Gratuity Policies in Startups: Is It a Must and How Do We Implement Them?

Dear Readers,

I work as an HR professional for a startup company that was established in 2019. Our offer letter does not include any mention of gratuity. I am seeking clarification on whether it is mandatory to have gratuity policies for employees and what steps are essential for implementing the gratuity policy.

Please share your valuable suggestions.

Hi Astha, Gratuity is a statutory benefit provided to employees in India and is governed by the Payment of Gratuity Act, 1972. The act applies to establishments with ten or more employees. Therefore, if your startup has more than ten employees, it is mandatory to provide gratuity.

Review Applicability:
Ensure that your startup falls under the purview of the Payment of Gratuity Act by having more than ten employees.

Update Offer Letters and Employment Contracts:
Include a gratuity clause in the offer letters and employment contracts of new hires. For existing employees, consider issuing an addendum to their contracts explaining the inclusion of a gratuity policy.

Policy Formulation:
Develop a comprehensive gratuity policy that outlines the eligibility criteria, calculation method, vesting period, and other relevant details. Make sure the policy complies with the Payment of Gratuity Act.

Communication:
Clearly communicate the gratuity policy to all employees. Hold sessions or send out communications to explain the details, eligibility criteria, and how the gratuity amount is calculated.

Nomination Process:
The Payment of Gratuity Act requires employees to nominate a family member who will receive the gratuity amount in case of the employee's demise. Establish a process for employees to make such nominations.

Fund Management:
Decide whether you want to manage the gratuity fund in-house or opt for a gratuity fund managed by a trust or insurance company. Establish a trust or purchase a group gratuity insurance policy if you choose the latter.

Legal Compliance:
Ensure that your gratuity policy and practices comply with the Payment of Gratuity Act and any amendments made to it. Regularly update the policy to align with any changes in legislation.

Employee Records:
Maintain accurate and up-to-date records of each employee's tenure, salary details, and other relevant information required for gratuity calculation.

Employee Education:
Educate employees on the importance of gratuity, how it works, and its benefits. This can help in fostering a positive work environment.

Seek Professional Advice:
If needed, consult with legal and financial professionals or seek advice from experts in employment law to ensure that your gratuity policy is compliant with current regulations.

Thanks

Applicability of the Payment of Gratuity Act

The Payment of Gratuity Act is applicable to your organization only when the organization has ten employees. However, if you are running a factory, then the Act will be covered regardless of the number of employees. Though the payment of gratuity will become due only when an employee completes 5 years of service, the employer will have to provide for gratuity even before that. The reason is that in case of death, the qualifying service of five years does not apply. Moreover, the accounting standards demand that provision for gratuity is to be made in the final accounts of every establishment covered by the Payment of Gratuity Act.

Gratuity Clauses in Appointment Orders

There is no need to have gratuity clauses in the appointment order, but it is implied that it is payable once it is accrued.

A company established in 2019 should have followed the above much earlier. It is surprising that the statutory auditors have not raised any queries regarding this. Therefore, please discuss the matter with your Chartered Accountant and start providing for the gratuity based on the actuarial valuation.

It's good to know that gratuity is a benefit for employees who've put in at least five years of service. This is usually governed by the Payment of Gratuity Act, 1972. The rule applies to establishments with ten or more employees.

Eligibility

Employees qualify for gratuity after completing five years of continuous service.

Exclusion

The act covers companies with ten or more employees and includes various types of establishments.

Applicability

Check if your startup falls under this act. If it does, it's a good idea to set up a gratuity policy.

Implementation

Add a gratuity policy to your HR guidelines. This should explain when employees are eligible, how to calculate gratuity, and other relevant details.

Offer Letter Updates

If your current offer letters don't mention gratuity, consider updating them to include this info.

Communication

Let your employees know about the new gratuity policy. Explain who qualifies and how it's calculated.

Compliance

Make sure your policy follows the law. Get legal advice if needed.

Remember, keeping things clear and open with your team is key. If you're ever unsure, it's a good idea to consult with legal or HR experts in your area. Rules might change, so staying updated is a smart move.