How Can a Factory Offer Gratuity Cost-Effectively for Workers Over 42? Urgent Help Needed!

Hi, I am a student and I need this answer urgently: In a factory, all the workers are above 42 years old, and the factory didn't initially start giving gratuity. Now, the factory wants to give gratuity in a cost-saving method. Please suggest, if possible, with relevant case laws.

Dear Dalia,

In your post, you have not mentioned whether the employees in the factory have served for more than 5 years continuously. Secondly, the Payment of Gratuity Act applies to the factory employing more than 10 employees. Does your factory come under the ambit or not?

Secondly, please make your query more detailed.

Regards

Payment of Gratuity Act 1972 is applicable to every factory where 10 or more persons were employed on any day of the preceding 12 months. The age of employees is not very important. Every employee who has rendered continuous service of not less than five years is eligible for gratuity. There is no economic way of gratuity. You have to pay as per eligibility.

Hi, You need to understand first the applicability of the Payment of Gratuity Act. If your organization is covered by the legislation, you need to estimate the actuarial value of the gratuity amount payable. This figure should necessarily be part of the balance sheet of your organization. To safeguard the interest of the employee on separation/retirement and the employer from financial burdens, it is preferable that your organization takes a group gratuity insurance policy from LIC or other reputed insurance firms.

As a cost-saving technique, some companies will show the gratuity amount as a separate component from the employee's CTC and will pay it at the time of resignation or retirement (if completed 5 years of continuous service). In the case of the death of an employee, they will be eligible for gratuity regardless of the number of years of service.

This approach can reduce labor turnover and act as a retention technique. If a person leaves the company before completing 5 years, the company can save the amount that is shown as a separate component from their salary. While this may not seem fair, it is a common practice among many companies.

Regards,
Rajendra

Hi,

The amount of Gratuity Payable is calculated by a simple arithmetic formula. It is payable to eligible employees only at the time of separation (resignation, retirement, death, termination). Hence, there is no possibility of any cost-saving at all in the payment of gratuity. You have to bear your legal liability.

Thanks & Regards

Suggestion of Mr. Rajendra of deducting amounts from salaries of employees as a contribution for gratuity does not align with the spirit and provisions of the law. This may even attract a penalty. Gratuity is to be borne entirely by the employer, and there is no provision for employee contribution in the law.

As a cost-saving technique, some companies will deduct some amount from the employee's CTC and will pay it at the time of resignation/retirement (if completed 5 years of continuous service). In case of an employee's death, they will be eligible for gratuity regardless of the number of years of service. This approach can reduce labor turnover and act as a retention technique. If an employee leaves the company before completing 5 years, the deducted amount from their salary can be saved.

While this practice may not seem fair, it is commonly followed by many companies. :)

Thanks & Regards

Rajendra

Thanks to all of you. Actually, I am a student, and I have to present these options to a corporate house so that they allow me to work on a project under their guidance. It was a challenging question for me as I had no prior knowledge about the gratuity act. Thanks to all of you.

Hello Seniors/Legal Pandits,

Could you please help me out with how the companies are managing this?
1. As someone said, is it illegal?
2. If it is illegal, how are the companies managing?
3. Is there any loophole in the law?

Let us shed some light on this, so it will be useful for all of us.

Personally, I feel it is okay in the CTC concept.

Regards,
Rajendra :)

Dear Mr. Rajendra,
Payment of Gratuity Act is applicable to most of the companies and they have to pay gratuity as applicable.

Concept and definition of Gratuity is very clear and it is entirely borne by employer. There is no provision of employee contribution, as in the case of PF.

I have not come across any company so far who collects contribution from employees towards gratuity. In case any company is doing so, it is illegal. There is no loophole in law.

As companies grow and number of employees and their length of services increases, employer's liability towards gratuity also keeps increasing. To make provision for the gratuity liability some companies form a ‘gratuity trust' and set aside amounts in trust. LIC and other insurance companies also offer a product wherein they charge annual premium based on the actuarial calculation of gratuity liability. In any case trust or insurance, it is entirely funded by employer alone.

Some companies include gratuity in CTC and nothing wrong if it is included in CTC.

Thanks & Regards