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Purpose and Importance of the Payment of Gratuity Act
The Payment of Gratuity Act, 1972 provides a statutory right to employees, mandating that they are entitled to gratuity after completing a minimum of five years of continuous service. The fundamental purpose of the Act is to ensure that employees who have worked for an extended period are compensated for their service once they leave the organization. Gratuity, being a form of retirement benefit , helps employees secure their financial future, especially during the transition period when they leave active service. This Act applies to establishments with 10 or more employees and covers workers in various sectors, including factories, mines, oilfields, plantations, shops, and commercial establishments. The Act ensures fair treatment to employees and upholds their right to receive an amount that is a reflection of the length of service and wages earned. Gratuity serves as an incentive for employees to stay with an employer for a longer period, thereby reducing turnover rates.
Section 1: Short title, extent, and commencement
Short Title : This Act may be called the Payment of Gratuity Act, 1972. Extent : The Act applies to the entire territory of India. Commencement : The Act came into force on 16th September 1972.
Section 2: Definitions
This section provides key definitions used throughout the Act. Some important definitions are: “Appropriate Government” : The term refers to the Central Government in certain establishments, while for others (like factories and mines), the State Government is the appropriate authority. “Employer” : Any person who has control over the employment of employees and is responsible for paying wages to them. “Employee” : A person employed for wages in an establishment, including workers in factories, mines, oilfields, plantations, shops, etc. “Gratuity” : The sum of money paid by the employer as a form of gratitude for the service rendered by the employee. “Continuous Service” : A term defining the period an employee has been continuously employed without a break. The definition is further expanded in Section 2A.
Section 3: Payment of Gratuity
Gratuity is payable to every employee who: o Completes five years of continuous service. o In case of death or disablement , the 5-year service condition is waived. Gratuity is paid as a token of gratitude for long and faithful service.
Section 4: Amount of Gratuity
This section defines how the gratuity is calculated:
- Gratuity formula : Gratuity=(Last drawn wages× 15divided by 26)×Number of years of service Where: o Last drawn wages = Basic salary + Dearness Allowance (DA). o 15/26 = It is the number of days for which wages are paid for each completed year of service. o 26 = Total working days in a month (standard). o The number of years of service is rounded off to the nearest full year.
- Maximum Limit : o Initially, the gratuity amount was capped at ₹3.5 lakhs. o This limit was later increased to ₹10 lakhs in 2010, and ₹20 lakhs in 2018.
- Payment of Gratuity : o The employer is responsible for calculating and paying the gratuity amount to the employee or nominee upon retirement, resignation, death, or disablement.
Section 4(1): Payment of Gratuity to Employees on Termination
This provision specifies the circumstances in which the gratuity is paid to employees:
- Upon Retirement or Superannuation : If the employee retires or reaches the age of superannuation.
- On Resignation : If the employee voluntarily resigns after completing 5 years of continuous service.
- On Death or Disablement : Even if the employee does not complete 5 years, gratuity is still payable in case of death or permanent disablement.
- Termination : The employee must complete 5 years of service to be eligible for gratuity unless the termination is due to misconduct.
Section 4(2): Gratuity on Death/Disablement
Section 7: Determination of the Amount of Gratuity
The employer is required to determine the amount of gratuity payable. They must notify the employee or their legal heirs/nominee of the amount. The employer must then pay the gratuity within 30 days from the date it is due. If the employer fails to do so, interest at the rate of 10% per annum is levied from the due date until the date of payment.
Section 8: Recovery of Gratuity
If an employer fails to pay gratuity within the stipulated 30 days, the employee/nominee can approach the controlling authority (typically a labor commissioner). The controlling authority may recover the gratuity, along with any penalties.
Section 9: Penalties
For non-payment or wrongful refusal to pay gratuity, the employer may be fined up to ₹10,000 or imprisoned for up to 1 year. Employers can be penalized for providing false information or obstructing the process of paying gratuity.
Section 10: Power to Make Rules
The appropriate government has the authority to frame rules to implement the provisions of this Act. These rules include procedures for determining the amount of gratuity, payment deadlines, and other operational aspects.
Section 11: Protection of Gratuity
Gratuity, once paid, cannot be attached by creditors. It is exempt from any court orders, such as in the case of bankruptcy.
Section 12: Rights of Employees Not Affected
The Act does not affect any right of the employee to gratuity or other payments under any other law or contract.
Section 13: Delegation of Powers
The appropriate government may delegate its powers or functions under this Act to any authority or officer to ensure proper implementation.
Section 14: Act to Override Contracts and Other Laws
In case there is a conflict between the provisions of the Act and any contract, agreement, or other law, the provisions of the Act will prevail.
Section 15: Continuity of Service
An employee's continuous service is not considered broken by certain absences such as: o Sickness o Leave o Layoff o Lockout o Strike (under certain conditions)
Section 16: Interpretation
If any ambiguity arises regarding the interpretation of any provision of the Act, the appropriate government has the final say in its interpretation.
Section 17: Power to Remove Difficulties
This section empowers the appropriate government to take measures to remove any difficulties faced in implementing the Act.
Case laws
Bharat Gold Mines Ltd. v. Regional Labour Commissioner (1987) In this case, the Supreme Court held that gratuity is a statutory right of the employee and not a gift from the employer. The Court clarified that an employee has the right to receive gratuity once they fulfill the required conditions of service, irrespective of any terms in the employment contract. The Court emphasized that gratuity should not be denied except for the specific grounds of misconduct , as mentioned in Section 4(6). This ruling reinforced that gratuity is not merely a goodwill gesture but a legal entitlement for employees. Union Bank of India v. C.G. Ajay Babu (2018) The Supreme Court in this case dealt with the issue of forfeiture of gratuity in the event of an employee’s dismissal. The Court ruled that gratuity could only be forfeited if the misconduct had a direct relationship with the employee's duties. This decision clarified that employees cannot be denied gratuity based on wrongful dismissal unless the misconduct was related to fraudulent or dishonest behavior connected to the employee's role.
