Gratuity : Notable Elements

Gratuity's history is long, dating back to expressions of appreciation beyond base pay. It likely began in the travel and service industries, with clients rewarding performers or travelers offering extra coins. Historically, employer-employee relations were less structured, and compensation relied on basic wages. Over the time, gratuity became a social custom to acknowledge good service. Today, it takes various forms like tips and bonuses.

Formal gratuity as compensation is a modern concept. Historically, employer-employee relations were less structured, and compensation relied on basic wages. Laws mandating gratuity payments, like India's Payment of Gratuity Act (1972), are recent developments. While the idea of thanking someone for service is older, standardized gratuity with legal backing is new.

This article reflects certain aspects related to Gratuity in brief. We have attempted to place relevant calculations, benefits and nomination etc, from Human Resource perspective.

Key Components of CTC (Salary Structure)

Gratuity is a payment made by an employer to an employee after they retire, leaves the company, or dies after a certain period of service. It's essentially a lump sum termination benefit.

Payment of Gratuity Act, 1972: An Act to provide for a scheme for the payment of gratuity to employees engaged in railway companies, factories, mines, oilfields, plantations, ports, shops or other establishments and for matters connected therewith or incidental thereto.

There are two main ways gratuity is calculated in India, depending on whether the company is covered under the Payment of Gratuity Act, 1972:

For Companies Covered under the Gratuity Act:

• The formula is: Gratuity = (Last drawn salary x 15/26 x Number of years of service)
• Here, 15/26 represents the estimated 15 working days in a month, so the gratuity is calculated based on 15 days' salary for each completed year of service.

For Companies Not Covered under the Gratuity Act:

• The formula is: Gratuity = (Last drawn salary x 15/30 x Number of years of service)
• In this case, the divisor is changed from 26 to 30 because the calculation is based on a full month's salary for each completed year of service.

Sample Salary Structure

The reason for calculating Gratuity at 4.81% is:

For Example : An employee's basic pay is Rs.100/-

Gratuity eligibility per year is:

Last drawn Basic Pay / 26 * 15 days for every completed month

Then the calculation would be = 100 /26 * 15 = 57.69231 for every completed year.

Then for a single month = 57.69231 / 12 = 4.81 per month

Benefits of Gratuity

Employee Benefits:

• Financial Security: Gratuity provides a lump sum of money at the time of retirement, resignation (after a certain period), or death/disability. This acts as a financial safety net during a period of transition.
• Recognition and Appreciation: Gratuity serves as a token of appreciation for an employee's loyalty and long service to the company. It demonstrates that their contributions are valued.
• Tax Benefits: Gratuity received up to 20 Lacs is exempt from income tax, making it beneficial for employees.

Employer Benefits:

• Improved Morale and Motivation: Offering gratuity can boost employee morale and motivation. Employees feel valued and are more likely to stay committed to the company for the long term.
• Reduced Employee Turnover: Gratuity can act as an incentive for employees to stay with the company, especially when combined with other benefits. This helps reduce employee turnover and its associated costs like recruitment and training.
• Positive Employer Branding: A company that offers gratuity is seen as an employee-friendly organization. This can attract and retain top talent in a competitive job market.

Overall, gratuity is a win-win situation for both employers and employees. It provides financial security for employees and fosters a positive work environment with a loyal and motivated workforce for the company.

When can Gratuity be withheld?

There are some possible reasons why the Gratuity can be withheld as mentioned below:

1. Court Order: If there's a court judgment against the employee for unpaid debts, a portion of the gratuity could be directed toward settling it.
2. Tax Dues: In some cases, outstanding taxes owed by the employee could be deducted from the gratuity amount.
3. Loan Defaults: If the employee has defaulted on a company loan, the company might have the right to recoup some of it from the gratuity.
4. Fraudulent Activity: If the employee is found to have engaged in fraud or embezzlement, the gratuity might be withheld to recover damages.
5. Serious Misconduct: Depending on the severity of misconduct leading to termination, some companies might have policies allowing them to withhold a portion of the gratuity.
6. Not Completing Notice Period: Some employment contracts might stipulate that the employee forfeits gratuity if they leave without completing the required notice period (unless there's a valid reason).
7. Probationary Period Termination: If the termination happens during the probation period and the contract allows it, gratuity might not be payable.
8. Voluntary Resignation (without completing minimum service): Certain companies might have a minimum service requirement for gratuity eligibility.
9. Death During Probation: Gratuity might not be payable if the employee dies during the probation period, depending on company policy and local laws.
10. Mutual Settlement: There might be situations where the employer and employee reach a mutual settlement agreement that addresses gratuity payout.

Nomination facility:

1. Nominate your family: Employees with families must name them for gratuity payment (within 1 year of service).
2. Share the gratuity: You can split the gratuity amount among multiple family members.
3. No outsiders if you have a family: If you have a family, you cannot nominate anyone outside your family for gratuity.
4. Family later? (Marriage) Renominate: If you don't have a family initially but from one year later, any previous nomination is void. You need to nominate your family members.
5. Change your mind? Update! You can update your nomination anytime by informing your employer.
6. Nominee dies? Renominate: If your nominated family member dies before you, you need to nominate someone else for their share.
7. Employer keeps it safe: Submit your nomination forms to your employer for safekeeping.

Role of the Human Resources Department (HRD)

HR plays a crucial role in the smooth handling of gratuity for employees. Key responsibilities are as follows:

1. Awareness and Eligibility: HR should ensure all employees are aware of the gratuity policy, its benefits, and eligibility criteria. This can be done through company handbooks, workshops, or internal communication channels.
2. Calculation and Record Keeping: HR is responsible for accurately calculating the gratuity amount for each eligible employee. This typically involves factors like a last-drawn salary, tenure of employment, and reasons for leaving. They need to maintain detailed employee records, including salary history and service details, which are crucial for gratuity calculations.
3. Processing and Disbursement: HR plays a key role in initiating the gratuity payment process upon receiving an employee's resignation or retirement application as applicable. This involves verifying eligibility, calculating the amount, and ensuring timely disbursement through payroll or designated channels.
4. Compliance and Legal Matters: HR must ensure the company adheres to all gratuity-related regulations as mandated by local labor laws. They may need to stay updated on any changes or amendments to the gratuity act and advise the company accordingly.
5. Using Technology: Technology can be an enabler to leverage and streamline gratuity calculations, record keeping, and communication with employees regarding their gratuity entitlement. (Ex. HR management systems (HRMS)).

Disclaimer:

This content is the sole expression of the authors and does not reflect the views of their employers, companies, or affiliated organizations.