Gratuity Calculation Dispute: Should We Pay on Gross or Basic? Seeking Legal Insights

Gratuity Calculation Dispute: Seeking Guidance

I have come across a case that requires handling, and I am expecting guidance from the Senior Members.

In 2010, the Company made a deed with a Fund House to release Gratuity. According to the Deed, the Gratuity is to be paid on Gross. However, the deed was not registered with the IT Department. Until 2012, the Gratuity calculation was done on Gross, but since then, the company has decided to calculate it as per the Law, i.e., on Basic (without a separate DA factor as a part of the salary). The Company is also in the process of amending the current Deed.

Meanwhile, a senior employee has retired and is demanding that the Gratuity be calculated on Gross (as per the previous deed) and is threatening to take the matter to Court. The Company does not agree with this demand.

What action should be taken? Should the Company make the payment on Gross or on Basic? What are the legal implications?

Regards

Payment and Legal Implications Regarding Gratuity

The payment should be made as per the deed. If it has been changed, then the new policy would apply. In case the change is in process and the old deed was in force on the date of retirement of the employee, then the old policy will be applicable.

It is up to the management whether they want to settle the matter amicably or go to court and then pay the employee. They have to understand that it would be their loss as they would have to go through the long litigation process, pay for the legal services, and then pay the employee what is rightfully due to him along with interest and costs as may be decided by the Court. In addition, they would be spoiling their goodwill.

However, the exact status and opinion can be given only after knowing the actual facts of the case. If you wish to seek expert opinion on the matter, our legal team would be pleased to help.

Thanks,

Kind Regards,

Avika Kapoor Vice President - Operations

Website: Kapgrow

Understanding the Deed and Its Implications

The deed is a private document between the company and the fund house. The employee has no say in the deed, its implementation, or execution. I assume no payment is deducted from the employee for establishing the fund (though it may be a part of the CTC, that is not amounting to deduction). Also, I assume the terms of the deed were not made a part of the terms of employment or communicated to the entire company in a manner amounting to an implied promise to pay.

Legal Obligations and Payment Requirements

So, the company needs to pay as per the law. The law says you need to pay on basic + DA! So, that is what matters. The employee is likely to lose the case (if the facts are as above). However, you need to sit with your lawyers with the full facts of the case and decide the course of action.

Your post is silent on whether the Payment of Gratuity Act is applicable to the employee or not. Assuming that the Payment of Gratuity Act is applicable, then the employee is entitled to receive gratuity from his employer based on his basic pay plus dearness allowance. This is regardless of the contents of the deed referred to by you. The deed is an arrangement between the employer and the fund managers and does not bind the employee. Moreover, a deed between two individuals, in other words, a contract between two individuals (including companies, etc.), cannot override the provisions of any law currently in force. Therefore, regardless of the contents of the deed, if it is less favorable than the terms of the Payment of Gratuity Act, then the PG Act will prevail.

If the Payment of Gratuity Act is not applicable to the employee, then regardless of the terms of the deed, the employee is entitled to receive gratuity according to the terms related to gratuity in his appointment order. If the appointment order does not contain terms related to gratuity, then the employee will receive gratuity according to any scheme for the payment of gratuity that is established by the employer.

Regards,