity insurance premium even with respect to those employees who have not completed five years of continuous service with an organisation and thus, have not become eligible to receive any benefits under the Gratuity Act; and (b) unfairly impose an additional monetary liability on the small-scale employers. The Petitioners urged the High Court to declare the Gratuity Insurance Rules unconstitutional and grant an interim order staying their operation during the pendency of the instant matter. On the other hand, the Principal Secretary, Labour Department of Karnataka (“Respondent”), argued that the Gratuity Insurance Rules have been notified to avoid disputes in relation to payment of gratuity to eligible employees. The Respondent further emphasized that ordering a stay on the operation of the Gratuity Insurance Rules would prevent the employers from paying the gratuity insurance premium even for those employees who have completed five years of continuous service.
After hearing the arguments from both sides, the High Court observed that passing a stay order on the operation of the Gratuity Insurance Rules entirely would also prevent the employers who are capable of paying the gratuity insurance premium from doing so. However, considering that the pleadings were yet to be completed, the High Court passed an interim order directing the Government of Karnataka to not take any coercive measures against the employers for their failure to pay the gratuity insurance premium until the next date of hearing in the matter i.e., 3 June 2025.
Key Action Points for Human Resources and In-house Counsel
The instant ongoing matter is an important development for the employers in Karnataka regarding their liability under the Gratuity Act. While the High Court has intermittently restricted any coercive action against the employers failing to pay the gratuity insurance premium, there is no final judgement on the matter yet. The final judgement will not only determine the employers’ liability in relation to the gratuity insurance premium but also their compliance in relation to the other obligations such as registration of establishment and incorporation of a gratuity trust fund as prescribed under the Gratuity Insurance Rules.
1The Gratuity Act applies to establishments where 10 or more persons are employed or were employed in the last 12 months in the preceding year. Section 4A of the Gratuity Act empowers the State Governments to frame rules requiring employers to mandatorily obtain an insurance policy that covers their liabilities under the legislation.
2W.P. Nos. 9358/2024 and other connected petitions.
