As per the current scenario in private sector companies, it has been observed that some companies are including gratuity as a part of Cost to Company (CTC) or total emolument payable to an employee per month or annum. Making gratuity part of CTC raises two questions:
i) Whether gratuity should be part of CTC or not?
ii) If yes, can an employee claim it at the time of separation before completing 5 years?
Let us search for the answer and evaluate both questions in light of the provisions of the applicable relevant legislation, i.e., the Payment of Gratuity Act 1972 and the rules made therein.
Whether Gratuity Should Be Part of CTC or Not?
The preamble of the Payment of Gratuity Act itself is clear that it was enacted to introduce a scheme for the payment of gratuity for certain industrial and commercial establishments as a measure of social security. The significance of this legislation lies in the acceptance of the principle of gratuity as a compulsory retirement benefit.
Section 4 of the Act provides the conditions for the payment of gratuity to any employee as follows:
(1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years:
(a) On his superannuation, or
(b) On his retirement or resignation, or
(c) On his death or disablement due to accident or disease:
Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.
Section 4(2) provides the quantum of gratuity payable to the eligible employee as follows:
(2) For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned:
Explanation: In the case of a monthly rated employee, the fifteen days' wages shall be calculated by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by fifteen.
A plain reading of the above provisions suggests that gratuity shall be payable to an employee when the employee completes continuous service of 5 years, except in the case of death or disablement where this condition of 5 years continuous service is not applicable.
"Gratuity," as observed by the Supreme Court in its etymological sense, means a gift, especially for services rendered or in return for favors received (Delhi Cloth & General Mills Co. Ltd. v. Its Workmen AIR 1970 SC 919).
The general principle underlying the gratuity scheme is that by their length of service, workmen are entitled to claim a certain amount as a retirement benefit (Indian Hume Pipe Co. Ltd. v. Its Workmen See AIR 1960 SC 251). Gratuity has to be considered an amount paid unconnected with any consideration and not resting upon it and has to be considered something given freely or without recompense. It does not have a foundation on any legal liability but upon a bounty stemming from appreciation and graciousness. Long service carries with it the expectation of appreciation from the employer and gracious financial assistance to tide over post-retirement difficulties.
Gratuity is a social/retirement statutory benefit payable to an employee by the employer as a reward for good, efficient, and faithful service rendered for a considerable period of at least 5 years. This has been observed by the Apex Court in a series of judgments on the subject, and the calculation of the gratuity amount shall be based on the last drawn wages of the employee.
Legally, the right which will accrue to an employee after 5 years, how can that right be affected from day one, and further, when the calculation is based on the last drawn wages, how can the amount be fixed initially while the basic wage structure of any employee is subject to change every year?
In view of the above, we are of the considered opinion that making gratuity a part of CTC is completely against the provisions of the PG Act and the intention of the legislation being social welfare legislation.
Further, if an employer contends that they have made the provisioning for considering the future prospects and have subscribed to a scheme of insurance for setting up a trust for the gratuity fund in terms of section 4A of the Act, it is also not tenable because section 4A has not been implemented and never notified by the Government of India or any state except the state of Andhra Pradesh.
Even in the case of the constitution of a voluntary scheme of insurance, the employer cannot deduct the contribution of gratuity toward such an insurance scheme from the wages of the employee as there is no provision under the PG Act which allows the employer to deduct or contribute any amount from the salary of employees. The administration of the Gratuity Scheme, if any, shall be the responsibility of the employer itself.
If Gratuity is Part of CTC, Can an Employee Claim Such Amount as Wages?
Though legally the answer to the first question is negative, still in the guise of CTC, if any employer is making gratuity a part of CTC (as there is no definition of CTC provided under any law) and showing the same in the monthly & annual pay package, then it may amount to earned wages of an employee. In case of any dispute, the employee can claim such a deduction as illegal and can recover the same as his earned wages.
In case the employee does not claim such an amount deducted as gratuity from the wages of an employee, then it should be deposited with the Welfare Commissioner of the concerned state in light of the provisions of the Labour Welfare Fund Act of that state as unpaid wages/accumulation at the end of the year.