Gratuity- Payment of Gratuity Act 1972 | Labour and Industrial Law - CLAT PG PDF Download

Introduction

• Gratuity is a monetary benefit provided by an employer to an employee for continuous service of five years or more. It is typically given at the time of employee separation or retirement.
• The main purpose of gratuity is to support workers after retirement, regardless of the reason for retirement, such as superannuation, physical disability, or impairment.

• Gratuity is considered a right for industrial workers, but the rules surrounding its payment were unclear until the Payment of Gratuity Act was enacted in 1972.
• The Act aims to provide a uniform scheme for gratuity payment to employees in various sectors, including factories, mines, oil fields, plantations, ports, railways, and shops.
• Gratuity is different from pension and is based on the length of service and the last drawn salary of the employee.
• In legal cases, such as Delhi Cloth and General Mills Co. Ltd. V. Their Workmen and Indian Ex-services League and others v. Union of India and others, the principles and rules regarding gratuity have been clarified and enforced.
• The concept of gratuity is distinct from pension, and claims for gratuity are based on the rules and regulations set forth in the Act.

Scope and Application

• The Payment of Gratuity Act, 1972(Gratuity Act) applies to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops, or other establishments with ten or more employees.
• Gratuity is fully funded by the employer, with no contribution from the employee's salary.
• To be eligible for gratuity under the Gratuity Act, an employee must have at least five full years of service with the current employer. However, if an employee passes away or becomes disabled due to an accident or illness, gratuity must be paid regardless of the length of service.

Definitions

Section 2(a) - "Appropriate Government"

• Appropriate Government: Refers to the government authority responsible for overseeing the establishment in question.

Section 2(b) "completed year of service"

• "Completed year of service" refers to continuous service for one year.

Section 2(c) "continuous service"

• "Continuous service" is defined in Section 2(A) of the Payment of Gratuity Act.

Section 2(e) "employee"

• "Employee" refers to any person (excluding apprentices) employed for wages in various types of work, manual or otherwise, in connection with the work of a factory, mine, oilfield, plantation, port, railway company, shop, or other establishment covered by the Act.
• It does not include individuals holding posts under the Central or State Government and governed by other Acts or rules providing for gratuity payment.

In Secretary O.N.G.C. Ltd. V. V.U. Warrier

• The Supreme Court ruled that the respondent, holding the post of Additional Director (Finance and Accounts) in O.N.G.C. Ltd. with a salary exceeding Rs. 2500/-, was not considered an 'employee' under Section 2(e) of the Payment of Gratuity Act, 1972.

In E.I.D. Parry (I) Ltd. V. G. Omkar Murthy and others

• The respondent employees, who worked for the appellant between 1958 and 1984, claimed a difference in gratuity between what they received and what was payable under Section 40(3) of the Andhra Pradesh Shops and Establishments Act, 1966.
• The Supreme Court noted that when the respondents voluntarily retired on October 1, 1984, the Payment of Gratuity Act, 1972 did not apply to them as they were earning more than Rs. 1600 per month according to Section 2(e) of the Central Act.
• Additionally, the gratuity under the State Act was found to be more beneficial than under the Central Act, making the issue of repugnancy of the State Act irrelevant.

Section 2(f) "Employer"

• "Employer" refers to the person or authority in charge of supervision and control of employees in establishments like factories, mines, oilfields, plantations, ports, railway companies, or shops.
• It includes government-appointed individuals or authorities for institutions under Central or State Government control, local authority-controlled establishments, and others with ultimate control over establishment affairs.

Section 2(h) "family"

• "Family" of an employee includes dependents like spouse, children, parents, and in-laws, with provisions for adopted children.

Section 2(s) "wages"

• "Wages" encompass all emoluments earned by an employee while on duty or leave, including dearness allowance, but excluding bonuses, commissions, and other allowances.

In Kirloskar Brothers Ltd. v. Appellate Authority (under Payment of gratuity Act) and other

• The employees claimed that the incentive bonus should be included in wages for calculating gratuity.
• The authority under the Payment of Gratuity Act and the High Court agreed that the incentive bonus was part of wages as per Section 2(s) of the Act.
• The High Court ruled that the definition of 'wages' excludes bonuses, commissions, and other allowances, making incentive bonus/production bonus not includable in wages under the Act.

Considerations towards ascertaining Gratuity

• Section 2-A outlines the continuous service criteria for gratuity eligibility under the Payment of Gratuity Act.
• Sub-section 1 defines continuous service, including interruptions due to sickness, accidents, leave, and other specified reasons.
• Sub-sections 2 and 3 provide conditions for deemed continuous service based on actual workdays for employees not in continuous service, with specific criteria for seasonal establishments.

Section 4 - Payment of Gratuity

• Gratuity is payable to an employee after five years of continuous service upon termination due to superannuation, retirement, resignation, death, or disablement.
• In case of death, gratuity is paid to the nominee or heirs.
• For every completed year of service or part exceeding six months, gratuity is calculated at fifteen days' wages.
• The gratuity amount cannot exceed ten lakh rupees.
• Employees may receive better gratuity terms under agreements or contracts.
• Gratuity can be forfeited due to misconduct, such as damage to employer's property or disorderly conduct.

