The Payment of Gratuity Act, 1972: Notes | Corporate & Other Laws for CA Intermediate PDF Download

 Page 1


5 
The Payment of Gratuity Act, 1972 
Learning Objectives 
In this Chapter, the students come to know  
? To whom Gratuity is payable? 
? How to calculate the amount of Gratuity payable? 
? When Gratuity will be forfeited? 
? Procedure for nomination in respect of Gratuity payment. 
5.1 An Introduction 
Gratuity is a word derived from a Latin word ‘Gratuitas’ which simply means a ‘Gift.’  In the 
industrial sector, it can be treated as a gift from the employer to his employee for the services 
rendered to his establishment by him for the development and prosperity of the same.  
Gratuity is a benefit, which an employee gets at the time of retirement or when he leaves the 
establishment.  Gratuity is a amount (as a lump sum payment) which is paid by an employer to 
his employee for his past services when the employment comes to an end due to the 
retirement or superannuation of the workers. Thus, this gratuity scheme serves as an 
instrument of social security as well as a reward to a person who sacrifices his whole life in 
the betterment, development and prosperity of an establishment, and in other way for the 
Nation. Today the payment of gratuity have become a statutory obligation of employers and a 
statutory right of the employees to claim through the way of an enactment, the Payment of 
Gratuity Act,1972. The Act provide for a scheme for the payment of gratuity to employees 
engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other 
establishments and for matters connected with or incidental to them. 
5.2 Aims and Objects of the Act: 
The Payment of Gratuity Act, 1972 was laid down to provide for a uniform scheme for payment 
of gratuity to employees through out the country. Earlier there was no Central Act to regulate 
the payment of Gratuity to the workers .The bill was drafted on the basis of the West Bengal 
Employees’ Payment of Gratuity Act, 1971 with some modification which was made in the light 
of the views expressed at the Indian Labour Conference relating to the forfeiture of gratuity in 
cases of dismissal for gross misconduct. 
Page 2


5 
The Payment of Gratuity Act, 1972 
Learning Objectives 
In this Chapter, the students come to know  
? To whom Gratuity is payable? 
? How to calculate the amount of Gratuity payable? 
? When Gratuity will be forfeited? 
? Procedure for nomination in respect of Gratuity payment. 
5.1 An Introduction 
Gratuity is a word derived from a Latin word ‘Gratuitas’ which simply means a ‘Gift.’  In the 
industrial sector, it can be treated as a gift from the employer to his employee for the services 
rendered to his establishment by him for the development and prosperity of the same.  
Gratuity is a benefit, which an employee gets at the time of retirement or when he leaves the 
establishment.  Gratuity is a amount (as a lump sum payment) which is paid by an employer to 
his employee for his past services when the employment comes to an end due to the 
retirement or superannuation of the workers. Thus, this gratuity scheme serves as an 
instrument of social security as well as a reward to a person who sacrifices his whole life in 
the betterment, development and prosperity of an establishment, and in other way for the 
Nation. Today the payment of gratuity have become a statutory obligation of employers and a 
statutory right of the employees to claim through the way of an enactment, the Payment of 
Gratuity Act,1972. The Act provide for a scheme for the payment of gratuity to employees 
engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other 
establishments and for matters connected with or incidental to them. 
5.2 Aims and Objects of the Act: 
The Payment of Gratuity Act, 1972 was laid down to provide for a uniform scheme for payment 
of gratuity to employees through out the country. Earlier there was no Central Act to regulate 
the payment of Gratuity to the workers .The bill was drafted on the basis of the West Bengal 
Employees’ Payment of Gratuity Act, 1971 with some modification which was made in the light 
of the views expressed at the Indian Labour Conference relating to the forfeiture of gratuity in 
cases of dismissal for gross misconduct. 
5.2 Business Law, Ethics and Communication 
 
