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  • Writer's pictureDamilola Agubata

Let's Talk Gratuity: What is it and How Does it Benefit You?

As an employee, you are entitled to retirement benefits after offering time and effort to contribute value to the growth and development of the national economy. And among the benefits you deserve is gratuity.

Therefore, today we shall be diving deeper into what gratuity means and how it benefits you as an employee. Here, you will understand what it means when your employer negotiates gratuity as part of your retirement benefits with you.

We will break down the concept of gratuity according to the National Pension Commission (PenCom) as follows:

  • What is gratuity?

  • Do you deserve gratuity?

  • What are the requirements to be eligible for gratuity?

  • How will you receive your gratuity?

  • What does the Pension Reform Act (PRA) have to say on gratuity?

What is gratuity? Credit: Oak Pensions Limited
What is gratuity? Credit: Oak Pensions Limited

What is gratuity?

Gratuity, in simple terms, is a lump sum payment made by an employer to an employee who has dedicated a specific number of active years of service to a company or business as a way of showing appreciation to the employee for the years of hard work and dedication to their job.

You must note that you can only receive gratuity from your employer when you have spent the number of years stated in the handbook of the company. For example, if you worked for six months at an organization that provides gratuity as part of retirement benefits for its employees, you may not be entitled to receive gratuity if your employer has stated in their handbook or contract that you must spend at least two years at the company to be entitled to gratuity.

Do you deserve gratuity?

You are not automatically entitled to gratuity. You will only be entitled to receive it if there is a law binding on the federal or state government agency you worked for that enables it. To know if employees are paid gratuity, take a closer look at the provisions of the Public Service Rules.

And if you work for a private organization, receiving a gratuity is based on your employer providing gratuity as part of its retirement benefits in the terms and conditions of service (or employment contract).

This means that if there is a gratuity in your employment contract, then your employer becomes legally bound to pay a gratuity to you if you qualify to receive it.

What are the requirements to be eligible for gratuity?

You will be entitled to receive gratuity if:

  1. You have worked for the defined period or number of years in your employer’s terms and conditions of service.

  2. Your services to your employer have come to an end. In other words, this means that you are entering retirement or you are resigning from your job.

  3. You were unlawfully dismissed.

How will you receive your gratuity?

When your employer provides gratuity as part of your retirement benefits, they are required to establish a Gratuity Fund and appoint a PFA, in line with the Guidelines for Appointment of Pension Fund Administrators and Custodians for Existing Schemes, to manage the Gratuity Fund.

This must be after they’ve written to PenCom, notifying the Commission of their appointment of a Pension Fund Administrator (PFA) and seeking approval for the establishment of the Gratuity Fund with the PFA.

When PenCom approves your employer’s request to set up a Gratuity Fund, it is your employer’s responsibility to fully fund the established cumulative gratuity liability with the PFA they’ve appointed.

Just like your Retirement Savings Account (RSA) benefits, you will receive your gratuity through the PFA your employer appointed to manage and administer your retirement benefits.

What does the Pension Reform Act (PRA) have to say on gratuity?

According to the Pension Reform Act (PRA) 2004 which ushered in the Contributory Pension Scheme (CPS), gratuity schemes can be continued.

The amended Pension Reform Act (PRA) 2014 does not say that gratuity cannot be continued. According to PenCom, an employer may choose to pay any other severance benefits (by whatever name called) over and above the retirement benefits payable to the employee subject to the terms and conditions of his employment.

To read more pension-related tips and information and stay updated, follow our blog on Oak Pensions.


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