The Payment of Gratuity Act 1972

The Payment of Gratuity Act, 1972

Introduction Important Definitions Authorities under the Act Payment & Provisions Nomination Case law Studies

Introduction & Preliminary

Originally gratuity was considered as an amount given freely and could not be demanded as a matter of right by the employees. In many cases gratuity was given as a matter of favor. Employees used to pay gratuity as a reward for long, continuous and meritorious service.

 Various courts recognized the claim for gratuity and awarded gratuity schemes. This custom of payment of gratuity became, in the later days, a matter of right for the employees. With a view to ensure a uniform pattern of payment of gratuity to the employees throughout the country, the Central Government enacted the Payment of Gratuity Act.

Important Definitions

Appropriate Government [S.2(i)] is the Central Government in relation to:

a) Railways
b) Air transport services

c) Mines and oil fields

The State Government is the Appropriate Government in all other cases.

 Employer [S.2(g)]: meansi. In relation to an industry carried on by or under the authority of any department of the Central Government or a State Government the authority prescribed in this behalf;

ii. In relation to an industry carried on by or on behalf of a local authority the Chief Executive Officer of that authority.

Important Definitions
Employee [S.2(i)]: means any person:
a. b. c. d. e. f. Who is employed for hire or reward, To do any work, Skilled or unskilled, Manual or clerical, In Scheduled Employment, In respect of which minimum wages have been fixed.

But, it does not includea. Value of house accommodation, medical and other facilities, amenities and travelling, medical and other allowances; b. Contribution paid by the employer to any pension or provident fund; c. Any special expenses and gratuity paid at termination of employment.

Important Definitions
Wages [S.2(s)] means all remuneration (whether by way of salary, allowances or otherwise) expressed in terms of money, or capable of being so expressed which would, if the terms and conditions of employment, whether expressed or implied, be payable to a person in respect of his employment or any work done in such employment, and includesa. Any remuneration payable under any award or settlement between the parties or order of court;

a. Any remuneration to which the person is employed is entitled in respect of overtime work, or holidays or leave period; b. Any additional remuneration payable (bonus);
c. Any sum paid on the event of termination of employment; d. Any sum to which the a person is entitled under any scheme which is framed under a law currently in force.

Important Definitions
Retirement [Section 2(q)]:
It means the termination of service of an employee otherwise than on superannuation. This definition is framed in the widest sense. Retrenchment is also termination of service. It implies discharge of surplus labour.

Superannuation [Section (2)]:

In relation to an employee, it means The attainment by the employee of such age as is fixed in the sontract, or conditions of service, as the age on the attainment of which the employee shall vacate the employment.

Authorities Under The Act

Inspectors [Section 7(A)]
a) The Appropriate Government may appoint as many inspectors as it deems fit. b) The Appropriate Government may define the area to which the authority of an inspector shall extend. c) Every inspector shall be deemed to be a public servant.

 Powers of Inspectors [Section 7(B)]: An inspector may

a) Require an employer to furnish any information. b) Enter and inspect any premises or place in any factory, shop or establishment for the purpose of examining any register, record or notice or other documents, in relation to the employment of any person or the payment of gratuity to the employees c) Examine the employer or any person who is present in such premises.

 Controlling Authority [Section 3]

The Appropriate Government by a notification may appoint any officer to be the controlling authority who shall be responsible for Administration of this Act. Different controlling authorities may be appointed for different areas.

Powers of Controlling Authorities [Section 7(5)]

a) Enforcing the attendance of any person or examining him on oath. b) Requiring the discovery and production of documents. c) Receiving evidence on affidavits. d) Issuing commissions for the examination of witnesses.

Payment & Provisions

Circumstances under which Gratuity becomes payable to an employee [Section 4]
a) On termination of employment after he has rendered continuous service of not less than 5 years, on his superannuation, retirement, resignation, death or disablement due to accident or disease. b) In case of death of employee, the gratuity payable to him shall be paid to his nominee. If there is no nomination then to his legal heirs.

 If any nominee or heir is a minor, the share of such minor shall be deposited with the controlling authority, who shall invest the same for the benefit of such minor in such Bank or Financial Institution as may be prescribed, until the minor reaches the age of majority.

 Rate of Gratuity [Section 4(2)]

a) An employee who is eligible for gratuity shall be paid for every completed year of service or part of it in excess of 6 months, gratuity at the rate of 15 days wages for each completed year of service. b) Such gratuity is to be calculated on the basis of the rate of wages last drawn by the employee. c) In case of a piece rated employee, the rate of daily wages shall be calculated o the basis of average of the total wages earned by him for a period of 3 preceding months before the termination of his employment.

a) In case of an employee employed in as seasonal establishment, the rate of gratuity payable to him shall be 7 days wages for each completed season. b) In the case of a daily rated employee, he is to be paid gratuity at the rate of daily wages multiplied by 15 for every year of service. c) In case of a monthly rates employee, the daily rate of wages is arrived at by dividing the rate of wages last drawn by 26. This rate is to be multiplied by 15 for deciding the quantum of gratuity payable for a year.

 Maximum Amount of Gratuity [Section 4(3)]

Payable to an employee shall not exceed Rs.3,50,000 (w.e.f. 24.9.97)

Employment after disablement [Section 4(4)]

In case of an employee employed after disablement, the gratuity shall be calculated in 2 parts: a) For the period of employment before disablement and b) For the period after disablement at the reduced rate.