Initially, the Bill provided for gratuity to the employees drawing wages upto ` 270/- per month 
in factories, Plantations, shops, establishments and mines, in the event of superannuation, 
retirement, resignation and death or total disablement due to accident or diseases.  The 
quantum of gratuity payable will be 15 days’ wages based on the rate of wages last drawn by 
the employees concerned for every completed year of service or part thereof in excess of six 
months subject to a maximum of 15 months’ wages. 
In was proposed that the appropriate Government for administering the Act in relation to  
establishment belonging to or under the control of the Central Government or a railway 
company, or mine, a major port and oilfield or in relation to establishments having 
departments or branches in more than one State, will be the Central Government, and in 
relation to other establishments, the State Government.  
Act 39 of 1972 
The Central legislation for the Payment of Gratuity was passed in the year 1972  and came 
into force on 16
th
 September, 1972 as THE PAYMENT OF GRATUITY ACT, 1972  (39 of 
1972).  This Act was amended time to time as per requirement, the years 1984, 1987, 1994 
and 1998, 2009, 2010. 
5.3 Extent & Applicability: 
The Act extends to the whole of India. Provided that in so far as it relates to plantations or 
ports, it shall not extend to the State of Jammu & Kashmir.  [Section 1(2)]. 
The Act applies to: 
? Every factory, mine, oilfield, plantation, port and railway company; 
? Every shop or establishment within the meaning of any law for the time being in force in 
relation to shops and establishments in a state, in which 10 or more persons are 
employed, or were employed, on any day of the preceding twelve months; 
? Such other establishments or class of establishments, in which 10 or more employee are 
employed, or were employed on any day of the preceding twelve months, as the Central 
Government, specify in this behalf. [Section 1(3)] 
? A shop or establishment to which this Act has become applicable shall continue to be 
governed by this Act notwithstanding that the number of persons employed therein at any 
time after it has become so applicable falls below ten. [Section1 (3 A )] 
The expression ‘law‘ used in Section 1(3)(b) means any law in respect of shops, 
establishments - commercial or non-commercial. (K. Gangadhar Vs The Appellate Authority, 
(1993) 66 FLR 648(AP). 
The provisions of Section 1(3)(b) of the Act are very much comprehensive.  It also includes 
Municipal Board.  (Municipal Board Vs Union of India, (1993) 67 FLR 973 All) 
Page 3


5 
The Payment of Gratuity Act, 1972 
Learning Objectives 
In this Chapter, the students come to know  
? To whom Gratuity is payable? 
? How to calculate the amount of Gratuity payable? 
? When Gratuity will be forfeited? 
? Procedure for nomination in respect of Gratuity payment. 
5.1 An Introduction 
Gratuity is a word derived from a Latin word ‘Gratuitas’ which simply means a ‘Gift.’  In the 
industrial sector, it can be treated as a gift from the employer to his employee for the services 
rendered to his establishment by him for the development and prosperity of the same.  
Gratuity is a benefit, which an employee gets at the time of retirement or when he leaves the 
establishment.  Gratuity is a amount (as a lump sum payment) which is paid by an employer to 
his employee for his past services when the employment comes to an end due to the 
retirement or superannuation of the workers. Thus, this gratuity scheme serves as an 
instrument of social security as well as a reward to a person who sacrifices his whole life in 
the betterment, development and prosperity of an establishment, and in other way for the 
Nation. Today the payment of gratuity have become a statutory obligation of employers and a 
statutory right of the employees to claim through the way of an enactment, the Payment of 
Gratuity Act,1972. The Act provide for a scheme for the payment of gratuity to employees 
engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other 
establishments and for matters connected with or incidental to them. 
5.2 Aims and Objects of the Act: 
The Payment of Gratuity Act, 1972 was laid down to provide for a uniform scheme for payment 
of gratuity to employees through out the country. Earlier there was no Central Act to regulate 
the payment of Gratuity to the workers .The bill was drafted on the basis of the West Bengal 
Employees’ Payment of Gratuity Act, 1971 with some modification which was made in the light 
of the views expressed at the Indian Labour Conference relating to the forfeiture of gratuity in 
cases of dismissal for gross misconduct. 
5.2 Business Law, Ethics and Communication 
 
