Gratuity: The government has introduced major changes for employees working in the private sector. Effective November 21st, four labor laws have replaced 29 existing ones, changing the rules regarding salary, gratuity, pension, and health. The government has attempted to bring everyone, from women workers to gig workers, under one law and provided significant relief.
One of the biggest changes under this rule is the gratuity rule. The government has now reduced the gratuity payment period from five years to one year, a significant relief for some employees in the private sector. Furthermore, the scope of gratuity has been expanded to include fixed-term employees and contract workers. However, for permanent employees, it remains uncertain whether gratuity will be awarded after five years of service or after one year.
According to the revised rules, fixed-term employees will now be eligible for gratuity after only one year of continuous service. Companies must also release gratuity within 30 days, failing which a penalty of 10% annual interest will apply. Experts say that fixed-term employees will be treated at par with permanent employees in terms of salary and benefits, with the key difference being that the gratuity period is reduced to one year, provided the employee completes at least 240 days of continuous service within that period. This ensures that short-term employees are not disadvantaged simply because their role is contract-based.
This move is significant because gratuity calculations will now depend on changes in salary. With at least 50% of total compensation being “wages,” the base used for gratuity calculations is likely to increase, resulting in increased payments for many employees.
Will permanent employees receive gratuity after one year?
The distinction between the two categories has now become even clearer. Fixed-term employees have a predetermined retirement date, usually tied to a project. On the other hand, permanent employees continue working indefinitely. New laws ensure that fixed-term employees receive equal treatment throughout their employment and are entitled to gratuity as per their contract.
Importantly, labor code experts emphasize that the one-year rule does not apply to all employees. Rohit Jain, managing partner of Singhania & Co., clarified that reports that every employee will now receive gratuity after one year are incorrect. For permanent employees, the limit is still five years. The new one-year rule will only benefit fixed-term employees.
What experts say about gratuity?
According to Debjani H, partner at CMS IndusLaw, this change is a major change for companies that have long been accustomed to hiring fixed-term employees without gratuity or severance. She said that with the introduction of proportional gratuity for these employees, companies are now obligated to make additional payments. While she anticipates some impact on hiring patterns, H believes the financial burden will still be less than hiring full-time employees.