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Payment of Gratuity Act was enacted  with an objective to provide a Scheme for payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments and matters connected therewith or incidental thereto. It is welfare legislation and intended to recognise and reward those workmen who have rendered long and faithful service to the employer.

Applicability of the Act:

This Act is applicable to all states (except Jammu and Kashmir) and particularly to every factory, mine, oilfield, plantation, port, Railways Company. It is also applicable to every shop or establishment in which ten or more employees are/ were employed on any day during the preceding 12 months. The Act continues to be applicable to any establishment or institution even if the number falls below 10 subsequent to its coverage. Central Government may by notification extend the coverage to any establishment/institution.


Definition of employee:

It is very important to understand the definition of employee under the Act. Employee means any person (other than an apprentice) employed on wages  to do any skilled, semi- skilled, or unskilled, manual, supervisory, technical or clerical work, whether the terms of such employment are express or implied and whether or not such person is employed in a managerial or administrative capacity. However it does not include any such person who holds a post under the Central Government or a State Government and is governed by any other Act or by any rules providing for payment of gratuity.


Supreme Court in the case of Ahmedabad Pvt. Primary Teachers' Association, Appellant v. Administrative Officer and others, Respondents, AIR 2004 SC 1426 held that teachers as a class do not fall under the definition of employee as they can not be categorized as skilled or semiskilled or unskilled or managerial or administrative capacity. This decision surprised many as the Gratuity Act is extended to educational institutions employing ten or more persons. Supreme court however in the end said that this interpretation may not be used to deprive the retrial benefit, if some organisation has been extending such benefit.

When Gratuity is payable?

Gratuity shall be payable to an employee on the termination of his employment. Now let us now see look at those situations. An employment may come to end on an employee attaining retirement age fixed by the organisation which may be either 58 years or 60 years which is known as superannuation. Similarly on retirement or on submission of resignation which is a voluntary act and it may happen any time during the term of employment but before superannuation. Some times death or disablement due to accident or disease may also bring an end to employment.


Readers may carefully note the words “termination” and “continuous service for not less than 5 years”  used in Section 4 of the Act.


What is the meaning of Continuous service?

Readers may note that the primary condition for claim of gratuity is completion of not less than 5 years of service and at the same time in each of those years the employee must also fulfill the requirement of continuous service.


Now let us go deep into the meaning of continuous service. Section 2A  indicates  that  'Continuous service' means  an uninterrupted service and includes service interrupted by sickness, disablement due to accident during the course and arising out of employment, earned leave, maternity leave in the case female (max 12 weeks)lay off, strike or a lock oat or cessation of work not due to any fault of the employee concerned.


If the service is interrupted by causes other than those enumerated above, it will not be deemed to be continuous.

Section 2-A further provides that the employee shall be deemed to be in continuous service, if  for minimum number of days the employee has been  actually employed and worked. In the case of  case of persons employed below the ground of a mine, atleast 190 days and in any other case for atleast 240 days in a year employee must have worked.


If the period to be reckoned is 6 months then the above minimum number of days will be not less than 95 days in the case of mines and 120 days in other cases.  


Let us now find out the logic behind requirement of continuous service. It would be obvious from Section 2A that Legislation intends to give some relaxation with regard to actual working days. One form of relaxation is by fixing the number of minimum working days and the other by allowing breaks of service which are genuine and necessary during the period of service.


In Mettur Beardsell Ltd., Madras v. Regional Lab. Commissioner, Madras .,1998 (3) LLN 414, when an employee has put in a service of 4years 10 months and 18 days, it held that the employee will be entitled to gratuity. The author is of the view that this decision is not as per the requirement stipulated in Section 4(1) for claiming eligibility for gratuity. It is clear from the section that gratuity can be claimed only on completion of not less than 5 years of continuous service. Employers should not litigate and waste money on such border cases contesting the issue. Mostly it is seen courts will be liberal and  favour workmen in welfare legislations such as ESI,PF, Gratuity etc.Readers may refer to the case  Lalappa Lingappa. v. Lsxmi Vishnu Textile Mills in which SC held as follows:

“In construing a social welfare legislation, the court should adopt a beneficent rule of construction; if a section is capable of two construction, that construction should be preferred which fulfils the policy of the Act, and is more beneficial to the persons in whose interest the Act has been passed”


Exception to Minimum service or continuous service:

In the case of termination of employment by death or disablement due to accident or disease, the requirement of continuous service of 5 years for claiming gratuity need not be complied with. (First proviso to section 4(1)). For the purpose this section, Disablement means such disablement which incapacitates an employee for doing the work which he was capable of doing before the accident.


How gratuity is calculated ?

Let us shift our focus to the manner of calculating the amount of gratuity payable. Sequential  steps are:


1. First arrive at the number of completed years of service. Then any part of period which is less than 6 months is to be ignored and more than 6 months is to be treated as one full year of service.

2. Check whether the employee fulfils the requirement of continuous service in each year of completed service..


3. Only last drawn basic wages and DA (excluding all allowances) should be considered for arriving  15 days salary. Wages  should be calculated by dividing the last drawn monthly salary by 26 days  and not by 30 days.Readers may refer to judgment of Supreme court  in case Jeewanlal (1929) Ltd. v. Appellate Authority under the Payment of Gratuity Act" AIR 1984 SC 1842.


4. In the case of piece rated wages, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment( excluding overtime wages). In the case of employees in a seasonal establishment, the employer shall pay the gratuity at the rate of seven days' wages for each season.

5. Use the formula:

 Last drawn monthly Basic wages  x 15 days x no. of completed years.

 26 days


Ceiling on Gratuity and tax exemption

The  Maximum amount of gratuity payable is as per ceiling under Section 4(3) of the Act is Rs. 10 lakhs and  tax exemption is also available upto a limit of 10 lakhs. If there is any dispute as to the amount of gratuity payable, or about admissibility of any claim, or the person entitled to receive the gratuity, the employer shall deposit with the controlling authority such amount he regards as payable.


Nomination and nominee or Legal heirs’ right:

Employee can not nominate any other person, if he has a family as it is mandatory. However there can be two nominees from his family to receive gratuity payment in the case of death of employee (Section 6).In the absence of nomination it will be paid to the legal heirs(Second proviso to Section 4(2))


Gratuity is protected:

Gratuity payable under the Act can not be attached in execution of any decree or order of civil, revenue or criminal court. Gratuity if not paid, the aggrieved person on complaint through controlling authority /Collector  recover gratuity  with interest compounded.


When gratuity can  be forfeited?

The gratuity of an employee can be forfeited if employment is terminated for any Act of willful omission or negligence causing any damage or loss of property to the employer to the extent of damage. Gratuity can be fully forfeited, if employee involves in riotous behavior or disorderly conduct or commits any other act of violence or offence  involving moral turpitude in the course of his employment.


Conclusion: Since it is a welfare legislation, every employer should comply with the Act in letter and spirit and should not withhold on frivolous grounds or deprive payment. If an employer fails to pay gratuity, he shall be punishable with imprisonment for a term between six months to two years or a fine ranging between Rs.10,000 to Rs.20,000/- or both.

G S Rao,

DGM(Legal),OCL India Limited

Published by

G S Rao
(Deputy General Manager)
Category Others   Report

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