Special Project On

Labour Law II

Payment of Gratuity Act, 1972: An Overview

Submitted to:

Dr. Mrs. Balwinder Kaur

(Faculty, Labour Law II)

By:

Pankaj Sharma

Roll no. 100

Section A

Semester V, B.A. LLB (Hons.)

Submitted on:

November 30, 2018

Hidayatullah National Law University

Uparwara Post, Abhanpur, New Raipur – 493661 (C.G.)

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 Acknowledgements
I feel elated to work on the project “Payment of gratuity Act, 1972: An
overview”. The practical realization of the project has obligated the assistance of
many Persons. Firstly I express my deepest gratitude towards, Dr. Mrs. Balwinder
Kaur, Faculty of Labour Law II, to provide me with the opportunity to work on
this project. Her able guidance and supervision were of extreme help in
understanding and carrying out the nuances of this project.

I would also like to thank The University and the Vice Chancellor for providing
extensive database resources in the library and for the internet facilities provided by
the University.

Some printing errors might have crept in which are deeply regretted. I would be
grateful to receive comments and suggestions to further improve this project.

Pankaj Sharma

Roll No. 100

Section A, Semester V

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 Table of Contents

Acknowledgments ………………….…………………………….…2

1. Introduction …………………………………….….…………4
 Research methodology………….…..5
 Objectives of study …………………5
 Questions ……………………….…..5
 Hypothesis……………………….….5
 Scope of study ……………………...5
 Mode of citation………………….…5

2. Principle of Social Security ………………………………….….…6

3. Salient features of the Payment of Gratuity Act, 1972……………7

4. Amount of Gratuity…………………………………………………8
5. Employer To Initiate Calculation And Notice Of Payment………9
6. Powers of controlling authority……………………………….… 11

7. Penalties………………………………………………………….….13

Conclusion………………………………………………………………14

Bibliography………………………………………………………….…15

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INTRODUCTION

The Payment of Gratuity Act 1972 is a social security enactment. An Act to provide for a
scheme for the payment of gratuity to employees engaged in factories, mines, oilfields,
plantations, ports, Railway companies, shops or other establishments1. The significance of
this legislation lies in the acceptance of the principle of gratuity as a compulsory statutory
retiral benefit.2 The Act accepts, in principle, compulsory payment of gratuity as a social
security measure to wage earning population in industries, factories and establishments. Thus,
the main purpose and concept of gratuity is to help the workman after retirement, whether
retirement is a result of the rules of superannuation, or physical disablement or impairment of
vital part of the body. Thus, it is a sort of financial assistance to tide over post retiral
hardships and inconveniences. It is derived from the word ‘gratuitous’, which means ‘gift’ or
‘present’. However, having being enacted as a social security form, it ceases to retain the
concept of a gift but it has to be seen as a social obligation by an employer towards his
employee. 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(five year service not required) due to accident or disease

In the case of death of the employee, gratuity payable to him shall be paid to his nominee or,
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 (i.e.
government officer) 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. In
computing the gratuity payable to an employee who is re-employed, after his disablement, on
reduced wages, his wages for the period preceding his disablement, shall be taken to be the
1
E.M.Rao (Ed.) O.P. Malhotra, “The Law Of Industrial Disputes”, 6th Ed., 2004, Lexis Nexis Butterworths, New
Delhi. At P. 198
2
Jeewanlal Ltd. V. Appellate Authority, AIR 1984 SC 1842

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wages received by him during that period, and his wages for the period subsequent to his
disablement shall be taken to be the wages as so reduced.

Research Methodology

The method of research adopted is doctrinal & descriptive in nature. Secondary sources of
information have been used to give the research work a concrete structure. Websites & e-
articles have been extensively referred for relying on the data. Other relevant sources as
suggested by the faculty coordinator have been referred to. Footnotes have been provided
wherever required.

Objectives of study

 To examine the payment of gratuity Act.

 To study about the Applicability of Act
 To study various case-laws .

Questions

 What is Payment of gratuity and law relating to Payment of gratuity Act, 1972?

Hypothesis

Gratuity is a voluntary Payment made by the employer to the employee in recognition of

continuous, meritorious services and sincere efforts by the employee towards the
organization. It is governed under the Payment of Gratuity Act 1972. It is an Act to
provide for a scheme for the payment of gratuity to employees engaged in factories,
mines, Oilfields, plantations, ports, railway companies, and shops or other establishments.

Scope of study

In this project, the author only discusses the Payment of gratuity under Payment of gratuity
Act, 1972 and to highlight the various critical issues pertaining to this Act along with its
applicability and efficacy.