Initially, the Bill provided for gratuity to the employees drawing wages upto ` 270/- per month 
in factories, Plantations, shops, establishments and mines, in the event of superannuation, 
retirement, resignation and death or total disablement due to accident or diseases.  The 
quantum of gratuity payable will be 15 days’ wages based on the rate of wages last drawn by 
the employees concerned for every completed year of service or part thereof in excess of six 
months subject to a maximum of 15 months’ wages. 
In was proposed that the appropriate Government for administering the Act in relation to  
establishment belonging to or under the control of the Central Government or a railway 
company, or mine, a major port and oilfield or in relation to establishments having 
departments or branches in more than one State, will be the Central Government, and in 
relation to other establishments, the State Government.  
Act 39 of 1972 
The Central legislation for the Payment of Gratuity was passed in the year 1972  and came 
into force on 16
th
 September, 1972 as THE PAYMENT OF GRATUITY ACT, 1972  (39 of 
1972).  This Act was amended time to time as per requirement, the years 1984, 1987, 1994 
and 1998, 2009, 2010. 
5.3 Extent & Applicability: 
The Act extends to the whole of India. Provided that in so far as it relates to plantations or 
ports, it shall not extend to the State of Jammu & Kashmir.  [Section 1(2)]. 
The Act applies to: 
? Every factory, mine, oilfield, plantation, port and railway company; 
? Every shop or establishment within the meaning of any law for the time being in force in 
relation to shops and establishments in a state, in which 10 or more persons are 
employed, or were employed, on any day of the preceding twelve months; 
? Such other establishments or class of establishments, in which 10 or more employee are 
employed, or were employed on any day of the preceding twelve months, as the Central 
Government, specify in this behalf. [Section 1(3)] 
? A shop or establishment to which this Act has become applicable shall continue to be 
governed by this Act notwithstanding that the number of persons employed therein at any 
time after it has become so applicable falls below ten. [Section1 (3 A )] 
The expression ‘law‘ used in Section 1(3)(b) means any law in respect of shops, 
establishments - commercial or non-commercial. (K. Gangadhar Vs The Appellate Authority, 
(1993) 66 FLR 648(AP). 
The provisions of Section 1(3)(b) of the Act are very much comprehensive.  It also includes 
Municipal Board.  (Municipal Board Vs Union of India, (1993) 67 FLR 973 All) 
 The Payment of Gratuity Act, 1972 5.3 
 
In exercise of the powers conferred by clause (c) of Section 1(3) of the Act, the Central 
Government has specified Motor Transport undertakings, clubs, chambers of commerce and 
industry, inland water transport establishments, Solicitors’ Officers, Local Bodies and circus 
Industry, in which 10 or more persons are employed or were employed on any day of the 
preceding 12 months, as classes of establishments to which the Act shall apply.  Once this Act 
becomes applicable to a shop or establishments, it will continue to govern by it even if the 
number of employees falls below 10 after the application of the Act. 
Application of the Act to an employed person depends on two factors (i) he should be 
employed in an establishment to which the Act applies & (ii) he should be an employee under 
the definition of Section 2(e) of the Act. 
5.4 Important Definitions 
(1)  Appropriate Government means: 
 In relation to an establishment  -  
? belonging to, or under the control of  the Central Government, 
? having branches in more than one state, 
? of a factory belonging to, or under the control of the Central Government, 
? of a major port, mine, oilfield or railway company, the Central Government, 
In any other case, the State Government; [Section 2 (a)]  
(2) Completed Year of Service means continuous service for one year  [Section 2 (b)] 
(3) Employee means any person (other than an apprentice) who is – 
? employed for wages, whether the terms of such employment are express or implied,  
? employed in any kind of work, manual or otherwise,  
? employed in or in connection with the work of a factory, mine, oilfield, plantation, port, 
railway company, shop or other establishment to which this Act applies, but does not 
include any such person- 
? who holds a post under the Central Government or a State Government, and  
? post which is governed by any other Act or by any rules providing for payment of 
gratuity 
[Note:  This is the new definition, amended by the Payment of Gratuity (Amendment) Act, 
2009, w.e.f 3-4-1997.[Section 2(e)], This amendment in the definition made teachers 
entitled to gratuity vide Notification SO1080, dated  3-4-1997 by Ministry of Labour and 
Employment] 
Decision given by the court in the case Khanderan P. Rajopadhyee v. United Western 
Bank Ltd.1984 Lab IC 1910, laid that mere nomenclature of a post is not of much 
Page 4


