How Should We Calculate Gratuity for an Employee Transferred Between Group Companies?

One of our employees (DOJ) joined in January 2002 and was transferred to another group company in July 2010, completing 8.5 years. From July 2010 until December 2011, he worked at the second group company and then resigned from service without any intimation, completing 1.5 years. In the first company, his basic salary was at 60% of the Gross Salary (Gross: Rs. 8500), but upon transfer to the second company, his basic salary was revised to 50% of the Gross Salary (Gross: Rs. 12000) in line with all the second company's other employees. Suddenly, he came back to claim his Gratuity amount. Could you please suggest what method should be adopted for the Gratuity calculation:

If we consider 50% of the Basic Salary for the 10 years of service, the employee would lose, whereas if we consider 60% of the Basic Salary, the company would lose. It was suggested by my HOD to consider Gratuity of 8.5 years at 60% of Basic Salary and for the 1.5 years at 50% of the Basic Salary, and make two different payout cheques from the respective companies. But as per the Gratuity Act, the same has to be payable as per the last drawn salary and from the company in which the employee was working on the last day.

I kindly request your suggestions so that neither the employee nor the company management is at a disadvantage.

Thanks & Regards,

M Gupta

It is not a question of whether the employee will be the loser or the employer will be the loser. It is the Gratuity Act that states it should be calculated based on the last basic salary.

The last basic salary was Rs 6000 per month. Please pay the 10 years' gratuity by using Rs 6000 as the basic salary.

My view is as follows:

When you used the word "transferred," the employee is entitled to gratuity for 8.5 + 1.5 years. Now the question is on what basis? According to the Payment of Gratuity Act, the last drawn basic pay is considered. However, you cannot reduce the basic (and also gross) pay. It is detrimental to his various benefits.

Gratuity Calculation Based on the Gratuity Act

It is not a question of whether the employee will be a loser or the employer will be a loser. It is the Gratuity Act that states it should be calculated on the last basic salary.

The last basic salary was Rs 6000 per month. Please pay 10 years of gratuity by considering Rs 6000 as the basic salary.

Dear Malik ji,

I completely agree with your comments. The law cannot be interpreted according to the employer's whims and fancies. It's good to see you back after a long time. Please continue the good work.

Warm regards.

I do not understand the question. When the employee was working in the first company, the salary was Rs. 8500, and the Basic was Rs. 5100. When he went to the second company, the salary was Rs. 12000, and the Basic was Rs. 6000. So, how does he lose by choosing the last salary? His basic is still higher than what he was drawing in the second company.

I hope you are aware that Gratuity is computed on the last drawn wages, not to be computed for each year separately. So, he is to get gratuity on the basis of 10 years of service, at 15 days for every year worked, based on his last drawn salary.

Please also note that in working out the per day rate, you divide the monthly salary by 26, not by 30.

In my opinion, he is not entitled to receive his gratuity unless he quits the job. This is because the word "transferred" has been used for a change of company, which means that the employee is continuing with the same employer but is posted at a different station. Therefore, unless his services are terminated for any reason, he should neither claim gratuity nor be paid.

Computation of Gratuity

Regarding the computation of gratuity, it is calculated based on the last pay drawn, which includes Basic pay + DA. If there are two separate employers in both companies, he is eligible for gratuity from the first company for 9 years (if the service period is more than 8 years 6 months). However, since he is continuing in the second company, he is not eligible to claim gratuity from there.

Regards,
AK Jain

I am extremely sorry for the error. Thank you for your valuable advice. I welcome your suggestion. However, my contention is that if the companies (1) and (2) belong to the same employer/group, the employee shall be eligible for 10 years of gratuity, and if not, for 8 or 9 years (if part of the year exceeds six months), doesn't it? Please advise/comment.

Thanks once again.

Regards,
AK Jain

Thank you for your response and for approaching the matter positively! Since this involves group companies and the continuity of employment, the service for the purpose of gratuity should be considered as 10 years.

For instance, if an employee of Coal India Ltd. is transferred to other subsidiaries during their career (with their personnel file and records moving from one company to another), they should be entitled to gratuity for the total length of service. Isn't that correct?

Warm regards.