Mode of citation

The mode of citation of this project is bluebook 19th edition.

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Principle of Social Security

Lord William Beveridge, the pioneer in initiating a comprehensive social security plan who
mentioned five giants in the path of social progress namely, ‘want’, ‘sickness’, ‘ignorance’,
‘squalor’ and ‘idleness’ on the road to social security which should be attacked and killed,
defines ‘social security’ as “security of an income to take the place of earnings when they are
interrupted by unemployment, sickness or accident, to provide for retirement through age, to
provide against loss of support by death of another person and to meet exceptional
expenditure, such as those concerned with birth, death and marriage.” Generally speaking, the
principle of social security may be considered to be a part of the principle of welfare, but in
view of its special connotation, it is desirable to keep it under a separate category. In
industrial societies, income insecurity resulting from various contingencies of life such as
disablement, old age and death and others, has become a serious problem. The problem has
become more acute in view of phenomenal growth of the permanent class of wage-earners.
During such contingencies the income of the earners either stops altogether or is reduced
substantially or becomes intermittent causing hardships not only to the earners, but also to
their family members. One of the outstanding measures to mitigate the hardship is to make
available social security benefits under the coverage of legislation3.

Social security legislation may be kept under two broad categories- social insurance
legislation and social assistance legislation. In social insurance, benefits are generally made
available to the insured persons, under the condition of having paid the required contributions
and fulfilling certain eligibility conditions. The fund for social insurance schemes usually
comes from contributions of the beneficiaries and their employers, often supplemented by
state grants. Under social insurance, the beneficiaries receive benefits as a matter of right.
The benefits are not linked to the economic needs or financial conditions of the beneficiaries
who receive these at the rates and in the forms, established by law. In social assistance also,
the beneficiaries receive benefits as a matter of right, but they do not have to make any
contributions. The finance is made available by the state or a source specified by the state.
Social assistance benefits are generally paid to persons of insufficient means and on
consideration of their minimum needs. In the beginning, social security laws mainly covered
industrial workers but subsequently, other categories of workers, self-employed persons and
people at large, also came under its coverage.

3
K.D.Shrivastav, The Industrial Disputes Act, 1947, (6th Ed., 1985, Eastern Book Company, Luknow)

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Salient features of the Payment of Gratuity Act, 1972

1. The Act is a self-contained and an exhaustive Act and the provisions of this Act and
rules made under it have an overriding effect on all other Acts or instruments or
contracts so far as they are inconsistent with this Act.
2. The Act is fairly sweeping in coverage, as it applies to all factories, mines, oil fields,
plantations, ports and railways irrespective of the number of workmen employed by
them. It also covers shops and establishments employing 10 or more persons.
3. The Act gives a statutory right of gratuity to all the employees, who have rendered
five years’ continuous service and whose services stand terminated after coming into
force of the Act on account of superannuation, or retirement, or resignation, or death
or disablement.
4. The Act provides both executive and quasi-judicial machinery for matters pertaining
to nomination, determination and recovery of gratuity.
5. The executive machinery pertains to maintenance of records regarding opening,
change or closure of establishments, display of notices and maintenance of records by
the controlling authority. The quasi-judicial functions have been divided between the
employers and the Controlling Authority in as much as for payment of gratuity, the
first forum provided is an application to the employer. When the employer has
declined or avoided payment of gratuity, then an application is required to be made to
the Controlling Authority.
6. The machinery provided for recovery rests with the Controlling Authority.
7. The orders of the Controlling Authority for payment or determination of gratuity are
applicable before the appropriate government or the appellate authority.

Amount of Gratuity

For every completed year of service or part thereof in excess of six months, the employer
shall pay gratuity to an employee at the rate of fifteen days’ wages based on the rate of wages
last drawn by the employee concerned In the case of a piece rated employee, 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, and, for this purpose, the
wages paid for any overtime work shall not be taken into account (in a piece rated system
there may not be the concept of basic, DA, HRA, CCA etc. In the case of an employee who is

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employed in a seasonal establishment and who is not so employed throughout the year, the
employer shall pay the gratuity at the rate of seven days’ wages for each season. In the case
of a monthly rated employee, the fifteen days’ wages shall be calculated by dividing the
monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by
fifteen. The amount of gratuity payable to an employee shall not exceed Rs.3,50,000. If there
is an award, agreement or contract for higher amount of gratuity It is allowed.

Employer To Initiate Calculation And Notice Of Payment

Any person eligible to receive gratuity shall make an application to the employer for payment
of the same within the prescribed time. Whether an application is made or not the employer
shall determine the amount payable and give notice to the eligible person/s. The controlling
authority shall perform the following functions.

