Impact of Revised Wage Code on Gratuity
Liabilities
There have been several discussions around the Revised Wage Code, which
has perplexed several organisations and made them a bit uncertain about various
liabilities. Here are some key highlights and how they impact us. We see that Gratuity
will be one of the most important liability and will see a huge change and
hence it’s essential to understand that better.
The Code
It regulates: (i) Wages, (ii) Industrial Relations, (iii) Social Security, and (iv) Occupational Safety, Health and Working Conditions
•
While the Code
on Wages, 2019 was passed by the
Parliament, Bills on the other three areas were referred to the Standing
Committee on Labour
•
The Standing
Committee has submitted its report on all three Bills. The government replaced
these Bills with new ones on September 19, 2020.
Revised Definition of Wages (As per Draft Code)
Revised definition of
wages states 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. Wages include—
a)
Basic pay
b)
Dearness
allowance; and
c)
Retaining
allowance, if any
The Code on Wages 2019 excludes bonuses, pension and PF contributions, conveyance allowance, HRA or housing benefits, overtime, gratuity, commission, retrenchment compensation and such other things. It mandates that basic pay will have to make up 50% of employees' CTC. Allowances to employees, like leave travel, house rent, overtime and conveyance, will have to be limited to the remaining 50% of CTC. If any of these exemptions, in aggregate, exceed 50% of the CTC, the extra amount will be deemed as remuneration and will be added to the wages.
New Wage Definition – Impact on Corporates
•
The new
definition of Wages may impact the costs of many organisations and take-home
salaries for employees
•
The exclusion
limit of 50% is aimed at ensuring that companies do not adopt compensation
structures which result in wages being reduced below 50% of the total
remuneration.
•
Several companies may have to re-design their
compensation structures, with basic
salary (and DA) seeing an increased proportion in the total CTC / Compensation
•
About a third
of the Companies may have to materially increase basic salaries within
the component structures, which may impact take home salaries whilst also pushing up actuarial
liabilities due to change in underlying salary for Gratuity calculation.
An Actuarial Study* from valuation
analysis in FY 20, shows that Basic salary to Gross Salary ratio of some of the top listed Companies
What is Gratuity
The payment of a gratuity to employees upon cessation of service is a statutory obligation imposed on employers by the Payment of Gratuity Act, 1972 now merged to Social Security Code. In terms of the Act, gratuity is payable to an employee on the termination of her/his employment after she/he has rendered continuous service for not less than 5 years (a) on his superannuation or (b) on his retirement or resignation or (c) on his death or disablement due to accident or disease (completion of 5 years is not, however, necessary for payment of gratuity in case of death or disablement). The gratuity is to be calculated at the rate of 15/26th of a month’s wages for every completed year of service or part thereof in excess of six months.
Nature of the Liability:
The amount of gratuity payable depends
upon the terminal salary of the employee and the number of years of service
completed by him. Since the liability keeps on increasing with the completion
of every year of service and with the grant of every increase in salary, sound
financial principles demand that necessary funds are set apart in advance.
The valuation of liability is calculated
by an independent actuary through assessment of salary data, proposed wage
increase (salary escalation), possible attrition and tenure of services.
GRATUITY ACTUARIAL
LIABILITY
•
The “applicable
wages” considered in gratuity calculation is expected to increase and may result
in a one-off increase in gratuity liability
•
The one-off
increase in liability shall be charged to Income Statement or Other
Comprehensive Income (OCI)depending upon the applicable accounting standard
•
The extent of
this one-off increase in liability will depend on the extent to which there is
a need to re-design the compensation structure
Higher than expected increase in salary (vis-à-vis the assumed salary
growth rate) will result in actuarial loss
(experience loss) and an increase in the liability, with the said
increase being recognised in accordance with the applicable Accounting Standards.
Current Methods of Gratuity Fund Management.
- The P&L Account of the company
reflects an inflated picture of the Profits/Losses of the company. In
years where there are no or minimal gratuity payments sue to
death/resignation/termination etc. the profits are overstated whereas in
years where the payout is high, the same is understated.
- Funds are not earmarked for the purpose of
gratuity payouts, thereby,
putting strain on the company funds incase of winding up/dissolution of
the company or incase there are several separations in any particular
year(s), as gratuity is a statutorily payable to the employees.
Considering the impact on liability It is thus recommended to
·
Invest your funds
so that your liabilities are appropriately provisioned. It is however important to decipher the
provisions once notified. Final shape of the code will give a clearer picture.
·
It is
certain that most employee benefit liabilities will see a massive
change.
·
Companies who are
yet to fund its liability will see lot of strain in balance sheet and hence
funding would become a necessity than choice to ensure a healthy balance sheet
in years to come.
Please feel free to write to me Rahul.chaurasia@bajajallianz.co.in for any queries
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