5 
The Payment of Gratuity Act, 1972 
Learning Objectives 
In this Chapter, the students come to know  
? To whom Gratuity is payable? 
? How to calculate the amount of Gratuity payable? 
? When Gratuity will be forfeited? 
? Procedure for nomination in respect of Gratuity payment. 
5.1 An Introduction 
Gratuity is a word derived from a Latin word ‘Gratuitas’ which simply means a ‘Gift.’  In the 
industrial sector, it can be treated as a gift from the employer to his employee for the services 
rendered to his establishment by him for the development and prosperity of the same.  
Gratuity is a benefit, which an employee gets at the time of retirement or when he leaves the 
establishment.  Gratuity is a amount (as a lump sum payment) which is paid by an employer to 
his employee for his past services when the employment comes to an end due to the 
retirement or superannuation of the workers. Thus, this gratuity scheme serves as an 
instrument of social security as well as a reward to a person who sacrifices his whole life in 
the betterment, development and prosperity of an establishment, and in other way for the 
Nation. Today the payment of gratuity have become a statutory obligation of employers and a 
statutory right of the employees to claim through the way of an enactment, the Payment of 
Gratuity Act,1972. The Act provide for a scheme for the payment of gratuity to employees 
engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other 
establishments and for matters connected with or incidental to them. 
5.2 Aims and Objects of the Act: 
The Payment of Gratuity Act, 1972 was laid down to provide for a uniform scheme for payment 
of gratuity to employees through out the country. Earlier there was no Central Act to regulate 
the payment of Gratuity to the workers .The bill was drafted on the basis of the West Bengal 
Employees’ Payment of Gratuity Act, 1971 with some modification which was made in the light 
of the views expressed at the Indian Labour Conference relating to the forfeiture of gratuity in 
cases of dismissal for gross misconduct. 
5.2 Business Law, Ethics and Communication 
 
Initially, the Bill provided for gratuity to the employees drawing wages upto ` 270/- per month 
in factories, Plantations, shops, establishments and mines, in the event of superannuation, 
retirement, resignation and death or total disablement due to accident or diseases.  The 
quantum of gratuity payable will be 15 days’ wages based on the rate of wages last drawn by 
the employees concerned for every completed year of service or part thereof in excess of six 
months subject to a maximum of 15 months’ wages. 
In was proposed that the appropriate Government for administering the Act in relation to  
establishment belonging to or under the control of the Central Government or a railway 
company, or mine, a major port and oilfield or in relation to establishments having 
departments or branches in more than one State, will be the Central Government, and in 
relation to other establishments, the State Government.  
Act 39 of 1972 
The Central legislation for the Payment of Gratuity was passed in the year 1972  and came 
into force on 16
th
 September, 1972 as THE PAYMENT OF GRATUITY ACT, 1972  (39 of 
1972).  This Act was amended time to time as per requirement, the years 1984, 1987, 1994 
and 1998, 2009, 2010. 
5.3 Extent & Applicability: 
The Act extends to the whole of India. Provided that in so far as it relates to plantations or 
ports, it shall not extend to the State of Jammu & Kashmir.  [Section 1(2)]. 
The Act applies to: 
? Every factory, mine, oilfield, plantation, port and railway company; 
? Every shop or establishment within the meaning of any law for the time being in force in 
relation to shops and establishments in a state, in which 10 or more persons are 
employed, or were employed, on any day of the preceding twelve months; 
? Such other establishments or class of establishments, in which 10 or more employee are 
employed, or were employed on any day of the preceding twelve months, as the Central 
Government, specify in this behalf. [Section 1(3)] 
? A shop or establishment to which this Act has become applicable shall continue to be 
governed by this Act notwithstanding that the number of persons employed therein at any 
time after it has become so applicable falls below ten. [Section1 (3 A )] 
The expression ‘law‘ used in Section 1(3)(b) means any law in respect of shops, 
establishments - commercial or non-commercial. (K. Gangadhar Vs The Appellate Authority, 
(1993) 66 FLR 648(AP). 
The provisions of Section 1(3)(b) of the Act are very much comprehensive.  It also includes 
Municipal Board.  (Municipal Board Vs Union of India, (1993) 67 FLR 973 All) 
 The Payment of Gratuity Act, 1972 5.3 
 
