How to Calculate Gratuity for a Director with Consolidated Pay? Seeking Advice!

Dear Friends, Please provide me with a citation and calculation for the following issue:

There was an employee who worked for a salary for eleven years. He was further appointed as a Whole-time Director (WTD) for 6 years. This was duly informed to the ROC and the same is recorded with the ROC. Since he was made a Director, he was being paid Director's consolidated remuneration (hence no Basic or DA) as per Board resolutions, and every year, depending upon the profit, he was given an increase in his fee as well. The Board resolutions clearly spell out that he was being paid Directors' remuneration.

After his resignation, he is claiming gratuity from the Company.

Please clarify:

1. How to calculate his gratuity when there is no basic and DA as he was paid consolidated remuneration.

2. Should we calculate gratuity on the whole consolidated amount?

3. If I refer to the below statement:

"Where the WTD has completed his tenure of 5 years and is paid gratuity for the period. He is reappointed for another 5 years but resigns before completion of the tenure of another 5 years after reappointment. In such a case, he will lose the gratuity for his second term."

If the above is true, then we have not paid any gratuity. Then how should it be calculated now?

Please reply as soon as possible.

Thanks,

Ritika

Gratuity Calculation for Directors

As per the Payment of Gratuity Act, 1972, Section 2(e), a Director is also considered an employee. The Director's entire remuneration can be considered as Basic.

According to the Payment of Gratuity (Amendment) Bill, 2010, the maximum Gratuity payable is Rs. 10,00,000.00/- (Rupees Ten Lakh).

The Director's salary is inevitably higher than the ceiling limit. Based on my understanding from your previous post, your Director has served as a Managerial Employee for 11 years and as FTD for 6 years (First Term). Therefore, the calculation is as follows:

Considering a consolidated salary of Rs. 1,00,00,000.00:
- Salary (Basic + DA) X 15/26 X Number of completed years of service
- 1,00,00,000.00 X 15/26 X 17 years
- 9,80,76,923.08 = 10,00,000.00/- (Ten Lakhs)

Even if the calculated amount is Rs. 9,80,76,923.08, you are bound to pay only Rs. 10,00,000.00/-.

Thank you, Suhas. However, what happens when the WTD completes his tenure of five years and is paid gratuity for that period? If he is reappointed for another five years but resigns before completing the second term, will he lose the gratuity for his second term?

Regards,
Ritika

Yes, he will lose gratuity for his second term because his employment ceases in the first term and new employment starts in the second term. So, if there is no continuous service of 5 years in the second term, then there is no gratuity payable for his service in the second term.

Dear Ritika,

So far as any payment to the WTD, it should be regulated as per the Articles of the Association, Board Resolution/AGM Resolution, and the provisions of the Companies Act, 1956. First of all, you should refer to the Terms & Conditions of appointment and look for what it says about his gratuity. As per the Companies Act, Director's remuneration includes the component 'gratuity'. And if the gratuity is administered by your own Gratuity Rules, then things should be clear to you. Otherwise, you have to go by the provisions of the Companies Act; an extract of relevant clauses is given below:

Section 198 in The Companies Act, 1956

198. 1 Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits.

(1) The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company, to its directors and its managing agent, secretaries, and treasurers or manager in respect of any financial year shall not exceed eleven percent of the net profits of that company for that financial year computed in the manner laid down in sections 349, 350, and 351, except that the remuneration of the directors shall not be deducted from the gross profits: Provided that nothing in this section shall affect the operation of sections 352 to 354 and 356 to 360.

(2) The percentage aforesaid shall be exclusive of any fees payable to directors under subsection (2) of section 309.

(3) Within the limits of the maximum remuneration specified in subsection (1), a company may pay a monthly remuneration to its managing or whole-time director in accordance with the provisions of section 309 or to its manager in accordance with the provisions of section 387.

(4) Notwithstanding anything contained in subsections (1) to (3), but subject to the provisions of section 269, read with Schedule XIII, if, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole-time director or manager, by way of remuneration any sum, exclusive of any fees payable to directors under subsection (2) of section 309, except with the previous approval of the Central Government.

1. Subs by Act 65 of 1960, s. 56, for s. 198.

2. Subs. by Act 31 of 1988, s. 25 (w.e.f. 15-6-1988).

Explanation: For the purposes of this section and sections 309, 310, 311, 348, 352, 381, and 387, "remuneration" shall include:

(a) any expenditure incurred by the company in providing any rent-free accommodation, or any other benefit or amenity in respect of accommodation free of charge, to any of the persons specified in subsection (1);

(b) any expenditure incurred by the company in providing any other benefit or amenity free of charge or at a concessional rate to any of the persons aforesaid;

(c) any expenditure incurred by the company in respect of any obligation or service which, but for such expenditure by the company, would have been incurred by any of the persons aforesaid; and

(d) any expenditure incurred by the company to effect any insurance on the life of, or to provide any pension, annuity, or gratuity for, any of the persons aforesaid or his spouse or child.

If you go through further, there are maximum limits on remuneration linked to profits and other factors (at 1% and 10% and so on). Please refer to Sections 197A, 198, 268, 269, 309, 310, 311, read with Schedule XIII of the Companies Act, 1956, containing provisions relating to the appointment and remuneration of Managerial Personnel.

So far as calculation is concerned, general calculation as per the Gratuity Act could be followed, stating 15 days' salary for every year of service, and for the maximum limit, it should be guided by the relevant AOA, Board resolution, etc. If you are in HR, I think your Co.Secretary should guide you properly, taking all factors into consideration. But still, you will have a problem as to how the past service should be reckoned, whether to treat this as 'continuous service' or otherwise. This is also a matter to be dealt with by your Board.

Regards,