Gratuity Confusion: Is an Employee Paid by Voucher Without PF Eligible for Gratuity?

If we have given an appointment to the employee and we pay him a salary by voucher, deducting TDS, but his name is not on our salary sheet and his PF is not deducted, is he entitled to gratuity?

Gratuity Payment and Compliance

Payment of gratuity has nothing to do with ESI or PF. Even if an employee is paid salary in cash, if they can prove they have worked for 5 years, they should be entitled to gratuity. Not including the employee's name in the salary sheet/payroll, not paying salary through a bank, or not enrolling them under ESI/PF are non-compliances for which the concerned officers can take action against you. This is a separate issue.

If your concern is payment of gratuity, I would say that an employee who has not been served with an official appointment order or is a casual employee should receive gratuity if they have worked for the required 5 years with you. The employee needs to establish their employment with you, and the burden of proof is on them. However, if they file a complaint, a good officer who is the Controlling Authority under the Payment of Gratuity Act will certainly assist the employee in obtaining the necessary records to prove their employment with you.

Importance of Legal Compliance

You should understand that compliance with the law may incur costs, but it will also free up your mind and allow you to focus on other business priorities such as sales and operations. Therefore, prioritize compliance and keep the doors of your office open at all times. There is no need to conduct business with closed doors out of fear that a Labour Enforcement Officer may show up unexpectedly.

Hi Madhu sir, thanks for the clarity. I have a few questions:

Q1: Can we consider this employee as a consultant as per the Contract Act and designate him as a consultant with the same payment structure (TDS deduction)?

Q2: Is there a better way to handle this to comply with labor law requirements?

Please guide me.

Thank you

The Role of a Consultant

A consultant is a professional whose advice is sought as needed. They will not attend your office daily from 9 am to 5 pm, Monday to Friday, but will be physically present only if required. They will not follow your leave rules and will not seek permission if they wish to be absent from work, even if assigned a specific task. By designating an employee as a 'consultant,' you will not gain anything. Some companies reappoint retired employees as consultants with a consolidated salary. If their assignment is regular and it is established that they report to a particular officer functionally and administratively (for leave and other matters), they are considered employees. Their remuneration, if falling under taxable brackets, should be subjected to tax deduction under section 192 of the Income Tax Act and not under section 194J (as applicable to professional fees).

Consultant Benefits and Obligations

A consultant, as per the contract mentioned above, working in the establishment like an employee, will be eligible for ESI (if applicable), PF, bonus, leave with wages, and other benefits. If the period of such service extends beyond five years, they should certainly be paid gratuity as well. Therefore, if the objective is to reduce costs by way of ESI, PF, bonus, etc., appointing an employee as a consultant is not a good option.

Fixed Term Contracts (FTC)

Nowadays, fixed-term employment is permitted across industries, and establishments that do not have certified standing orders also give Fixed Term Contracts (FTC) to employ personnel. FTC does not imply that you need not comply with legal requirements, but all statutory contributions and payments due to an employee should be extended to an employee on a Fixed Term Contract. However, it is more flexible as it is easy to adjust the manpower with business requirements when you have a few employees on FTC. If you lose business, you need not renew the contract, and without any legal complications, the employee will leave the company. This is the attraction of employing persons under FTC and is suitable in the current situation where the market is very unpredictable.