Key changes impacting gratuity liability – Code on Social Security.

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Content Overview:

  • Brief Overview of the Labour Codes
  • Key changes Impacting Gratuity Benefits

Who should Read:

  • Company HR, Finance Personnel dealing with Retirement Benefits & Compensations
  • Statutory Auditors
  • Internal Auditors
  • Labour Law Consultants
  • General Users of Financial Statements

Brief Overview of the Labor Codes

With a view to reform the archaic labour laws and to facilitate the ease of doing business in India, the Government of India decided to consolidate 29 central labour laws into 4 labour codes,

  • The Code on Wages, 2019
  • The Code on Social Security, 2020
  • The Occupational Safety, Health and Working Conditions Code, 2020
  • The Industrial Relations Code, 2020

The Code on Social Security, 2020 consolidates 8 existing laws related to social security and aims to extend this security to all the employees working in organized and unorganized sector. It covers:

  • Employees’ Compensation Act, 1923
  • Employees’ State Insurance Act, 1948
  • Employees’ Provident Fund and Miscellaneous Act, 1952
  • The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959
  • Maternity Benefit Act, 1961
  • Payment of gratuity Act, 1972
  • The Cine Workers Welfare Fund Act, 1981
  • The Building and Other Construction Workers Welfare CESS Act, 1996
  • Unorganized Workers' Social Security Act, 2008

The Code on Social Security, 2020 has been passed in Lok Sabha on 22 nd September 2020 and in Rajya Sabha on 23 rd September, 2020. Currently, as on 1 st January, 2021, it is yet to be notified in the Official Gazette. But based on the information available in the public domain, the bill is likely to see the light of day very soon. https://www.thehindu.com/news/national/labour-codes-could-be-implemented-before-april-1/article33560366.ece

“The Code on Social Security, 2020” is likely to have a lot of compliance and procedural process shifts onto an entity. In this article, we have focused mainly on the likely changes impacting the financials of the company with respect to Gratuity Benefit.

Key Changes Impacting Gratuity Benefits:

  • Change in the Definition of Wages
  • Change in the Vesting Criteria for Fixed Term Employees & Working Journalist

Change in Definition of Wages

Wages Definition: Code of Social Security, 2020 — Technical

Section 2 (88) of the Code of Social Security, 2020, defines “WAGES” as

all remuneration, whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment,

And Includes (SPECIFIC INCLUSION LIST)

  • basic pay;
  • dearness allowance; and
  • retaining allowance,

if any, but does not include— (SPECIFIC EXCLUSION LIST)
(a) any bonus payable under any law for the time being in force,
(b) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity;
(c) any contribution paid by the employer to any pension or provident fund
(d) any conveyance allowance or the value of any travelling concession;
(e) any sum paid to defray special expenses entailed on him by the nature of his employment;/em>
(f) house rent allowance;
(g) remuneration payable under any award settlement;
(h) any overtime allowance;
(i) any commission payable to the employee;
(j) any gratuity payable on the termination of employment;
(k) any retrenchment compensation or other retirement benefit payable to the employee or any ex-gratia payment made to him on the termination of employment, under any law for the time being in force:

Provided that for calculating the wages under this clause, if payments made by the employer to the employee under sub-clauses (a) to (i) exceeds one-half, or such other per cent. as may be notified by the Central Government, of the all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent. so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause.

Wages Definition: Code of Social Security, 2020 – General Explanation:

Based on the above Definition the Wages, can be categorized into 4 Broad Classes:

  • Specific Inclusions
  • Specific Exclusions
  • Other Inclusions
  • Open Issues

Wages Definition: Payment of Gratuity Act, 1972 – Technical:

“Wages” means all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance. (section 2 (A) s)

Wages Definition: Payment of Gratuity Act, 1972 – General Explanation:

As the Definition specifically excludes any bonus, commission, house rent allowance, overtime wages and any other allowance, Wages considered for the purpose of Gratuity are Basic Salary + Dearness Allowance

Change in vesting Criteria of Fixed term Employees:

Technical Definition: “In the case of an employee employed on fixed term employment or a deceased employee, the employer shall pay gratuity on pro rata basis.” Reference – para 53 (2) -4
Explanation: Fixed term employees were not separately mentioned in payment of gratuity act. However, in social security code, fixed term employees will also be eligible to receive gratuity on termination, after completing term of contract, irrespective of vesting criteria. Calculation of such employees will be done on pro rata basis.

Change in vesting Criteria of Journalist:

Technical Definition: “In case of working journalist as defined in clause (f) of section 2 of the Working Journalists and Other Newspaper Employees (Condition of Service) and Miscellaneous Provisions Act, 1955, the expression "five years" occurring in this sub-section shall be deemed to be three years” Reference – para 53 (1)
Explanation: As per payment of gratuity act, an employee will be eligible to receive gratuity at termination onlyafter completing 5 years (4 years 240 days to be précised) of continuous service. As per new code, vesting criteria for Journalist and other newspaper employee has been changed from 5 to 3 years.