Gratuity in CTC: Can I Claim It After Being Let Go Before 5 Years?

Gratuity as Part of CTC and Employee Benefits

I joined an MNC in 2017. They included gratuity in my CTC and indicated growth benefits for joining the company. At the end of 4 years of service, citing the pandemic, business degrowth, and overhead reduction, they gave me a marching order in May 2021. They claim that gratuity is only applicable after 5 years and not permissible in this case.

Seeking Legal Support for Gratuity Claim

Is there any law that can support me in claiming back the gratuity indicated in my appointment order and CTC?

Regards,
Deepak

Dear Deepak,

The Payment of Gratuity Act, 1972, is in itself a complete code on the subject matter of statutory gratuity contemplated in it. Therefore, when an establishment to which the PGA, 1972 applies shows its annual financial liability to gratuity in the CTC as one of its annual costs incurred towards the employee, it would automatically imply that the payment of gratuity would arise subject to the fulfillment of the conditions of eligibility and entitlement associated therewith only. Besides, in my opinion, CTC appended to the offer of employment is just a statement showing the annual cost of employment to be incurred by the employer and as such it cannot be construed as a part and parcel of the contract of employment.

But, there can be yet another perception treating the CTC appended to the offer of employment as part of the offer and the mention of any benefit of employment therein without any rider clause has to be complied with when the unilateral termination of the contract of employment takes place at the instance of either of the parties. Such a contention would revolve around sec. 4(5) of the PGA, 1972, under the principle of entitlement to better terms of gratuity under an award or contract. But no one can be sure about the outcome of such a contention in judicial scrutiny.

No, you are not eligible for gratuity since you have not completed 5 years of service. CTC simply refers to the total cost to the company associated with an employee's work.

In this forum, there are numerous queries regarding the implications of CTC and how it affects actual benefits. CTC denotes the Cost To the Company. Besides salary and direct financial benefits to the employee, like the employer's contribution to PF, ESI, annuity paid for gratuity, incentives, bonuses, etc., it also includes the cost incurred by the company for employee benefits such as canteen, provision of uniform, shoes, PPE items, SODEX-like coupons, township expenses, clubs, and medical expenses, usually known as overhead expenses. All these expenses are added together, and the sum is divided by the number of employees to arrive at a figure of expenses per employee. All the aforementioned direct expenses summed together form the per-head expenses (CTC).

Such figures are prominently used in recruitment advertisements. There is a popular saying that the elephant has two sets of teeth: the tusks are for displaying might and prowess, but the useful ones for biting and chewing food items lie inside the mouth without any display value. Similarly, CTC is a misleading figure and is only an indicative value of what it costs the employer to have an employee in a particular post and position. What the employee gets directly is only a fraction of it. In many manufacturing organizations of yore with a lot of voluntary welfare facilities like townships, hospitals, educational institutions, religious worship places, clubs, and associations, the in-hand receipt may not even be 50% of the notionally derived CTC or per-head expenses.

Dear Colleague,

To the question of whether gratuity should form part of the CTC, the answer is yes. The liability to pay starts from day one of joining and is payable on death, for which no eligible service is required.

However, there is another condition of eligibility requiring a minimum of 5 years' service, which becomes unjust for those who put in less than 5 years and are deprived of it, just like the poster, despite the cost of it being included in CTC.

Besides, those who are employed on a Fixed-Term Contract basis are made eligible for gratuity after one or more years of their service.

This is a clear-cut discrimination between regular and FTC employees. The law needs to be amended to correct the discriminatory treatment and provide for gratuity payment after a minimum of one year's service for all types of employees and after ceasing employment either by resignation or termination by the employer.

Regards,
Vinayak Nagarkar
HR and Employee Relations Consultant

Dear Deepak,

The concept of CTC is to understand the financial implications of an employee on an employer. In CTC, the employer not only includes Gratuity but also considers the employer's contribution towards EPF. One is eligible for Gratuity after completing 5 years of service if it is not mentioned in the CTC.

You are not eligible for Gratuity after completing 4 years of service. You may want to consider fighting against the termination if you can.