What SMEs get wrong about gratuity

Gratuity is the payment an employer makes to an employee who leaves after completing the qualifying period of continuous service. It is calculated on last-drawn wages and years of service, it is a statutory obligation rather than a discretionary bonus, and it is the liability most small companies discover only when a long-serving employee resigns.

The qualifying period, the formula, the wage base and the ceiling should be confirmed against the current law and the Labour Code rules for your business; this article does not restate them. [CLIENT TO CONFIRM CURRENT PROVISIONS] What it does is list the misunderstandings we correct most often.

Misunderstanding 1: it only applies to large companies

Applicability depends on the type of establishment and the number of people employed, and the threshold is lower than many owners assume. Once the law applies, it continues to apply even if headcount later falls. Check your position rather than assuming.

Misunderstanding 2: it is paid out of that month's cash

A ten-year employee's gratuity is a significant sum. Companies that have not provisioned for it either delay payment, which creates a dispute and interest exposure, or scramble for cash. The right approach is to provision annually, and for larger liabilities to consider a funded arrangement with an insurer. Your accountant and your compliance adviser should be looking at this together.

Misunderstanding 3: contract or fixed-term staff never qualify

Whether a particular worker qualifies depends on the nature of the engagement and continuous service, and the Labour Codes have changed the position for some categories of fixed-term employment. Treat every long-serving worker as a potential claimant until you have confirmed otherwise.

Misunderstanding 4: the wage base is the basic salary you chose

Gratuity is computed on wages as the law defines them, not on whatever line you labelled basic. A salary structure designed to minimise contributions may not achieve that under the Codes' definition, and may create a shortfall at exit.

Misunderstanding 5: nomination forms are optional paperwork

Nomination records protect the employee's family and protect you from disputes over who is to be paid. Collect them at joining, keep them current, and store them where they can be found in ten years' time.

Gratuity computation, nomination records and settlement support are part of our statutory compliance service. If you want to know your exposure, start with a compliance health check.