In exercise of the powers conferred by clause (c) of Section 1(3) of the Act, the Central 
Government has specified Motor Transport undertakings, clubs, chambers of commerce and 
industry, inland water transport establishments, Solicitors’ Officers, Local Bodies and circus 
Industry, in which 10 or more persons are employed or were employed on any day of the 
preceding 12 months, as classes of establishments to which the Act shall apply.  Once this Act 
becomes applicable to a shop or establishments, it will continue to govern by it even if the 
number of employees falls below 10 after the application of the Act. 
Application of the Act to an employed person depends on two factors (i) he should be 
employed in an establishment to which the Act applies & (ii) he should be an employee under 
the definition of Section 2(e) of the Act. 
5.4 Important Definitions 
(1)  Appropriate Government means: 
 In relation to an establishment  -  
? belonging to, or under the control of  the Central Government, 
? having branches in more than one state, 
? of a factory belonging to, or under the control of the Central Government, 
? of a major port, mine, oilfield or railway company, the Central Government, 
In any other case, the State Government; [Section 2 (a)]  
(2) Completed Year of Service means continuous service for one year  [Section 2 (b)] 
(3) Employee means any person (other than an apprentice) who is – 
? employed for wages, whether the terms of such employment are express or implied,  
? employed in any kind of work, manual or otherwise,  
? employed in or in connection with the work of a factory, mine, oilfield, plantation, port, 
railway company, shop or other establishment to which this Act applies, but does not 
include any such person- 
? who holds a post under the Central Government or a State Government, and  
? post which is governed by any other Act or by any rules providing for payment of 
gratuity 
[Note:  This is the new definition, amended by the Payment of Gratuity (Amendment) Act, 
2009, w.e.f 3-4-1997.[Section 2(e)], This amendment in the definition made teachers 
entitled to gratuity vide Notification SO1080, dated  3-4-1997 by Ministry of Labour and 
Employment] 
Decision given by the court in the case Khanderan P. Rajopadhyee v. United Western 
Bank Ltd.1984 Lab IC 1910, laid that mere nomenclature of a post is not of much 
5.4 Business Law, Ethics and Communication 
 