(i) Specifying the amount of gratuity determined.

(ii) Prescribe the time limit for payment of gratuity.

(iii) The employer shall arrange to pay the amount of gratuity within thirty days from the date
it becomes payable.

(iv) If not paid within the period stipulated above employer is liable to pay interest for the
delayed payment.

(v) Interest is not payable if the delay was caused 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.

(vi) If there is any dispute as to the amount payable or the persons eligible to receive it the
employer shall deposit amount as per his calculation with the controlling authority.

Procedure for resolving the disputes

Where there is a dispute the aggrieved party shall make an application to the controlling
authority for deciding the dispute. controlling authority shall, after due inquiry and after
giving the parties to the dispute a reasonable opportunity of being heard, determine the matter
and pass appropriate orders.

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Powers of controlling authority

The controlling authority shall have the powers in respect of the following matters, namely
(a) enforcing the attendance of any person(b) requiring the discovery and production of
documents;(c) receiving evidence on affidavits; (d) issuing commissions for the examination
of witnesses. Appeal if any shall be made within 60 days from the date of the order. Appeal
by employer will not be admitted unless the disputed amount is deposited appellate authority,
after giving the parties to the appeal a reasonable opportunity of being heard, confirm, modify
or reverse the decision of the controlling authority.

Forfeiture of Gratuity

An employee, whose services have been terminated for any act, willful omission or
negligence causing any damage or loss to, or destruction of, property belonging to the
employer, shall be forfeited to the extent of the damage or loss so caused.

Recovery of gratuity

If the amount of gratuity payable under this 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 compound interest thereon as arrears of land revenue and pay the
same to the person entitled.

Registration of Establishments

Every employer shall get his establishment registered with the controlling authority in the
prescribed manner and no employer shall be registered under the provisions of this section
unless he has taken an insurance or has established an approved gratuity fund.

Retirement And Superannuation

Retirement 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 are 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

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dearness allowance but does not include any bonus, commission, house rent allowance,
overtime wages and any other allowance.

Payment of Gratuity

Gratuity shall be paid to an employee on the termination of his employment after s/he has
rendered continuous service of not less than 5 years i.e. on superannuation, retirement,
resignation, death or disablement due to accident or disease (Sec 4). The period of 5 years is
not necessary if the termination of the employee is because of death or disablement. In the
case of death the amount is paid to the legal heirs “Continuous Service” means uninterrupted
service which may be interrupted on account of sickness, accident, leave, absence from duty
without (not being treated as break in service), lay-off, strike, lock-out or cessation of work
not due to the fault of the employee. (Sec 2A).

Calculation of Gratuity

Gratuity is calculated at 15 days wages last drawn by the employee for each completed year
of service. The monthly wage is divided by 26 and multiplied by 15. In computing a
completed year of service the period in excess of six months shall be taken as a full year.
Gratuity = Monthly salary x 15 days x No. of years of service. The maximum amount of
gratuity payable under the Act is Rs. 3,50,000.00.

Compulsory Insurance

The Payment of Gratuity (Amendment) Act, 1987 has prescribed provisions for compulsory
insurance for employer’s liability for payment towards the gratuity under the Act from the
Life Insurance Corporation of India establishment under the Life Insurance Corporation of
India Act,1956 or any other prescribed Insurer. However, employer of an establishment
belonging to or under the control of the Central Government or the State Government are
exempted from operations of these provisions. (Section 4A).

Nomination

Each employee who has completed one year of service is required to make a nomination for
the purposes of gratuity in case of his death. (Sec 6) There can be more than one nominee.
(Form F). Nominees may be changed at any time by the employee, by giving a written notice
to the employer. (Form H). If no nomination has been made, it shall be paid to the legal heirs

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of the deceased employee or if the heirs are minor, the share of such minor shall be deposited
by the controlling authority with a bank till he attains majority.

Protection of Gratuity

No gratuity payable under the Act shall be liable to attachment in execution of any decree or
order of any civil, revenue or criminal court. However if the employee had agreed to a
deduction from the amount due as gratuity then that amount can be recovered4. (Sec. 13)

Notice of Opening, change, closing of Establishment (Rule 3)

Once the Payment of Gratuity Act becomes applicable to the establishment, a notice in Form
‘A’ has to be given by the employer to the controlling authority within 30 days. Notice in
Form ‘B’ is to be given to the controlling authority within 30 days of any change in name,
address, employer or nature of business. Where an employer proposes to close down the
business he shall submit a notice in Form ‘C’ to the Controlling Authority at least 60 days
before the intended closure.