Considerations towards ascertaining Gratuity

• Section 2-A outlines the continuous service criteria for gratuity eligibility under the Payment of Gratuity Act.
• Sub-section 1 defines continuous service, including interruptions due to sickness, accidents, leave, and other specified reasons.
• Sub-sections 2 and 3 provide conditions for deemed continuous service based on actual workdays for employees not in continuous service, with specific criteria for seasonal establishments.

Section 4 - Payment of Gratuity

• Gratuity is payable to an employee after five years of continuous service upon termination due to superannuation, retirement, resignation, death, or disablement.
• In case of death, gratuity is paid to the nominee or heirs.
• For every completed year of service or part exceeding six months, gratuity is calculated at fifteen days' wages.
• The gratuity amount cannot exceed ten lakh rupees.
• Employees may receive better gratuity terms under agreements or contracts.
• Gratuity can be forfeited due to misconduct, such as damage to employer's property or disorderly conduct.

For the purpose of claiming gratuity under the Act

• The employer must have rendered continuous service for a period of 5 years.
• Where such period of service has not been rendered gratuity shall not be paid under the Act.
• Where an employee claims gratuity on the basis of an agreement it was held in D.S.Purwar v. Elphinstone Spinning and Weaving Mills, that claim of gratuity on the basis of an agreement is outside the scope of adjudication under the Payment of Gratuity Act, 1972.

In Suchil Kumar Maloo v. Gujarat Raffia Industries Ltd

• The Gujarat High Court ruled that under Section 4 of the Payment of Gratuity Act, any employee with a minimum of five years of service is eligible for gratuity upon superannuation, retirement, resignation, death, or disablement due to accident or disease.
• The key consideration is whether the employee has rendered continuous service for at least five years at the time of termination, regardless of any other factors.
• The amendment in Section 2(e) of the Act, which removed the wage ceiling for coverage, aims to broaden the scope and extend gratuity benefits to all employees.

In Duncun Agro Industries Ltd. v. Subanna B.

• The determination was whether workmen were entitled to gratuity for service rendered before the Act came into force.
• Gratuity is payable to an employee with continuous service of not less than five years.
• Continuous service, as per Section 2(c), includes service before or after the Act's commencement.
• Thus, workmen are entitled to gratuity for service rendered before the Act's enforcement.

Section 7 - Determination of the amount of gratuity

• A person eligible for gratuity under this Act or an authorized representative must submit a written application to the employer for gratuity payment.
• Upon gratuity becoming payable, the employer must determine the amount and notify the person entitled and the controlling authority.
• The employer is required to pay the gratuity amount within thirty days from the date it becomes payable.
• If the gratuity amount is not paid within the specified period, the employer must pay simple interest on the amount from the date of becoming payable to the date of payment.
• No interest is payable if the delay is due to the fault of the employee and the employer has obtained permission from the Controlling Authority for the delayed payment.
• In case of disputes regarding the gratuity amount or claims, the employer must deposit the admitted amount with the Controlling Authority.
• Any party involved in the dispute can apply to the Controlling Authority for resolution.
• The Controlling Authority will conduct an inquiry and determine the disputed matters, directing the employer to pay any found payable amount to the employee.
• The Controlling Authority has the authority to pay the deposited amount, including any excess, to the entitled person.
• For inquiries, the Controlling Authority has powers similar to a Court under the Code of Civil Procedure, including enforcing attendance, requiring document production, and receiving evidence on affidavits.
• Inquiries are considered judicial proceedings under the Indian Penal Code.
• Aggrieved parties can appeal against orders from the Controlling Authority within sixty days.
• Extensions for filing appeals may be granted by the appropriate Government or appellate authority.
• Appeals can confirm, modify, or reverse the Controlling Authority's decision.

In Gurunath Vithal Thamse v. National Textile Corporation(N.M).

• The petition for gratuity payment was rejected by the controlling authority, and this decision was upheld by the appellate authority under the Payment of Gratuity Act, 1972.
• The rejection was based on the application being filed three years after the employee's superannuation.
• The High Court noted that the Legislature did not specify a limitation period for approaching the controlling authority.
• The controlling authority was deemed to have exceeded its jurisdiction by rejecting the employee's claim.

Section 8 - Recovery of Gratuity

• If an employer fails to pay the gratuity amount due under this Act within the stipulated time to the entitled person, the controlling authority will, upon receiving an application from the aggrieved person, issue a certificate for the owed amount to the Collector.
• The Collector will recover the amount, along with compound interest from the date of expiry of the prescribed time, as arrears of land revenue and pay it to the entitled person.
• Before issuing the certificate, the controlling authority will give the employer a reasonable opportunity to show cause against the issuance

Formula for Calculation of Gratuity
Gratuity in India is calculated using the formula:
Gratuity = Last Drawn Salary x 15/26 x No. of Years of Service

Notes: The ratio 15/26 represents 15 days out of 26 working days in a month.
Last drawn salary = Basic Salary + Dearness Allowance.