 Better Gratuity Scheme [Section 4(5)] a) If the employer has his own gratuity scheme which is better than the scheme provided under this Act, then the employees shall be entitled to gratuity as per that scheme. b) The Appropriate Government has powers to exempt by a notification any establishment, factory, mine, oil field, plantation, port, railway company or shop if the employees are gratuity and pensionary benefits under this Act.

 Forfeiture of Gratuity [Section 4(6)]

It gives the circumstances in which the gratuity payable to an employee may be forfeited either partly or wholly. 1) Partial Forfeiture: The gratuity of an employee whose services are terminated for any act, willful omission, negligence causing any damage, loss to, or destruction of property belonging to the employer; only to the extent of damage or loss so caused.

2) Full Forfeiture: The gratuity payable to an employee can be wholly forfeited: a) If the services of an employee are terminated for his riotous or disorderly behaviors or any other act of violence on his part, or b) If the services are terminated for any act which constitutes an offence involving moral turpitude; provided, that such an offence is committed by him in the course of his employment.

 Determination of Gratuity [Section 7] a) As soon as the gratuity becomes payable, the employer shall determine the amount of gratuity and give notice in writing to that person to whom the gratuity is payable. b) Notice is also given to the controlling authority specifying the amount of gratuity so determined. c) Calculation of gratuity is to be done by the employer whether an application has been made or not.

 Mode of Payment of Gratuity [Sections 7(3),(3A)]

a) The employer shall arrange to pay the amount of gratuity within 30 days from the date it becomes payable to the person. b) If the gratuity is not paid in time the employer shall pay interest at the rate notified by the Central Government. c) No interest will be paid if the delay is due to the fault of the employee and the employer has obtained permission in writing from the controlling authority.

 Dispute as to Gratuity [Section 7(4)] a) If there is any dispute abouti. Amount of gratuity payable to an employee. ii. Admissibility of any claim. iii. As to the person entitled to gratuity, the employer shall deposit the amount which he admits is payable with the controlling authority. b) Where there is a dispute about the above matters the employee can also make an application to the controlling authority for taking necessary action.

c) The controlling authority, after making the enquiry and giving the amount of gratuity payable to the employee. Further, as a result of the enquiry if any additional amount is payable to the employee, he shall direct the employer to pay the additional amount. d) The controlling authority shall pay the amount deposited including the additional amount, if any, to the person entitled.

 Recovery of Gratuity a) If the employee is not paid gratuity by the employer the employee can make an application to the controlling authority for the same. The controlling authority, if satisfied, shall issue a certificate for recovery of the amount to the collector. b) The collector shall recover the amount as arrears of land revenue. c) Such arrears are payable to the employee together with compound interest at such rate specified by the central government.

d) This amount is to be recovered after the date of expiry of the prescribed time. e) The controlling authority, before issuing a certificate, shall give a reasonable opportunity for the employer of showing cause against issue of the certificate. f) The amount of interest payable shall not exceed the amount of gratuity. g) The interest becomes payable only when the collector issues a Certificate of Recovery of the dues as a public demand.

Nomination
Meaning- naming the person or persons, who shall be entitled to the amount of gratuity if the employee dies before receiving the amount. Family [Section 2(h)]: in relation to an employee, shall be deemed to consist of: 1) Male Employees:
a) b) c) d) e) f) Himself. His wife. His children (whether married or unmarried) His dependent parents. Dependent parents of his wife. Widow and children of his predeceased son, if any.

2) Female Employees: a) Herself. b) Her husband. c) Her children (whether married or unmarried) d) Her dependent parents. e) Dependent parents of her wife. f) Widow and children of her predeceased son, if any.

Nomination
Every employee under this Act, is required to make a nomination as per the following rules:
1) Employee to make nomination: Every employee who has completed service of 1 year shall make a nomination within 30 days after completing 1 years service. 2) More than 1 nominee: An employee

can, in his nomination, distribute the amount of gratuity between more than one nominee.

3) Family members to be nominated: If the employee has a family at the time of nomination, the nomination can be made favoring member or members of his family.
4) No Family: If the employee does not have a family, then nomination can be made in favor of any person.

5) Family after nomination: If the employee acquires a family afterwards, such nomination becomes invalid. The employee shall make a fresh nomination within 90 days in favor of family members. 6) Modification of nomination: Can be done by the employee at anytime, after giving a notice to the employer. 7) Death of Nominee: If the nominee does before the employee, then employee shall make a fresh nomination.

8) Safe custody of nomination: Every: a) Nomination b) Fresh nomination c) Alteration of nomination, as the case may be, shall be sent by the employee to the employer, who shall keep the same in his safe custody. Further, it shall take effect from the date of receipt by the employer.

Case Law Studies

Indian Hume Pipe Co. Ltd. V/s Workmen
HELD:- The general principle underlying gratuity schemes is that by faithful service over a long period the employee is entitled to claim a certain amount as retirement benefit.

Delhi Cloth and General Mills Ltd. V/s Workmen

HELD:- The object of providing a gratuity scheme is to provide a retiring benefit to the workmen who have rendered long and unblemished service to the employer and thereby contributed to the prosperity of the employer.

Case Law Studies

DBR Mills Ltd. V/s Appellate Authority
HELD:- Cessation of work by the employee on these days cannot be said to be due to any fault of the employee. Therefore, he would be deemed in continuous service if he has been actually employed by an employer during the 12 months, immediately preceding the year for not less than 240 days in an establishment.

Patel Hiralal Ramlal & Co. Vs. Smt. Chandbib Pirubhai

HELD:- The workmen carrying raw materials from the employers premises to their home and rolling up bidis at their home for manufacturer are employees, and as such are entitled to claim and payment of gratuity.