Mr. P.V. Unnikrishna Pillai is an ex-employee of HDFC Bank.
According to market practice, at the end of his service, he was paid 5.95 lacs as gratuity for 16 years of service based on his last drawn basic + DA. Mr. Pillai observed a component named personal pay in his salary breakup and wanted to verify whether component could be a part of the salary eligible for gratuity.
According to POGA 1972, wages are defined as
“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.”
The above is interpreted as follows to arrive the salary for Gratuity,
- include basic pay & DA
- exclude allowances and other components (as defined in the Act).
Mr. Pillai found that personal pay does not form a part of the “exclusions” list. Whatever is not (explicitly) excluded can be a part of the inclusions (i.e. basic + DA).
Therefore, if personal pay were to be included in the definition of Wages, his gratuity eligibility would be 13.17 lacs (v/s 5.95 lacs actually paid).
Mr. Pillai went to the Controlling Authority claiming that his gratuity was underestimated and personal pay should be a part of his gratuity workings. Turns out, the ruling turned out to be in his favor. Mr.Aneish Ravindra, Assistant Labour Commissioner, Ernakulam, mentioned in his order.
“In the instant case, it is pertinent to note that with respect to the components of the salary of the applicant, the term used by the employer is ‘personal pay’ instead of ‘personal allowance’ and all other components of the salary are specifically termed as ‘allowances’.”
The order specifically mentions that if it was personal allowance, it would be excluded. Since, it’s not the case, Mr. Pillai’s claim stands.
HDFC appealed.
The Deputy Chief Labour Commissioner (Central) ruled in HDFC’s favor saying that gratuity is to be paid only on basic pay, personal pay is not be included in the definition of wages. However, at the time of final hearing, Mr. Pillai’s counsel was not present due to serious illness and Mr. Pillai was not able to properly defend his case.
The Appellate Authority ruled in HDFC’s favor.
Mr. Pillai persisted and went to High Court to appeal the ruling and argued that the order was ex-parte (decision was made without hearing the other party’s side). The High Court ruled in Mr. Pillai’s favor and ordered The Appellate Authority to conduct the appeal hearing again.
The ruling was passed in October 2024. As of this writing (March 2025), there are no further updates on the case.
In the interim, HDFC faces some serious financial implications due to the preliminary order.
- Should it include personal pay to determine gratuity for employees resigning henceforth?
- Should it include the component in determining the year-end actuarial liability? The following is a snapshot from HDFC’s Mar’22 balance sheet.
- As on Mar’22, the Gratuity liability was 375 cr. If personal pay were included in working out Gratuity, assuming Mr. Pillai’s increase of 120% across the board, this could go up to 840 Cr.
- If the company doesn’t choose to fund the liability, the net balance sheet provision can up from 86 Cr. to 565 Cr. An approx. ~6x increase in a single financial year.
The interim order is bound impact everyone else and not just HDFC. It calls for employers to review their pay components. With Code on Social Security implementation around the corner, the outcome of this case has the potential to set a jurisdictional precedent for the industry at large.