consequence and what is to be seen is the nature of the duties performed by the 
employee to conclude him as an employee within the meaning of section 2(e) of the Act. 
A company director not having a ultimate control over the affairs of management of the 
company will be considered as an employee under the Act [Monitron Securities (p) Ltd. v. 
Mukundlal Khushalchand (2002) 1 cur LR 507 Guj] 
(4) Employer Means: 
? In relation to any establishment, factory, mine, oilfield, plantation, port, railway 
company or shop –  
(i) Belonging to, or under the control of the Central Government or a State 
Government a person or authority appointed by the appropriate Government 
for the supervision  and control of employees, or where no person or authority 
has been so appointed, the head of the Ministry or the Department concerned, 
(ii) Belonging to, or under the control of any local authority, the person appointed 
by such authority for the supervision, and control of employees or where no 
person has been so appointed, the chief executive officer of the local authority, 
(iii) In any other case, the person, who, or the authority which has the ultimate control 
over the affairs of the establishment, factory, mine, oilfield, plantation, port, railway 
company or shop, and where the said affairs are entrusted to any other person, 
whether called a manager, managing director or by any other name, 
- there such person shall be the employer[Section 2 (f)] 
(5)  Factory: ‘factory’ has the meaning assigned to it in clause (m) of Section 2 of the 
Factories Act, 1948 (63 of 1948); [Section 2 (g)] 
(6)  Family: In relation to an employee, shall be deemed to consist of –  
? In the case of a male employee, himself, his wife, his children, whether married or 
unmarried, his dependent parents (and the dependent parents of his wife and the 
widow) and children of his predeceased son, if any, 
? In the case of a female employee, herself, her husband, her children, whether 
married or unmarried, her dependent parents and the dependent parents of her 
husband and the widow and children of her predeceased son, if any; 
Explanation:  
Where the personal law of an employee permits the adoption by him of a child, any child 
lawfully adopted by him shall be deemed to be included in his/her family, and where a 
child of an employee has been adopted by another person and such adoption is, under 
the personal law of the person making such adoption, lawful, such child shall be deemed 
to be excluded from the family of the employee. [Section 2 (h)] 
(7) Retirement: Means termination of the service of an employee otherwise then on 
superannuation; 
Page 5


5 
The Payment of Gratuity Act, 1972 
Learning Objectives 
In this Chapter, the students come to know  
? To whom Gratuity is payable? 
? How to calculate the amount of Gratuity payable? 
? When Gratuity will be forfeited? 
? Procedure for nomination in respect of Gratuity payment. 
5.1 An Introduction 
Gratuity is a word derived from a Latin word ‘Gratuitas’ which simply means a ‘Gift.’  In the 
industrial sector, it can be treated as a gift from the employer to his employee for the services 
rendered to his establishment by him for the development and prosperity of the same.  
Gratuity is a benefit, which an employee gets at the time of retirement or when he leaves the 
establishment.  Gratuity is a amount (as a lump sum payment) which is paid by an employer to 
his employee for his past services when the employment comes to an end due to the 
retirement or superannuation of the workers. Thus, this gratuity scheme serves as an 
instrument of social security as well as a reward to a person who sacrifices his whole life in 
the betterment, development and prosperity of an establishment, and in other way for the 
Nation. Today the payment of gratuity have become a statutory obligation of employers and a 
statutory right of the employees to claim through the way of an enactment, the Payment of 
Gratuity Act,1972. The Act provide for a scheme for the payment of gratuity to employees 
engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other 
establishments and for matters connected with or incidental to them. 
5.2 Aims and Objects of the Act: 
The Payment of Gratuity Act, 1972 was laid down to provide for a uniform scheme for payment 
of gratuity to employees through out the country. Earlier there was no Central Act to regulate 
the payment of Gratuity to the workers .The bill was drafted on the basis of the West Bengal 
Employees’ Payment of Gratuity Act, 1971 with some modification which was made in the light 
of the views expressed at the Indian Labour Conference relating to the forfeiture of gratuity in 
cases of dismissal for gross misconduct. 
5.2 Business Law, Ethics and Communication 
 
