New Labour Codes: Government May ‘Grandfather’ Gratuity Outgo - Exclusive

The government plans to introduce grandfathering provisions under the Code on Wages Act, 2019 to ensure that the gratuity outgo for companies does not significantly rise after the new law comes into effect from the next fiscal (2021-22), a senior Labour and Employment Ministry official said on the condition of anonymity.

After the new labour codes come into effect, likely from April 1, the way companies structure employee salaries will undergo a significant change. The salaries will have to be structured in a manner so that all the monetary allowances — house rent, leave travel, overtime, conveyance, among others — are capped at 50% of the wage of an employee, which will include the basic pay, dearness allowance and retention pay.

This may lead to a higher basic pay and dearness allowance component of the salary, which is used for computing various statutory deductions such as provident fund and gratuity.

To address concerns of a surge in gratuity payments, in particular, the Labour and Employment Ministry is likely to issue a clarification soon.

This will say that gratuity will be calculated in two parts: the gratuity accumulated till the time of the new law comes into effect, which will be based on the older definition of wages. From the next fiscal onwards, gratuity will be calculated based on the new law.

This will reduce the financial impact of the move and will ensure that the law doesn’t have any retrospective effect, another ministry official said.

An e-mail sent to a Labour Ministry spokesperson didn’t elicit any response.

Gratuity is calculated on the last drawn salary of a worker and is equivalent to 15 days of their salary for every year worked in an orgnisation. Employees are entitled to receive gratuity from their employers on completion of five years of continuous service in an organisation. However, under the new law, even fixed-term contract workers who have completed only one year of service will get gratuity payment from employers.

“Given that ‘wages’ now assumes a broader definition, the last ‘wage’ could be used to reckon for all the years of service. Hence, prima facie, it seems that the impact is likely to extend to prior service as well (i.e. prior to the date when the said code will come into effect),” Parizad Sirwalla, partner and head – global mobility services, tax at KPMG India, said.

As such, a clarification from the government to limit the gratuity for past years of service on the basis of the current definition of wages will provide clarity and limit the incremental cost for the employer.

However, the impact of the new definition of wages on gratuity outgo will also be dependent on the upper limit on gratuity which will be set by the government. Under the present law, an employee can accumulate up till Rs 20 lakh as gratuity in single job tenure.

Law firm Lall & Sethi partner Tia Malik said the new definition of wages will lead to an increase in the cash outflow for employers towards retiral and pension benefits. However, the grandfathering provision in the code, if introduced, would mean that gratuity will be calculated on the old wage structure till March 31, 2021, and with new structure post-April 1, 2021. “This will be some relief to the employers as it will ensure gratuity outgo does not increase significantly,” Malik said.

In a meeting chaired by Labour and Employment Minister Santosh Kumar Gangwar with employers and trade unions on Dec. 24, most of the representatives of employers either raised objections on the new definition of wages or sought clarity on what would constitute allowances.

“In relation to Code on Wages, the definition of wages and floor wage need adequate illustrations to facilitate their understanding by all stakeholders to avoid different interpretation and multiplicity of disputes in various courts,” the All India Organisation of Employers said in the meeting, according to the minutes of the meeting reviewed by BloombergQuint.

The Confederation of Indian Industry said the new definition of wages will have a “destabilising effect on establishments” and it would require clarity. It has told the government that contractual bonus, performance-linked bonus, joining bonus, employees referrals, etc should not form a part of wages and the government should come up with proper illustrations to clear the ambiguity, the minutes showed.

The government, however, has told industry representatives that it is not willing to amend the definition of wages for now but will provide clarity on gratuity outgo. The cost burden is not too much when it comes to the Employees’ Provident Fund deductions as it is not mandatory for employers to provide EPF contribution in case the monthly wage exceeds Rs 15,000, the Labour Ministry official cited above said.