Common Misconceptions About Gratuity

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Issues of gratuity payments can be quite prickly to discuss and eventually resolve, but that need not be the case. Here we look at a few misconceptions around the subject of gratuity payments for employees.

1. The company doesn’t need to pay any employee gratuity payment.

We’ve all been there before at one point or another in our careers, our contracts have ended with one employer, or we simply decide to move on to another one. The question we all have but never seem to ask is, “Am I going to get paid any gratuity for the work that I have put in at said company? 

Does the company need to pay gratuity to all its employees? You may wonder… 

 Gratuity payment, at its most basic definition, is payment made to an employee in gratitude for his/her service to the company. And in this simplified manner, most employers see it as an optional payment awarded to employee as the employer sees fit, or in most cases it is withheld completely.

But let’s take a closer look at what gratuity really is; According to the Labour Employment Act Code no. 3 of 2019, Gratuity means;

“a payment made to an employee in respect

of a person’s service on the expiry of a long-term contract

of employment based on basic pay earnings that have

accrued to the employee during the term of service;

There we have it, all spelled out in black and white. Which leads us to another misconception

2. The percentage of gratuity is at the company’s discretion

Again, we consult our trusted Labour Employment Code on the matter, 

“where a contract of employment is for a fixed duration,

severance pay shall either be a gratuity at the rate of

not less that twenty-five percent of the employee’s basic

pay earned during the contract period or the retirement

benefits provided by the relevant social security scheme

that the employee is a member of, as the case may be”

The Code clearly states that the lower threshold for anything a company can give is 25%. This is compulsory and not open to discretion. 

3. I do not need to put it in the employment contract

Better safe than sorry when it comes to your employment contracts. Stating that you will give out a gratuity payment to your workers at the end of their tenures creates a feeling of security for them, it also boosts morale and productivity knowing that they will get a payment appreciating their work efforts.

As we can see from the earlier discussed clauses, you really cannot escape paying gratuity to your employees at the end of their working tenures. What you should be concerned with more at this point is your financial preparedness when the time comes.

4. Gratuity is not an important part of compensation

Its no secret that including gratuity and other emoluments as part of the overall compensation package helps to attract and retain employees. It helps build loyalty and maintains consistent output of work, helping you as a company maintain the quality of services you offer to your clients as there are less transient employees.

5. There is no need to set up a separate fund to take care of these payments

Here the common adage comes into play, “he who fails to plan, plans to fail” and we definitely do not want you to fail your team. Most employers assume setting aside a small percentage of their payroll each month to prepare for the final payment owed to employees as gratuity will suffice. Sad to say it may not be enough, as the final gratuity payment is only calculated at the time employees actually leave (or give notice of their leaving) and they often find themselves strapped for cash. The amounts needed to be set aside are also affected by inflation, pay increases and overall industry trends. Taking all this into account, it’s advisable to set up an external fund specifically for this.

6. All of the details can be done inhouse

As seen above, you already have a lot on your hands dealing with every day business, there are many things to consider in setting up why not work more efficiently by having a professional fund manager help you set up your gratuity fund. It takes out all the stress of setting one up on your own, as well as giving you more freedom to plan ahead strategically for your company and employees’ future.

Speak to an expert now about how you can best prepare.