Social Security Legislations Lesson

LESSON 19

Unit IV– Payment of Gratuity Act, 1972 19-IV

KEY CONCEPTS
n Employee n Appropriate Government n Continuous Service n Gratuity n Family n Retirement
n Superannuation n Wages n Nomination n Claims n Forfeiture of Gratuity

Learning Objectives
To understand:
 The legal frame work provided for law regulating retiral social security benefit in India.
 The legal machinery for securing just and humane social security benefit after he has rendered
continuous service for not less than five years
 The important definitions and concepts
 To familiarize the students with the legal frame work pertaining to payment of gratuity stipulated
under the Payment of Gratuity Act, 1972

Lesson Outline
 Introduction  Rights and obligations of employees
 Application of the Act  Rights and obligations of the employer
 Who is an ‘employee’?  Recovery of gratuity
 Continuous Service  Protection of gratuity
 Retirement  Lesson Round-Up
 Superannuation  Glossary
 Wages  Test Yourself
 When is gratuity payable?
 To whom is gratuity payable
 Amount of gratuity payable
 Nomination
 Forfeiture of gratuity
 Exemptions
 The Controlling Authority and the Appellate
Authority

563
EP-SBI&LL Social Security Legislations

Regulatory Framework
l Payment of Gratuity Act, 1972

The Payment of Gratuity Act, 1972 provides for the payment of gratuity to employees engaged in
factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments and for
matters connected therewith or incidental thereto. It extends to the whole of India.

INTRODUCTION
Gratuity is a lump sum payment made by the employer as a mark of recognition of the service rendered by
the employee when he retires or leaves service. The Payment of Gratuity Act provides for the payment of
gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or
other establishments.
The Payment of Gratuity Act has been amended from time to time to bring it in tune with the prevailing situation.
The Act has been amended to enhance the ceiling on amount of gratuity from Rs.10 lakh to Rs.20 lakh as well
as to widen the scope of the definition of “employee” under section 2 (e) of the Act.

APPLICATION OF THE ACT

Application of the Act to an employed person depends on two factors. Firstly, he should be employed in an
establishment to which the Act applies. Secondly, he should be an “employee” as defined in Section 2(e).
According to Section 1(3), the Act applies to:
(a) every factory, mine, oilfield, plantation, port and railway company;
(b) 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 ten or more persons are employed, or were employed,
on any day of the preceding twelve months;
(c) such other establishments or class of establishments in which ten or more employees are employed,
or were employed, on any day of the preceding twelve months as the Central Government may, by
notification specify in this behalf.
In exercise of the powers conferred by clause (c), the Central Government has specified Motor transport
undertakings, Clubs, Chambers of Commerce and Industry, Inland Water Transport establishments, Solicitors
offices, Local bodies, Educational Institutions, Societies, Trusts 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.
A shop or establishment to which the Act has become applicable once, continues to be governed by it, even if
the number of persons employed therein at any time after it has become so applicable falls below ten. (Section
3A)

WHO IS AN EMPLOYEE?
The definition of “employee” under section 2 (e) of the Act has been amended by the Payment of Gratuity
(Amendment) Act, 2009 to cover the teachers in educational institutions retrospectively with effect from 3rd
April, 1997. The amendment to the definition of “employee” has been introduced in pursuance to the judgment
of Supreme Court in Ahmedabad Private Primary Teachers’Association v. Administrative Officer, AIR 2004 SC
1426.
According to Section 2(e) as amended by the Payment of Gratuity (Amendment) Act, 2009 “employee” means

564
Unit IV – Payment of Gratuity Act, 1972 LESSON 19

any person (other than an apprentice) who is employed for wages, whether the terms of such employment are
express or implied, in any kind of work, manual or otherwise, 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 is
governed by any other Act or by any rules providing for payment of gratuity.

OTHER IMPORTANT DEFINITIONS

Appropriate Government
“Appropriate Government” means:
(i) in relation to an establishment:
(a) belonging to, or under the control of, the Central Government,
(b) having branches in more than one State,
(c) of a factory belonging to, or under the control of the Central Government.
(d) of a major port, mine, oilfield or railway company, the Central Government.
(ii) in any other case, the State Government. [Section 2(a)]
It may be noted that many large establishments have branches in more than one State. In such cases the
‘appropriate Government’ is the Central Government and any dispute connected with the payment or non-
payment of gratuity falls within the jurisdiction of the ‘Controlling Authority’ and the ‘Appellate Authority’
appointed by the Central Government under Sections 3 and 7.
A Company Secretary should know whether the ‘appropriate Government’ in relation to his establishment is the
Central Government or the State Government. He should also find out who has been notified as the ‘Controlling
Authority’ and also who is the ‘Appellate Authority’. It may be noted that any request for exemption under
Section 5 of the Act is also to be addressed to the ‘appropriate Government’. It is, therefore, necessary to be
clear on this point.

