How Is the New Wage Code Affecting Your Gratuity? Let's Discuss Its Fairness

Impact of the New Wage Code on Gratuity Calculation

As per the new wage code, the basic salary should be 50% of the total salary. In implementing this, there is a gap in gratuity calculation due to the difference between the current basic salary and the revised basic salary. The difference is being recovered from employees by adjusting leaves, encashing leaves, or through increments.

Is it a fair practice, as employees are at a great loss since they are losing their money? The government should look into this matter.

Dear Tushar, the point you have raised is not clear to me.

Code on Wages, 2019

First, the Code on Wages, 2019 has not yet been enforced.

Restructuring Salary in Anticipation

Second, has your organization started restructuring the existing salary of your employees as per sec. 2(y) of the Code in anticipation of its enforcement? If so, what is the current cadre-wise componential structure and the percentage of each component to the gross wages/salary payable at the end of the wage period?

Impact of Excluded Components

Third, even if you keep your salary structure as it is after the Code comes into force, if the proportion of the excluded components exceeds 50% of the gross salary payable, the excess should be automatically added to the basic for the calculation of gratuity and other indirect benefits. Then how comes the question of recovery from the employees?

Thank you for your prompt response. My point is, suppose any employee's previous basic salary was around 23,000 (when the gross salary is about 70,000). Now, after the restructuring under the wage code, the basic salary is around 35,000.

The gratuity calculation for 10 years when the basic salary is 23,000 is 132,692 (for the employee continuing service). The gratuity calculation for 10 years when the basic salary is 35,000 is 201,923 (for the employee continuing service). The difference (201,923 - 132,692 = 69,230) is being recovered from employees, which is not under the wage code. This results in a loss for the employees.

This recovery should be stopped. I hope you understand my point.

Regards, Tushar

Dear Tushar,

The entire episode of proposed recovery starts from the misinterpretation of the term 'wages' as defined under section 2(y) of the Code on Wages, 2019, which is yet to be enforced.

Perhaps your management adopts the principles of CTC in wage and salary administration. Sorry, given the general parameters to calculate the CTC, it cannot be straight away and completely applied to the concept of wages, which is the actual and basic monetary consideration payable under the contract of employment for the services rendered by the employee. This is the employee perspective on the term wages. Since other indirect benefits, which are statutorily required to be given or offered by the employer to retain the employees, do not form part of the actual wages. If you critically analyze the definition under section 2(y), you will understand the reasoning behind the demarcation between the included and excluded components enumerated therein. Unfortunately, many employers treat the CTC as the yardstick for the cost of labor, though it contains the actual cost of labor, incidental cost of statutory obligations in respect of labor subject to certain conditions, and the discretionary cost of retention of labor. If you mess up these things by pooling together to arrive at the overall cost towards employees, certainly you will have to trim the foot to fit the shoes only.

The statutory compulsion of maintaining a certain proportionality between the two sets of components is to curb the exploitation of reducing the actual wages comprising the basic components from which the excluded items are derived. Therefore, only the components payable with the basic wages at the end of the wage period should be taken into account for the purpose of determining proportionality and not otherwise just because they are payable.

If you notice carefully, gratuity is taken out of the excluded components for the above purpose. That apart, statutory gratuity does not require any contribution from the employee. It is a one-time lump sum payable by the employer only on the occasion of termination of employment.

Therefore, the deduction proposed is totally illegal.

Mr. Umakanthan is right. What is not understood is, since the new Wage Code is not implemented yet, where is the compulsion to restructure wages in line with that? And if restructuring is implemented of your own volition, and as a result, if a higher amount of gratuity becomes payable, where is the question of recovering an additional amount from him? Sounds ridiculous and patently illegal.

Regards,
Vinayak Nagarkar
HR and Employee Relations Consultant

Dear Tushar,

In your first post, you mentioned that Basic should be 50% of the Total Salary, but in your subsequent post, you mentioned Basic is 50% of the gross salary (if I am not wrong, you would like to mean 50% of the monthly gross). In my opinion, 50% of the Total salary (which is payable to any employee, including Co's contribution to PF, LTC/LTA, Bonus, OT, etc., that are included but not included in the monthly gross) is the correct interpretation of the definition of wages as per different labor codes (the definition is the same everywhere).

Now, let's address the gratuity issue. It is evident that after restructuring the remuneration package as per the Wage code, Basic will increase, and accordingly, the gratuity amount will also increase. However, as of now and even in the future after the implementation of all labor codes, nowhere is it mentioned that the Gratuity amount is to be paid by deducting from the employee's salary. Many organizations include gratuity as a part of CTC, but that does not mean that gratuity will be deducted from the employee's salary. The most challenging aspect after the implementation of labor codes will be the restructuring of the Remuneration package. Under any circumstances, gratuity will not be paid by deducting from the employee's salary; it would be absolutely illegal.

Thanks & regards,

S K Bandyopadhyay (WB, Howrah) CEO - USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] USD HR Solutions – To Strive towards excellence with effort and integrity

Thank you all for your valuable responses. As the unfair practice of adjusting the gratuity difference from the salary of employees is being adopted by many companies, the question now is how it can be corrected through the government or administration, as a single employee cannot go against the company.

Thanks and Regards,
Tushar

Dear Tushar,

Will you please mention one case where an employer is adjusting gratuity from an employee's salary with detailed calculation? For your ready reference, I am citing one example for you:

Item Existing After Wage Code Implementation

BASIC 20,000 35,433
HRA 10,000 10,000
SPL.ALLOW 20,000 4,567
MNLY GROSS 50,000 50,000
YRLY GROSS 6,00,000 6,00,000
YRLY PF EMPR(ON 15,000/-) 21,600 21,600
LTA 1,00,000 1,00,000
BONUS (20% OF 12,000/-) 28,800 NIL
RETENTION BONUS 1,00,000 1,00,000
YRLY CASH COMPONENT 8,50,400 8,21,600
GRATUITY 11,538 20,442
CTC 8,61,938 8,42,042

The new basic is arrived at by making 50% of the cash component. Here, CTC has come down due to the absence of a Bonus in the proposed calculation, due to the basic increase of more than 21,000/-.

In my opinion, there will be several such conditions that will vary from organization to organization after the implementation of the wage code. There is nothing wrong with the new remuneration fixation.

Thanks & Regards,

S K Bandyopadhyay (WB, Howrah)
CEO-USD HR Solutions
[Phone Number Removed For Privacy-Reasons]
[Email Removed For Privacy Reasons]
USD HR Solutions – To Strive towards excellence with effort and integrity

Illegal Adjustment of Gratuity

The action of adjusting the difference in gratuity by deducting leave encashment, etc., is illegal. I have not heard of any other company doing it.

You can, if you wish, go to the Labour Commissioner and file a complaint. If you do not wish to do that, you can ask your union to do it.

Alternatively, you can go and meet officials of the major unions like INTUC, BMS, and ask them to take it up. They can force the Labour Commissioner to investigate, and at the moment, they have a vested interest as they do not like the new labor code.

But how you will keep your name secret is a different story.

I suggest you look for another job because this is not a company you should be working with anyway.