Gratuity Calculation Confusion: Can Special Allowances Be Included Without DA?

Ours is a private limited company and we are supposed to settle the gratuity claim of one of our employees. We do not have Dearness Allowance (DA) included in the pay slip, but among other allowances, we have Special Allowances, House Rent Allowance (HRA), etc. Should the calculation of gratuity be restricted to basic salary alone, or can any other allowance be added?

Dear Aks,

The calculation of Gratuity will be on Basic + DA + VDA. All other allowances with other nomenclature will not be taken into consideration.

Few states like Maharashtra declare half-yearly DA as Special Allowance. If an employee contests that special allowance should be considered in the calculation of gratuity, the Controlling Authority may pass an order to that effect.

If an organization wants to play it safe, they should never have any allowance that will be termed as Special Allowance.

Please go through the judgment of the Supreme Court in the case of Straw Board Manufacturing Co. Ltd. vs Its Workmen reported in AIR 1970 SC 941/1977 SCR (3) 91. In this case, the Court held that in the Payment of Gratuity Act, not Basic wages but Gross wages inclusive of D.A. have been taken as the basis and clarified that wages will mean and include Basic Wages and D.A. and nothing else.

I hope this clarifies your query. If you want to know more, you can go through my article "An overview of wages under the Payment of Gratuity Act, 1972" published in Volume 154 - September 15, 2017 - Part 18 of Indian Factories and Labour Reports.

Thanks,
S. Sensharma
Industrial Law Consultant, Meerut

Dear Friend,

The gratuity is calculated on Basic and DA inclusive. Where the DA component is not present, the calculation should be done on Basic only.

Thank you.

Special Allowance in the Absence of Dearness Allowance

In the absence of Dearness Allowance, some companies pay what is known as Special Allowance. One company's typical wage structure comprises: a) Basic Salary, b) HRA, and c) Special Allowance.

For example, an employee's salary package is as follows:
Basic Salary: Rs 40,000
HRA: Rs 20,000
Special Allowance: Rs 50,000
Gross: Rs 1,10,000

In this case, the employer conveniently terms a major part of the salary as Special Allowance to circumvent statutory payments like PF, Gratuity, etc., taking advantage of the definition of wages/salaries under the relevant statute.

Claiming Special Allowance for Gratuity Calculation

In such a case, can an employee claim special allowance as part of the salary for the purpose of calculating gratuity? May the enlightened members share their views and also present any case law on this matter.

Wages Definition Under Payment of Gratuity Act 1972

Section 2(s) of the Payment of Gratuity Act defines "wages" as all emoluments earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment, which are paid or payable to him in cash. This includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages, and any other allowance.

Intent and Objective of the Statute

The intent and objective of this statute should be to exclude from the purview of the definition of wages only such payments like bonus, HRA, overtime wages, and other allowances. The special allowance may fit into the exclusion category as an allowance from the definition of wages as long as this payment remains at a reasonable percentage of basic salary or similar to HRA, bonus, or overtime, which are restrictively linked to certain percentages or norms in accordance with the respective statutes. In the case of a special allowance that is abnormally high and greater than the basic salary, it is an ostensible act on the part of employers to circumvent the statute and thereby restrict or deprive the enhanced monetary benefits due to employees arising out of provisions of the Payment of Gratuity Act 1972 by taking shelter under the definition of wages under the statute.

Broader Interpretation of Wages

The payment of gratuity being a social security legislation, a broader and benevolent interpretation of the definition of wages has to be taken. In the current situation, it is permissible for an employer to fix the salary structure of an employee who is designated as an Executive in a supervisory cadre as follows:

Basic Pay: 36,000 (45%)
HRA: 18,000 (22.5%)
Special Allowance: 26,000 (32.5%)
Gross Salary: Rs 80,000 P.M.

Absence of Dearness Allowance

In the absence of dearness allowance, which is a definite ingredient of salary/wages under the Payment of Gratuity Act 1972, essentially meant to secure and further the standard of living of the employee, it is unfair and grossly exploitative on the part of employers to allocate a major portion of gross salary (say more than 30% of gross salary) detrimental to the interests of the employee’s terminal dues/retirement benefit.

Allowance as an Essential Ingredient

It should be held that any allowance, irrespective of its nomenclature, which is fixed at an unreasonable and illogical quantum should be considered dubious and subterfuge. Such allowances should be an essential ingredient of salary/wages as defined under the Payment of Gratuity Act 1972 and hence should be reckoned for the calculation of gratuity.

Negotiated Wage Settlements

It may not be out of context to highlight here that in certain negotiated wage settlements, the managements/employers do agree in response to demands of the union to treat certain wage components like ad-hoc, special allowance, etc., as part of basic wages for the purpose of reckoning statutory benefits like provident funds, overtime, gratuity act. While such agreements are possible through direct negotiation at bipartite/tripartite forums, why should such special allowance be deprived to those employees in supervisory/executive cadres who are neither bargainable employees nor unionized?

Industry Practice

It is an acceptable practice in the industry to fix the basic salary and dearness allowances applicable to union employees at anything between 60% and 90% depending upon the outcome of wage negotiation between employers and workmen.

Objective of Salary Structure Fixation

The objective of this fixation of salary structure is a conscious decision between parties aimed at ensuring employees’ statutory benefits like OT, PF, gratuity, etc. This being so, only a particular category of employees in an establishment cannot be allowed to be denied the benefit while the statute seeks to extend the benefit of gratuity to all employees.

Statutory Distinctions

As the statute (Payment of Gratuity Act 1972) does not make a distinction between bargainable employees and supervisory/executive employees (as per the broad definition of employee under the act), it is grossly erroneous and devoid of natural justice to keep off special allowance from the ambit of wages under the statute with respect to supervisory/executive/managerial cadres who are otherwise eligible employees for receiving gratuity under the statute. Therefore, the dual standards in the dispensation of gratuity are arbitrary, capricious, and against the spirit of the provisions of the act.

Any aggrieved member can make the aforesaid submissions before the controlling authority to claim the benefit of special allowance being reckoned as wages/salary for the purpose of calculation of gratuity.