Can My Employer Deduct Backdated Gratuity Without Notice? Seeking Legal Advice

Dear Seniors, I work in a Pvt Ltd IT company with 80 employees. So far, our company doesn't have gratuity as part of CTC, but now my employer wants to deduct the same from employees' salary even from previous months backdated from April 2018.

Understanding Gratuity in CTC

I understand that companies working on CTC concepts usually include gratuity as part of their CTC to avoid liability. I want to ask a few questions from a legal perspective and if there are any sections which support it:

1. Can an employer, without any intimation or late intimation, change salary breakups of employees to include gratuity at any time?
2. Can an employer deduct the previous month's gratuity amount from our current month's salary even when we have already received payslips for those months?

Clause in Appointment Letter

The employer is saying they have mentioned one clause in the appointment letter: "Your CTC will be broken up into the following components (as per discussion), and the final breakup will be provided to you later.
1. Basic Salary
2. Conveyance Allowance
3. Medical Allowance
4. Medical Insurance Premium
5. House Rent Allowance (HRA)
6. TDS
7. Provident Fund and Gratuity."

So they can add gratuity to the breakup anytime they want. But the fact is they have not provided any breakup to employees with the Gratuity amount mentioned in it.

Filing a Complaint

If we want to complain about the employer in this regard, how and where can we do it? Can we file an anonymous complaint?

An urgent reply will really help.

Thanks,
Shukvinder

Dear Shukvindar, In the first place, I would request you to go through the various threads on the concept and relevance of CTC already available in this forum as well as on other websites.

Understanding CTC and Employment Benefits

The employment benefits mentioned in monetary terms in the CTC are only a mere projection of the overall cost per employee per annum. It includes certain social security benefits solely payable by the employer in respect of all the employees in the establishment on specific eventualities for which he is statutorily or at his discretion required to make periodical provisions. One such fringe benefit of employment is gratuity payable on the termination of employment as per the provisions of the Payment of Gratuity Act, 1972, if it becomes applicable to the establishment. It requires no contributions from the employee at any stage of his employment.

Employer's Move to Deduct Gratuity

Therefore, the present move of your employer to deduct any sum from the employees towards any gratuity fund either prospectively or retrospectively is illegal. If you are scared of any negative reactions from your employer, you can make an anonymous complaint to the State Labour Commissioner.

Understanding CTC and Employee Salary Components

Strictly speaking, CTC is a misnomer used by some companies to entice employees by showing the Cost To Company as the salary package offered. It is not exactly what an employee receives, even as a gross salary, let alone the net salary. It pertains more to the costs that a company incurs towards an employee in a year than the salary payable. Hence, it includes even the employer's contributions like PF, ESI, and some even include Gratuity, though strictly no contributions can ever be made payable by an employee towards it.

Addressing Disputes Regarding Gratuity in CTC

Number 7 is disputable in the above case, and you may politely take up the issue with the concerned manager and ask for an explanation before you consider legal action. While PF and ESI have part of the contributions from the employee, Gratuity is not. It is payable by the employer, subject to conditions as laid down in the Payment of Gratuity Act.

Thanks and Regards

But they are saying they are not deducting it from salary but from CTC, which is the employee cost to them, and they can deduct from this. I have referred to various threads here and found that while the practice of deducting the gratuity amount from CTC is unethical, it cannot be legally challenged as it's CTC and not salary.

Main Concerns

My main concern here is: can they deduct the amount backdated, even when the previous month's salary slips are already issued? Can any company change the CTC breakup at any time without prior intimation to employees? Please guide me on how we can highlight this anonymously to the state labor commission.

Role as an HR Manager

I am working as an HR manager here, and I am continuously telling them it's wrong and we shouldn't do it, at least backdated. Or the best approach is to do it within the appraisal cycle. However, they are not listening to me and have asked me to act as a mere coordinator. What should I do, and what will be my liabilities as an HR if any dispute arises in the future, and how can I safeguard myself?

Employer's Contribution to Gratuity and CTC Changes

If the employer is paying less than what was paid in the previous month and indicates that as a contribution towards the Gratuity, it is illegal as contributions are to be from the employer only. CTC cannot be changed in the middle of the employment to the detriment of an employee.

Even before you take the issue to the labor department, it will be better if you form a delegation and talk to the employer before going public. Let your employer read the Payment of Gratuity Act in the first place before doing anything that may result in unnecessary issues for the whole company.

Try to have a conversation across the table and maintain the pressure, including sending emails raising concerns about how it will affect the company in the long run, etc. Ensure you have enough proof of raising concern and asking your management not to resort to any such action to safeguard your interests.

Thanks and Regards

Thank you, AKS14.

Please let me know if there is any legal provision that supports the notion that 'CTC cannot be changed in the middle of employment to the detriment of an employee.' My employer doesn't understand terms like wrong or unethical; what he does understand is if something is illegal, especially if it is mentioned in the law.

Seniors - Please help. I have read the Payment of Gratuity Act, and nowhere does it mention CTC; it only refers to salary. The company is taking advantage of this situation.

Your cause of action will only arise once the employer deducts the salaries payable. For now, it is an apprehension that will not automatically make it actionable. You may talk to the employers if there is any intimation received regarding the changes to be made to the CTC, and that part of the amount will be taken as a contribution towards Gratuity. Remember, there is a difference between the salary payable and the CTC. It may be technical in nature, but the employer can still say that they have taken their [employer] contribution into CTC and made that as a package. I am just speculating at this juncture, but you need to be prepared.

For now, it is better to sit with a few more seniors within the management and check what exactly they have planned instead of confrontation.

Thanks and Regards

Dear colleague, please clarify why the Gratuity Act is being applied now despite its existence since 1972. Was your establishment employing fewer than 10 employees until now?

There are no legal issues involved in considering gratuity as part of CTC or excluding it. In fact, it can be deemed fair if the employer considers it a cost to him and shows it as part of CTC. However, it is fair to apply this to future employees and not to existing ones.

In this scenario, if the employer is reducing the salaries of existing employees, it is unfair and unethical. Any legality concerns should be brought up with labor authorities after exhausting internal avenues, citing that benefits or concessions once granted cannot be withdrawn without adhering to the provisions of the Notice of Change under the Industrial Disputes Act. You may want to invoke this provision of Notice of Change at the appropriate stage.

Regards, Vinayak Nagarkar HR Consultant

Thank you for your replies so far.

Our company has around 80 employees and is about 8 years old. They recently paid gratuity to the first employee, and many more are going to complete 5 years by the year's end. That's why they are suddenly trying to impose liability on employees.

My main concern is also the same—a reduction in existing payouts, as this will impact employees' take-home salary. I am suggesting that they introduce it for new employees now, and for existing employees, it would be better to introduce it at the time of appraisal with a new CTC and new breakdown. However, they are not willing to wait until that time.