How Should We Handle Gratuity Payments with a New Salary Structure? Seeking Your Advice

Hello all, I would like to get your opinion. We don't have a salary structure, which is why we are currently paying gratuity based on gross salary. Now, we are planning to introduce a salary structure for all employees so that we can control our liability. I would like to know the following:

1) Can we pay gratuity today to members who are eligible for it?

2) Can we pay X% of the gratuity today (resulting in a loss of gratuity due to the new structure) and the remaining amount at the time of actual payment when a member resigns or retires?

I seek your opinion on this matter.

Payment of Gratuity

Payment of gratuity is a terminal benefit given by the employer to the employee at the time of their exit from the organization due to resignation, termination of service (except for moral turpitude), or retirement.

Gratuity is calculated based on the last drawn salary of the employee.

Gratuity Payment During Employment

Paying gratuity during employment will not resolve the issue but will make it more complicated, as there is no provision for gratuity payment midway through employment. It is payable only at the time of leaving the job. Today or tomorrow, there might be increments where the employer can adjust the increments in other headings, keeping the present level as basic.

Group Gratuity Scheme as a Solution

For a handy solution, opt for a group gratuity scheme of LIC and deposit the applicable amount there. It will reduce the employer's burden. Restructuring wages without discussion with employees and their consent may dent the performance of the establishment. However, at the time of increments, the management can do it by adding perks/allowances in place of a basic hike.

You can pay this amount as an advance towards gratuity, which would otherwise become payable to the employee at the cessation of employment, and adjust this amount from the gratuity to be paid at that time. If an agreement is entered into between the management and the employees in this regard, then it will be on the safer side.

Dear colleague, there is no legal provision to pay advance against gratuity as it is payable on the last salary drawn basis on cessation of employment. If you bifurcate your salary structure, causing the basic salary to be reduced, it will create an anomaly regarding gratuity.

Explore if you can pay it as an ex-gratia now in favor of employees but consider the service for gratuity payments in the future when due. This is certainly a double payment but is necessary to compensate for the reduced basic arising out of restructuring wages.

Regards, Vinayak Nagarkar HR and Employee Relations Consultant

Understanding Gratuity as a Statutory Right

Gratuity is a statutory right of employees and cannot be denied on the grounds that they are receiving provident fund and pension benefits. It is a statutory benefit paid to employees who have rendered continuous service for at least five years.

Gratuity is a lump-sum amount paid to an employee based on the duration of their total service. The benefit is payable upon cessation of employment, whether by resignation, death, retirement, or termination, with the last drawn salary as the basis for calculation.

Gratuity serves as an important form of social security and is viewed as a gesture of gratitude by the employer towards employees, expressed monetarily for the services rendered to the organization. It is a defined benefit plan and one of the many retirement benefits offered by the employer to the employee upon leaving their job. The employer's gratuity payment liability tends to increase with an escalation in salary and tenure of employment.

Understanding Gratuity and Ex Gratia Payments

Gratuity is a payment of welfare benefits upon the severance of the employer-employee relationship. If an employer wishes to pay any amount earlier for any reason, it can be termed as ex gratia payments, which will be taxable, while gratuity is non-taxable subject to conditions.

Salary Structuring and Its Implications

Structuring the salary needs to be done in a manner that does not reduce present emoluments. Restructuring is not a way to reduce salary, even unknowingly or unintentionally. Plan restructuring appropriately to avoid the hassle of ex gratia or gratuity payments while the employee is still in service. The employee will be at a disadvantage, as they will receive gratuity based on today's salary, while according to the law, it should be calculated on the last drawn salary.

Such an arrangement vitiates the very objective of the statutory provision for the payment of gratuity and could lead to a legal imbroglio.

Dear friends,

Considering the polarized response on the issue of advance payment of gratuity while the contract of employment is still active, I would like to delve into the origin of the issue as depicted in the post. It's evident that the establishment currently lacks a salary structure, leading to the implication of payment of a consolidated salary. Now, the employer aims to introduce a salary structure comprising various components such as basic pay and other allowances, hence the proposal.

I believe that the proposal itself is an unwarranted exercise. As rightly pointed out by most members, the question of gratuity arises only upon the termination of employment, and therefore, there is no need for prior payment of gratuity, even under the guise of a gratuity advance, simply due to the proposed change in the salary structure. Furthermore, such a change goes against the fundamental purpose of the concept of gratuity, as highlighted by Mr. Venu. Given that gratuity calculation is based solely on the last drawn salary, any alteration in the salary structure mid-service will not adversely impact either the employer or the employees.