You may get higher gratuity after new labour code; know how to calculate it

As per period labour force survey in 2018-19, only 2.4% of the workforce in the country is formally

After the new wage code is implemented, some employees are expected to see their salaries being restructured; companies are required to pay atleast 50% of the salary as basic wage. In cases where the basic pay is below the required mark, the employers may have to restructure the salary to comply with the new rules under the four labour codes, namely the Industrial Relations Code, Code on Occupational Safety, Health and Working Conditions Code, Social Security Code and Code on Wages. An increase in basic pay will also result in higher gratuity for the employees as the gratuity calculation is based on basic pay.

“An increase in pay resulting from the restructuring will also lead to increase in the gratuity payment of the employees. However, the formula for calculating gratuity remains the same under the Code of Social security, 2020. “The formulae for calculation of gratuity remains similar to the one provided for under the Payment of Gratuity Act,1972, that is, 15 days’ wages (or such number of days as may be notified by the central government) for every completed year of service, based on the rate of wages last drawn by the employee concerned, subject to a ceiling to be prescribed by the central government,” said Manishii Pathak, founding partner, Anhad Law.

In case of gratuity, for each year of service, the organization has to pay an amount equalling 15 days of last-drawn salary. Salary here is considered basic wages plus dearness allowance. Moreover, if a person works for over 6 months in the last year of service, it will be considered as a complete year for gratuity calculation. For instance, if a person completes seven years and six months of continuous service, gratuity paid will be for eight years.

For gratuity calculation, a month of work is calculated as 26 days. So, the 15-day salary will be calculated as (monthly salary x 15)/26. This number multiplied by the number of years in service will be the gratuity amount payable. As the basic wages go up, the payment of gratuity will also go up.

Another change proposed in the social security code is the extension of gratuity benefit to fixed-term employees as well. “ The proposed code on social security, 2020, has extended the benefit of gratuity to fixed-term employees, irrespective of the duration of their employment, making it mandatory on employers to disburse gratuity amounts to fixed-term employees even if they are employed for less than five years,” said Pathak.

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