Penalties

Failure to comply with the Payment of Gratuity Act 1972 entails certain penalties (Sec. 9),
which are the following:

(i) For avoiding any payment knowingly makes any false statement or representation Shall
be punishable with imprisonment upto 6 months or fine upto Rs. 10,000.00 or both.

(ii) Failure to comply with any provision of the Act or Rules Shall be punishable with
imprisonment upto 1 year but will not be less than 3 months or with fine, which will not be
less than Rs. 10,000.00 but may extend upto Rs. 20,000.00 or with both.

(iii) Any offence relating to non payment of gratuity under the Act Employer shall be
punishable with imprisonment for a term which shall not be less than 6 months but may
extend to 2 years, unless the court for reasons recorded decides for a lesser term of
imprisonment or fine.

Constitutional Validity of the Act

The right to gratuity is a statutory right. It is necessary that the employee should have been
regular in the employment. However, if an employee is re-employed without any break in

4
Jaganatha Dasik V Bina Khadi & Village Industries Board 1995 Lab. IC 923

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service he will also be eligible for gratuity. According to section 4(2), every employee is
entitled to gratuity at the rate of 15 days’ wages for every completed year of service. An
employee who resigns from the service is entitled to gratuity. A nominee of an employee can
make an application for gratuity without producing a succession certificate. Under section
4(6)(a), gratuity payable to an employee shall be forfeited to the extent of loss or damage
caused if termination is effected for any act, wilful omission or negligence. However, the
employer has to prove the extent of damage or loss caused by the employee’s misconduct. In
the absence of any proof the right to forfeit the gratuity under section 4(6)(a) is not available
to the employer.5 The right to recover damages for not surrendering the quarters of the
employer was held to be not connected with the conduct for which the services were
terminated.

Withholding of gratuity on that account was held to be not justified.6 For the purpose
of ascertaining the extent of damage or loss caused by the employee, the employer has to give
a notice of the proposed forfeiture to the employee. Where no such notice was given, it was
held that the matter required reconsideration. Gratuity cannot be forfeited unless quantum of
loss or damage has been ascertained. In Bakshish Singh v. Darshan Engineering Worksit
was held that provision of a period of 5 years service as qualifying period in section 4(1)(b) is
one of minimum service conditions made available to employees notwithstanding financial
capacity of employer to bear its burden and it is reasonable restriction on the right of the
employer to carry on business within the meaning of Article 19 of the Constitution and
section 4(1)(b) of the Act is legal and valid. Even assuming that the presumption that a
longer period of service for entitlement to gratuity on voluntary retirement or resignation is
necessary to prevent labour from changing employment frequently, that consideration has no
bearing on the question whether a short period of qualifying service is violative of Article
19(1)(g) of the Constitution. That Article comes into picture only if, among others-

(a) It is shown that the short qualifying period of service throws on any particular employer
such financial burden as would force him to close his establishment an

(b) The provision is not one of the minimum service conditions, which must be made
available to the employees.

5
Permalli Wallance Ltd. V. State Of M.P., (1996) 2 Llj 515 (Mp).
6
Rajendra Pal V. Canara Bank, (1998) 1 Lab Lj 577 (Ker)

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Hence the provision for a short qualifying period per se is not invalid and cannot be struck
down generally as being violative of Article 19(1)(g) of the Constitution. The provisions of
the Act were meant for laying down gratuity as one of the minimum service conditions
available to all employees covered by the Act. There is no provision in the Act for exempting
any factory, shop etc. from the purview of the Act covered by it except those where, the
employees are in receipt of gratuity or pensionary benefits which are no less favourable than
the benefit conferred under the Act. The payment of gratuity under the Act is thus obligatory
being one of the minimum conditions of service. The establishments which have no capacity
to give to their workmen the minimum conditions of service prescribed by the statute have no
right to exist.

Payment of Gratuity Act is on the genre of statutes like the Minimum Wages Act, ESI etc.
which lay down the relevant minimum benefits which must be made available to the
employees. Payment of Gratuity Act is a welfare measure introduced in the interest of the
general public to secure social and economic justice to workmen to assist them in old age and
to ensure them a decent standard of life on their retirement. Therefore the Act imposed a
reasonable restriction on the employer in respect of the fundamental right under Article
19(1)(g). The provision for payment of gratuity contained in section 4(1)(b) of the Act is one
of the minimum service conditions which must be made available to the employees
notwithstanding financial capacity of employer to bear its burden and it is reasonable
restriction on the right of the employer to carry on business within the meaning of Article 19
of the Constitution and section 4(1)(b) of the Act is legal and valid.

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Conclusion

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Bibliography

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