We have not been deducting Gratuity from Employees since inception. Now, the Gratuity amount is coming to more than 1 crore

Hello all,

We are a small company with a staff of 130 employees. Although we have outlined everything regarding Gratuity in the offer letter and Employment Agreement, we have not been deducting Gratuity from employees since the beginning. Currently, the Gratuity amount exceeds 1 crore, which must be paid to the employees. What should we do in this case, please?

Hi,

Under the Payment of Gratuity Act, 1972, gratuity is a lump sum amount that employers pay their employees as a sign of gratitude for the services provided. Gratuity is statutory, and employers cannot recover it from the salaries of the employees. Upon resignation of the employee, if the employee had completed a continuous service period of 5 years and above, then it is the responsibility of the employer to pay gratuity upon the resignation of the employee. Employers have the option of opting for a group gratuity scheme facility through any insurance companies and can pay premiums to the insurance companies. Group gratuity insurance helps an employer meet their statutory liability towards gratuity. Upon resignation of eligible employees, insurance companies will pay the gratuity.

With 130 employees, you are claiming a projected gratuity amount of 1 Crore, which seems a bit abnormal. How long has your establishment been functioning, and is the Basic+DA on the higher side? Please check your calculation for gratuity.

Thank you so much for the reply, sir. The company has been in the market since 2004. The calculation approximately amounts to 1 crore.

Hi,

Okay. In total, 19 years as of 2023. I hope around 80% of your employees have been working for many years?

Yes, sir, that is correct. Slowly, tenured employees have started to resign, and we are liable to pay them the gratuity amount.

Hi,

Got it. You can suggest to your management about a Group Gratuity Scheme, where the premium would initially be high due to the seniority of the employees. However, in the event of more resignations, it could potentially become a significant liability for your organization.

Will the group gratuity help in the current situation? How can I save my company as an HR.

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The very purpose of Section 4A of the Payment of Gratuity Act, which necessitates establishments to invest gratuity funds in the form of LIC's policies, is to ensure that the establishment can pay gratuities without impacting working capital. It is true that this section is not consistently enforced, as the obligation to purchase policies depends on state government notifications, and many states have yet to specify when this section will become enforceable. However, Accounting standards (I don't recall which standard) dictate that actuarial valuation must be performed annually, and an amount should be set aside for gratuity payments based on this valuation. Therefore, the responsibility lies not with the HR Manager but with the Finance Manager. Chartered Accountants auditing your financial statements should have properly informed your management of this requirement. With proper advice, this situation could have been avoided. There is no way to circumvent the law, as Lakshmi Narayan rightly pointed out.

Acquiring a gratuity policy at this stage will be quite expensive, although it may be the only solution. Alternatively, you could decide to address the issue as it arises when employees depart, releasing funds from the working capital accordingly. You can estimate the immediate fund requirements based on retirement age and the likelihood of employees leaving. It is essential to involve the finance team in this process.

Sure, sir. Thank you so much for your time. I appreciate it.

Thanks,
Nisha Singh