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India Inc to face significant costs from proposed gratuity rules

Employers who hire fixed term contract employees through third party agencies may also face also see higher bills from contractors as they would pass on the costs to principle employers

The draft Social Security Code, 2020, tabled in the Parliament has done away with the five-year requirement for gratuity, making it pro rata for fixed term contract staff. Along with this, the code’s definition of wages for the purpose of gratuity calculation will raise the quantum of gratuity, say experts. The requirement of a dedicated gratuity fund or insurance provision for gratuity is also likely to increase compliance costs for micro, medium and small enterprises (MSMEs).

“The definition of wages in the code covers much more than what it was covered earlier. So, the moment your gratuity is calculated in the new definition of wages, the financial liability of employers goes through the roof. Employers will have to pay out gratuity for higher wage contract workers,” Arun Chawla, deputy secretary general, FICCI, said.

“It appears that gratuity cannot be calculated on basic wages and dearness allowance that are less than 50% of CTC. Most firms currently have these components at 30-40% of CTC. This could potentially increase the gratuity liabilities for most employers in India,” said Ritobrata Sarkar, Head of Retirement – India, Willis Tower Watson.

Employers who hire fixed term contract employees through third party agencies may also face also see higher bills from contractors as they would pass on the costs to principle employers. Considering fixed term contract employees typically tend to leave the organisation before five years, or not offered gratuity, the 15 day (of each year of service) gratuity would mean a higher payout by about 5% of basic salary, said Nitin Sethi, India CEO, performance rewards and organisation at Aon.

“Companies might have to set up a dedicated “approved” gratuity fund or take insurance for paying gratuity. This is not currently the case for most smaller companies, who pay gratuity from revenue. This can raise costs and increase administrative hassles, especially for smaller companies,“ added Sarkar.

The impact will be felt severely by MSME sector and startups, experts pointed out.

“This may not be the case for large sized, financially resilient companies, who in any case follow the practice of making provisions of annualised gratuity payouts for each employee in their books,” said Rituparna Chakraborty, co founder and EVP, Teamlease Services.

In fact, some tax set offs for the revised gratuity norms may have been more in order for the MSMEs, who are already struggling with the covid19 induced pressures, felt Prabir Jha, founder and CEO, Prabir Jha People Advisory.

Amit Gopal, India Business Leader – Investments, Mercer downplayed the impact of the gratuity norms on white collar staff. “Such staff on fixed term contracts are only about 10% of the workforce in large companies. These tend to specialist roles,” he said. Randstad’s Vishwanath PS however questioned the relevance of having a gratuity act in the current times. Instead, he recommended merging gratuity with employee provident fund. “Today, provident fund is 12%, gratuity is a little over 4%, so simply make employer’s contribution to the provident fund as 16% and do away with the gratuity act. It will simplify the whole thing,” he said.

Source
Live Mint
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