Continuous Service
According to Section 2A, for the purposes of this Act:
(1) An employee shall be said to be in ‘continuous service’ for a period if he has, for that period been in un-
interrupted 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), layoff, 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;
(2) 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:
(a) 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:

565
EP-SBI&LL Social Security Legislations

(i) one hundred and ninety days in the case of an employee employed below the ground in a
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;
(b) 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:
(i) ninety five days, in the case of an employee employed below the ground in a mine or in an
establishment which works for less than six days in a week; and
(ii) one hundred and twenty days in any other case;
Explanation: For the purpose of clause (2), the number of days on which an employee has actually
worked under an employer shall include the days on which:
(i) he has been laid-off under an agreement or as permitted by standing orders made under the
Industrial Employment (Standing Orders) Act, 1946, or under the Industrial Disputes Act, 1947,
or under any other law applicable to the establishment;
(ii) he has been on leave with full wages, earned in the previous year;
(iii) he has been absent due to temporary disablement caused by accident arising out of and in
the course of his employment; and
(iv) in the case of a female, she has been on maternity leave; so however, that the total period
of such maternity leave does not exceed Melve weeks.
(3) Where an employee, employed in a seasonal establishment, is not in continues 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 such period if he has actually worked for not less than seventy-five per
cent, of the number of days on which the establishment was in operation during such period.
Service is not continuous, in case of legal termination of service and subsequent re-employment.
Gratuity cannot be claimed on the basis of continuous service on being taken back in service after break in
service of one and a half year on account of termination of service for taking part in an illegal strike, where the
employee had accepted gratuity for previous service and later withdrawn from the industrial dispute (Baluram
v. Phoenix Mills Ltd., 1999 CLA Born. 19).

Family
Family, in relation to an employee, shall be deemed to consist of:
(i) in 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,
(ii) 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. [Section 2(h)]
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 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.

566
Unit IV – Payment of Gratuity Act, 1972 LESSON 19

Retirement
“Retirement” means termination of the service of an employee otherwise than on superannuation. [Section 2(q)]

Superannuation
“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 as the age on the attainment of which the employee shall vacate the
employment. [Section 2(r)]

Wages
“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 employment and which are paid or are payable to him in cash and includes
dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and
any other allowance. [Section 2(s)]

WHEN IS GRATUITY PAYABLE?

According to Section 4(1) of the Payment of Gratuity Act, 1972, gratuity shall be payable to an employee on the
termination of his employment after he has rendered continuous service for not less than five years:
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease.
Note: The completion of continuous service of five years is not necessary where the termination of the
employment of any employee is due to death or disablement.
Further, the period of continuous service is to be reckoned from the date of employment and not from the date
of commencement of this Act (CLA-1996-III-13 Mad.). Mere absence from duty without leave can not be said to
result in breach of continuity of service for the purpose of this Act. [Kothari Industrial Corporation v. Appellate
Authority, 1998 Lab IC, 1149 (AP)]

TO WHOM IS GRATUITY PAYABLE?

It is payable normally to the employee himself. However, in the case of death of the employee, it shall be paid
to his nominee and if no nomination has been made, to his heirs and where any such nominees or heirs 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 other financial institution, as may be prescribed, until such minor attains
majority.

Amount of Gratuity Payable

Gratuity is calculated on the basis of continuous service as defined above i.e. for every completed year of
service or part in excess of six months, at the rate of fifteen days wages last drawn. The maximum amount of
gratuity allowed under the Act is Rs. 20 lakh. The ceiling on the amount of gratuity from Rs. 10 lakh to Rs.20 lakh
has been enhanced by the Payment of Gratuity (Amendment) Act, 2018.

Nomination
An employee covered by the Act is required to make nomination in accordance with the Rules under the Act for
the purpose of payment of gratuity in the event of his death. The rules also provide for change in nomination.