Initially, the Bill provided for gratuity to the employees drawing wages upto ` 270/- per month 
in factories, Plantations, shops, establishments and mines, in the event of superannuation, 
retirement, resignation and death or total disablement due to accident or diseases.  The 
quantum of gratuity payable will be 15 days’ wages based on the rate of wages last drawn by 
the employees concerned for every completed year of service or part thereof in excess of six 
months subject to a maximum of 15 months’ wages. 
In was proposed that the appropriate Government for administering the Act in relation to  
establishment belonging to or under the control of the Central Government or a railway 
company, or mine, a major port and oilfield or in relation to establishments having 
departments or branches in more than one State, will be the Central Government, and in 
relation to other establishments, the State Government.  
Act 39 of 1972 
The Central legislation for the Payment of Gratuity was passed in the year 1972  and came 
into force on 16
th
 September, 1972 as THE PAYMENT OF GRATUITY ACT, 1972  (39 of 
1972).  This Act was amended time to time as per requirement, the years 1984, 1987, 1994 
and 1998, 2009, 2010. 
5.3 Extent & Applicability: 
The Act extends to the whole of India. Provided that in so far as it relates to plantations or 
ports, it shall not extend to the State of Jammu & Kashmir.  [Section 1(2)]. 
The Act applies to: 
? Every factory, mine, oilfield, plantation, port and railway company; 
? Every shop or establishment within the meaning of any law for the time being in force in 
relation to shops and establishments in a state, in which 10 or more persons are 
employed, or were employed, on any day of the preceding twelve months; 
? Such other establishments or class of establishments, in which 10 or more employee are 
employed, or were employed on any day of the preceding twelve months, as the Central 
Government, specify in this behalf. [Section 1(3)] 
? A shop or establishment to which this Act has become applicable shall continue to be 
governed by this Act notwithstanding that the number of persons employed therein at any 
time after it has become so applicable falls below ten. [Section1 (3 A )] 
The expression ‘law‘ used in Section 1(3)(b) means any law in respect of shops, 
establishments - commercial or non-commercial. (K. Gangadhar Vs The Appellate Authority, 
(1993) 66 FLR 648(AP). 
The provisions of Section 1(3)(b) of the Act are very much comprehensive.  It also includes 
Municipal Board.  (Municipal Board Vs Union of India, (1993) 67 FLR 973 All) 
 The Payment of Gratuity Act, 1972 5.3 
 
In exercise of the powers conferred by clause (c) of Section 1(3) of the Act, the Central 
Government has specified Motor Transport undertakings, clubs, chambers of commerce and 
industry, inland water transport establishments, Solicitors’ Officers, Local Bodies and circus 
Industry, in which 10 or more persons are employed or were employed on any day of the 
preceding 12 months, as classes of establishments to which the Act shall apply.  Once this Act 
becomes applicable to a shop or establishments, it will continue to govern by it even if the 
number of employees falls below 10 after the application of the Act. 
Application of the Act to an employed person depends on two factors (i) he should be 
employed in an establishment to which the Act applies & (ii) he should be an employee under 
the definition of Section 2(e) of the Act. 
5.4 Important Definitions 
(1)  Appropriate Government means: 
 In relation to an establishment  -  
? belonging to, or under the control of  the Central Government, 
? having branches in more than one state, 
? of a factory belonging to, or under the control of the Central Government, 
? of a major port, mine, oilfield or railway company, the Central Government, 
In any other case, the State Government; [Section 2 (a)]  
(2) Completed Year of Service means continuous service for one year  [Section 2 (b)] 
(3) Employee means any person (other than an apprentice) who is – 
? employed for wages, whether the terms of such employment are express or implied,  
? employed in any kind of work, manual or otherwise,  
? employed in or in connection with the work of a factory, mine, oilfield, plantation, port, 
railway company, shop or other establishment to which this Act applies, but does not 
include any such person- 
? who holds a post under the Central Government or a State Government, and  
? post which is governed by any other Act or by any rules providing for payment of 
gratuity 
[Note:  This is the new definition, amended by the Payment of Gratuity (Amendment) Act, 
2009, w.e.f 3-4-1997.[Section 2(e)], This amendment in the definition made teachers 
entitled to gratuity vide Notification SO1080, dated  3-4-1997 by Ministry of Labour and 
Employment] 
Decision given by the court in the case Khanderan P. Rajopadhyee v. United Western 
Bank Ltd.1984 Lab IC 1910, laid that mere nomenclature of a post is not of much 
5.4 Business Law, Ethics and Communication 
 
