The end of service gratuity, a statutory right of employees and a defined retirement benefit, is being gamed by some employers in Pakistan. Workers are made to resign one month before the end of the company’s financial year and immediately re-employed with effect from the start of the next financial year. Because gratuity is a multiple of one’s salary and years of service, it is paid to the workers annually and not as a lump sum at the natural end of the employment. This controversial practise that exploits the legal loopholes is against the spirit of gratuity.

The employees stand to lose because when gratuity is paid at the natural end of service, it is likely to be greater due to reasons such as increment and promotion. Add to it that a lump sum could be used for a variety of purposes, such as starting a small business. Employees resigning and getting immediately reappointed every year is of course a farce.

The scale of this controversial practice is hard to determine. Where the employer happens to be a listed company, buried deep inside its financial statements would be a note like this: “The Company operates an unfunded gratuity scheme for all its eligible employees. Provision is made annually to cover obligations under the scheme. The payable balance of gratuity is fully paid to the employees on (sic) annual basis.” Note that this is a real and not a made-up example.

Sadly, what such a note suggests is that the company’s accountants, legal advisors, external auditors and of course board of directors, all have given the green light to the practice of annual payment. If the controversial practice is prevalent in listed companies, the situation can only be worse in the non listed companies.

The onus is on the federal and provincial governments to offer clearer legislation on gratuity and think through the means of implementing it across Pakistan such that it can be and indeed is paid to the workers as intended

Unlike private pension schemes, which are widely practised in both developed and developing countries, gratuity is practised more in developing countries such as Pakistan, India, Nigeria, Botswana and the Gulf Cooperation Council countries, which may help explain why its law and practice are not as developed.

The legal position

Labour is a concurrent subject in the Constitution of Pakistan, that is, the responsibility of both the federal and provincial governments. That’s why over the years, gratuity has become spread over a dozen federal and provincial legislations, ranging from the Industrial and Commercial Establishments (Standing Orders) Ordinance, 1968 to the Khyber Pakhtunkhwa Shops and Establishments Act, 2015.

In general, providing gratuity or another retirement benefit is a requirement of the law. Gratuity applies to a commercial establishment or an industrial establishment with a specified number of “workmen”, ranging from 10 to 50 depending upon the province or federal capital. It becomes payable for reasons such as reaching the retirement age, death, or resignation of the employee. It is unrelated to the employee’s performance but by design, it serves as an incentive for longer service.

None of these laws deals with the subject clearly and sufficiently, for example, even basic elements like the definition of a worker are left vague and a reasonable timeframe for payment of gratuity by the employer has not been specified. To make matters worse, there is no one regulatory authority administering the gratuity law.

Let alone find redress, an aggrieved employee may find it quite difficult to identify the relevant forum — a commissioner or a court of law — to seek redress. This is unlike the international good practice of having a dedicated regulator for retirement benefits, such as The Pensions Regulator in the UK or Retirement Benefits Authority in Kenya.

Defending the practice

In defence of the practice, the employers may argue that the employees are being paid gratuity, it is not like their gratuity is being usurped. Annual payment means that workers get their money sooner, rather than later. If the workers invest the amount received, they may end up with an amount comparable to the lump sum. The annual payment also protects workers from the risk that the company operating a non-funded scheme may not be able to make the lump sum payment due to bankruptcy.

A non-funded scheme requires actuarial valuation and recognition of liability on the balance sheet and a funded scheme requires its own audited annual financial statements. Where a scheme is registered with tax authorities for tax efficiency, the required formalities are even greater. All this paperwork is done predominantly in English, which acts as an added barrier for small businesses.

The cost and hassle involved only suit those companies that are able and willing to hire qualified accountants and lawyers. It is downright unrealistic to expect that someone running a small business with just about 10 employees, all of whom may have basic education, if any, could comply with a pile of labour laws written in English. In such small setups, neither the employer nor the employee may have heard of gratuity in the first place.

That some listed companies are paying gratuity annually shows that they do want to pay but despite being a listed company, they are finding the compliance burden unbearable. Annual payment simplifies implementation for all concerned.

Finding a solution

The main defence of the controversial practice is that proper management and accounting of gratuity can be burdensome for employers, particularly the unsophisticated smaller setups. Although it does not justify gaming gratuity, this point is not without merit. But there is no excuse for larger companies, which are already dealing with matters far more complex than gratuity. Indeed, many listed companies in Pakistan are operating both non-funded and funded gratuity schemes the proper way. The onus is on the federal and provincial governments to offer clearer legislation on gratuity and think through the means of implementing it across Pakistan such that it can be and indeed is paid to the workers as intended.

The writer is an independent consultant. He is a former CEO of the Audit Oversight Board, Executive Director at the Securities and Exchange Commission and content director at CFA Institute (London)

He tweets @Usman_Hayat

Published in Dawn, The Business and Finance Weekly, July 26th, 2021

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