567
EP-SBI&LL Social Security Legislations

Forfeiture of Gratuity
The Act deals with this issue in two parts. Section 4(6)(a) provides that the gratuity of an employee whose
services have been terminated for any act of willful omission or negligence causing any damage or loss to, or
destruction of, property belonging to the employer, gratuity shall be forfeited to the extent of the damage or loss
or caused. The right of forfeiture is limited to the extent of damage. In absence of proof of the extent of damage,
the right of forfeiture is not available (LU- 11-1996-515 MP).
Section 4(6)(b) deals with a case where the services of an employee have been terminated:
(a) for riotous and disorderly conduct or any other act of violence on his part, or
(b) for any act which constitutes an offence involving moral turpitude provided that such offence is
committed by him in the course of his employment.
In such cases the gratuity payable to the employee may be wholly or partially forfeited. Where the service has
not been terminated on any of the above grounds, the employer cannot withhold gratuity due to the employee.
Where the land of the employer is not vacated by the employee, gratuity cannot be withheld (Travancore
Plywood Ind. v. Regional JLC, Kerala, 1996 LU-II-14 Ker.). Assignment of gratuity is prohibited, it cannot be
withheld for non vacation of service quarters by retiring employees (Air lndia v. Authority under the Act, 1999
CLA 34 Born. 66).

EXEMPTIONS
The appropriate Government may exempt any factory or establishment covered by the Act or any employee
or class of employees if the gratuity or pensionary benefits for the employees are not less favourable than
conferred under the Act.

The Controlling Authority and the Appellate Authority

The controlling authority and the Appellate Authority are two important functionaries in the operation of the
Act. Section 3 of the Act says that the appropriate Government may by notification appoint any officer to be a
Controlling Authority who shall be responsible for the administration of the Act. Different controlling authorities
may be appointed for different areas.
Section 7(7) provides for an appeal being preferred against an order of the Controlling Authority to the appropriate
Government or such other authority as may be specified by the appropriate Government in this behalf.

RIGHTS AND OBLIGATIONS OF EMPLOYEES

Application for Payment of Gratuity

Section 7(1) lays down that a person who is eligible for payment of gratuity under the Act or any person
authorised, in writing, to act on his behalf shall send a written application to the employer. Rule 7 of the Payment
of Gratuity (Central) Rules, 1972, provides that the application shall be made ordinarily within 30 days from the
date gratuity becomes payable. The rules also provides that where the date of superannuation or retirement of
an employee is known, the employee may apply to the employer before 30 days of the date of superannuation
or retirement.
A nominee of an employee who is eligible for payment of gratuity in the case of death of the employee shall
apply to the employee ordinarily within 30 days from the date of the gratuity becomes payable to him. [Rule
7(2)]
Although the forms in which the applications are to be made have been laid down, an application on plain
paper with relevant particulars is also accepted.

568
Unit IV – Payment of Gratuity Act, 1972 LESSON 19

The application may be presented to the employer either by personal service or be registered post with
acknowledgement due. An application for payment of gratuity filed after the period of 30 days mentioned
above shall also be entertained by the employer if the application adduces sufficient cause for the delay in
preferring him claim. Any dispute in this regard shall be referred to the Controlling Authority for his decision.

RIGHTS AND OBLIGATIONS OF THE EMPLOYER

Employers Duty to Determine and Pay Gratuity

Section 7(2) lays down that as soon as gratuity becomes payable the employer shall, whether the application
has been made or not, determine the amount of gratuity and give notice in writing to the person to whom the
gratuity is payable and also to the Controlling Authority, specifying the amount of gratuity so determined.
Section 7(3) of the Act says that the employer shall arrange to pay the amount of gratuity within thirty days from
the date of its becoming payable to the person to whom it is payable.
Section 7(3A): If the amount of gratuity payable under sub-section (3) is not paid by the employer within the
period specified in sub-section (3), the employer shall pay, from the date on which the gratuity becomes payable
to the date on which it is paid, simple interest at the rate of 10 per cent per annum:
Provided that no such interest shall be payable if the delay in the payment is due to the fault of the employee
and the employer has obtained permission in writing from the controlling authority for the delayed payment on
this ground.