consequence and what is to be seen is the nature of the duties performed by the 
employee to conclude him as an employee within the meaning of section 2(e) of the Act. 
A company director not having a ultimate control over the affairs of management of the 
company will be considered as an employee under the Act [Monitron Securities (p) Ltd. v. 
Mukundlal Khushalchand (2002) 1 cur LR 507 Guj] 
(4) Employer Means: 
? In relation to any establishment, factory, mine, oilfield, plantation, port, railway 
company or shop –  
(i) Belonging to, or under the control of the Central Government or a State 
Government a person or authority appointed by the appropriate Government 
for the supervision  and control of employees, or where no person or authority 
has been so appointed, the head of the Ministry or the Department concerned, 
(ii) Belonging to, or under the control of any local authority, the person appointed 
by such authority for the supervision, and control of employees or where no 
person has been so appointed, the chief executive officer of the local authority, 
(iii) In any other case, the person, who, or the authority which has the ultimate control 
over the affairs of the establishment, factory, mine, oilfield, plantation, port, railway 
company or shop, and where the said affairs are entrusted to any other person, 
whether called a manager, managing director or by any other name, 
- there such person shall be the employer[Section 2 (f)] 
(5)  Factory: ‘factory’ has the meaning assigned to it in clause (m) of Section 2 of the 
Factories Act, 1948 (63 of 1948); [Section 2 (g)] 
(6)  Family: In relation to an employee, shall be deemed to consist of –  
? In the case of a male employee, himself, his wife, his children, whether married or 
unmarried, his dependent parents (and the dependent parents of his wife and the 
widow) and children of his predeceased son, if any, 
? In the case of a female employee, herself, her husband, her children, whether 
married or unmarried, her dependent parents and the dependent parents of her 
husband and the widow and children of her predeceased son, if any; 
Explanation:  
Where the personal law of an employee permits the adoption by him of a child, any child 
lawfully adopted by him shall be deemed to be included in his/her family, and where a 
child of an employee has been adopted by another person and such adoption is, under 
the personal law of the person making such adoption, lawful, such child shall be deemed 
to be excluded from the family of the employee. [Section 2 (h)] 
(7) Retirement: Means termination of the service of an employee otherwise then on 
superannuation; 
 The Payment of Gratuity Act, 1972 5.5 
 
 [Section 2 (q)] 
(8) Superannuation: In relation to an employee, means the attainment by the employee of 
such age as is fixed in the contract or conditions of service at the age on the attainment 
of which the employee shall vacate the employment. [Section 2 (r)] 
(9)  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 employments and which are paid or are 
payable to him in cash and includes D.A. but does not include any bonus, commission, 
house rent allowance, overtime wages and any other allowances. [Section 2 (s)] 
Free food supplied to an employee is merely an amenity. Hence its value cannot be 
included in the wages for the purpose of calculating the amount of gratuity payable under 
the Act. [N. Sivasadan v. Appellate Authority under the Payment of Gratuity Act(1997)1 
LLJ1155 Mad DB] 
(10) Continuous Service 2: [Section 2A)]: Continuous service means service without 
interruption or break. 
 For the purposes of this Act –  
? An employee shall be said to be in continuous service for a period if he has, for that 
period, been in uninterrupted service, including service which may be interrupted on 
account of sickness, accident, leave, absence from duty without leave (not being 
absence in respect of which an order treating the absence as break in service has 
been passed in accordance with the standing orders, rules or regulations governing 
the employees of the establishment), lay-off, strike or a lock-out or cessation of 
work not due to any fault of the employee, whether such uninterrupted or interrupted 
service was rendered before or after the commencement of this Act;[ Section 2A(1)] 
? Where an employee (not being an employee employed in a seasonal 
establishment) is not in continuous service within the meaning of clause (1), for any 
period of one year or six months, he shall be deemed to be in continuous service under 
the employer –  
 For the said period of one year, if the employee during the period of twelve 
calendar months preceding the date with reference to which calculation is to be 
made, has actually worked under the employer for not less than –  
i One hundred and ninety days, in the case of any employee employed below, 
the ground in mine or in an establishment which works for less than six days in 
a week; and 
ii Two hundred and forty days, in any other case; [ Section 2A clause (2) (a)] 
 For the said period of six months, if the employee during the period of six 
calendar months preceding the date with reference to which the calculation is to be 
made, has actually worked under the employer for not less than –