Gratuity Confusion: Should We Count All 6 Years or Just the Last 4 for Our Long-Time Employee?

Hi, it's been a while since I visited CiteHR. How are you all?

Questions Related to Gratuity

Before the question, I will try my best to explain the exact scenario:

Our company has been incorporated for 6 years. In the early stages, we did not have a proper CTC structure, and there was no provision for the Gratuity component in our structure. Later on, after 2 years, we introduced the Gratuity component in our CTC structure, and it's been 4 years since that implementation.

We have an employee who has been with us since day 1. So, he has been associated with us for 6 years.

To calculate gratuity, do we need to consider 4 years (since we implemented it) or 6 years (since he joined)?

He had resigned after receiving a hike in his salary. So should we consider his previous basic salary or updated basic salary after the increment?

Please let me know at your earliest convenience if possible.

A warm welcome back to you. Gratuity, being a statutory terminal benefit of employment, is not optional on the part of either the employer or the employee once the Payment of Gratuity Act, 1972, becomes applicable to an industrial establishment under the Act.

Whatever the mode of wage and salary administration, the liability to pay gratuity and the right to claim arise from day one of the application of the Act to the establishment as well as from day one of the commencement of the service of the employees in the organization.

The important factors for the calculation of gratuity are the last drawn salary comprising only the sum of basic and dearness allowance and the total number of years of continuous service rendered by the employee right from the date of his/her appointment till the date of termination of employment.

Therefore, you have to pay gratuity to the employee for his entire service of six years based on his last drawn salary.

You will have to count his service as 6 years, please.

Gratuity is applicable to the establishment from the day it's in operation and the day employees are taken on the payroll.

Hi,

The Payment of Gratuity Act is applicable from the day the employee strength of your company reaches 10. The employee in question has been associated with you from the beginning. Therefore, you need to calculate his service from the day your employee strength reaches 10. If he has completed 5 years of service, he is eligible for gratuity, which is calculated based on the last salary drawn by him.

Lakshmanan
Labour Law Consultant
Kolkata

Just a follow-on remark to the reply of Mr. Lakshmanan.

The poster has not mentioned the type of establishment run by the company. For the application purpose of the Act, no minimum number of employees is required in respect of the entities mentioned under clause (a) of s.s (3) of Section 1 of the PG Act, 1972. It is required only in respect of establishments falling under clause (b) and (c) only.

Even in respect of these establishments falling under clause (b) or (c), the entire service of the existing employees, including the service prior to the date of the application of the Act, has to be taken into account if the termination of employment takes place on or after the date of the application of the Act.