Dispute as the Amount of Gratuity or Admissibility of the Claim

If the claim for gratuity is not found admissible, the employer shall issue a notice in the prescribed form to the
applicant employee, nominee or legal heir, as the case may be, specifying reasons why the claim for gratuity is
not considered admissible. A copy of the notice shall be endorsed to the Controlling Authority.
If the disputes relates as to the amount of gratuity payable, the employer shall deposit with the Controlling
Authority such amount as he admits to be payable by him. According to Section 7(4)(e), the Controlling Authority
shall pay the amount of deposit as soon as may be after a deposit is made
(i) to the applicant where he is the employee; or
(ii) where the applicant is not the employee, to the nominee or heir of the employee if the Controlling
Authority is satisfied that there is no dispute as to the right of the applicant to receive the amount of
gratuity.

Recovery of Gratuity
Section 8 provides that if the gratuity payable under the Act is not paid by the employer within the prescribed
time, the Controlling Authority shall, on an application made to it in this behalf by the aggrieved person, issue
a certificate for that amount to the Collector, who shall recover the same together with the compound interest
thereon at such rate as the Central Government may be notification, specify, from the date of expiry of the
prescribed time, as arrears of land revenue and pay the same to the person entitled thereto:
“Provided that the controlling authority shall, before issuing a certificate under this section, give the employer
a reasonable opportunity of showing cause against the issue of such certificate:
Provided further that the amount of interest payable under this section shall, in no case, exceed the amount of
gratuity payable under this Act”.

569
EP-SBI&LL Social Security Legislations

Protection of Gratuity
Gratuity has been exempted from attachment in execution of any decree or order of any Civil, Revenue or
Criminal Court. This relief is aimed at providing payment of gratuity to the person or persons entitled there to
without being affected by any order of attachment by an decree of any Court.

LESSON ROUND-UP

l The Act is applicable to every factory, shop or an establishment, in which ten or more persons are
employed, or were employed on any day of the proceeding Melve months.
l A shop or establishment to which the Act has become applicable shall continue to be governed by the
Act even if the number of persons employed falls bellow 10 at any subsequent stage.
l An employee is eligible for receiving gratuity payment only after he has completed five years of
continuous service. This condition of five years is not necessary if the termination of the employment of
an employee is due to death or disablement. The maximum amount of Gratuity payable is Rs. 20 lakhs.
l Each employee is required to nominate one or more member of his family, as defined in the Act, who
will receive the gratuity in the event of the death of the employee.
l Any person to whom the gratuity amount is payable shall make a written application to the employer.
The employer is required to determine the amount of gratuity payable and give notice in writing to the
person to whom the same is payable and to the controlling authority thereby specifying the amount of
gratuity payable.
l The employer is under obligation to pay the gratuity amount within 30 days from the date it becomes
payable. Simple interest at the rate of 10% p.a. is payable on the expiry of the said period.
l Gratuity can be forfeited for any employee whose services have been terminated for any act, willful
omission or negligence causing damage or destruction to the property belonging to the employer. It
can also be forfeited for any act which constitutes an offence involving moral turpitude.
l If any person makes a false statement for the purpose of avoiding any payment to be made by him
under this Act, he shall be punishable with imprisonment for a term which may extend to six months,
or with fine which may extend to ten thousand rupees or with both. If an employer contravenes any
provision of the Act, he shall be punishable with imprisonment for a term which shall not be less than
three months but which may extend to one year or with a fine, which may vary from ten thousand
rupees to twenty thousand rupees.

GLOSSARY

Employee: Under section 2 (e) of the Act it covers the teachers in educational institutions retrospectively.
Retirement: It means termination of the service of an employee otherwise than on superannuation.
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 as the age on the attainment of which the employee shall vacate the
employment.
Wages: It means all emoluments which are earned by an employee while on duty or on leave in accordance
with the terms and conditions of his employment and which are paid or are payable to him in cash and
includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime
wages and any other allowance.

570
Unit IV – Payment of Gratuity Act, 1972 LESSON 19

Test Yourself

(These are meant for re-capitulation only. Answers to these questions are not to be submitted for evaluation)
1. State the scope and object of the Payment of Gratuity Act?
2. Define the following terms:
l Continuous service
l Employee
l Wages.
3. When gratuity becomes payable? To whom gratuity is payable?
4. Who are entitled for payment of gratuity?
5. Whether gratuity is liable to be forfeited? If so, under what circumstances?

571
EP-SBI&LL Social Security Legislations

572