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Requisite Circumstances For Payment Of Gratuity Under Payment Of Gratuity Act, 1972

On 15th April, 2020 a bench of Hon'ble Supreme Court comprising of Justice R. Banumathi and Justice A.S. Bopanna, observed in a case titled as Rajasthan State Road Transport Corporation Ltd. & Ors. Versus Smt. Mohani Devi & Anr.[Civil Appeal No. 2236 OF 2020 (Arising out of SLP (Civil) No.5650 of 2019)] that:
Section 4(1)(b) of the Payment of Gratuity Act, 1972 provides that the gratuity shall be payable if the termination of employment is after 5 years of continuous service and such termination would include resignation as well.

The Hon'ble Apex Court though made it very clear that the due amount of gratuity would be payable in case of retirement by way of termination of service through employee's resignation if he has completed the stipulated length of service. The similar issues have also been decided in Texmaco Ltd. Vs. Shri Ram Dhan, 1992 LLR 369 (Del), wherein it was directed that an employee resigning from service is entitled to gratuity. Even if an employee resigns from service but his resignation was not accepted by the employer then also he is entitled to claim his gratuity.

Non acceptance of the resignation is no hurdle in the way of an employee to claim gratuity, as observed in Mettur Spinning Mills Vs. Deputy Commissioner of Labour, (1983) II LLJ 188. Thus, there is a need to highlight the requisite circumstances and provisions which make the employee entitled to claim his gratuity as a statutory right, since despite clear legislative provisions some of the employer are not able to adhere to the legislative provisions regarding payment of gratuity.

Gratuity is a monetary benefit paid to an employee by his employer at the end of a period of employment, without any contribution from the employee. The payment of gratuity was discretionary prior to 1972 and it was made compulsory for the employer to pay gratuity to his employee at the time of retirement. The Payment of Gratuity Act, 1972 was passed by the Parliament to provide for a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, orts, railway companies, shops or other establishments and for matters concerned therewith or incidental thereto.

The main purpose of this act is to provide social security to the employee, thus, this act is an important Social Security Legislation. It is very important to mention that no gratuity payable under this act (and no gratuity payable to an employee employed in any establishment, factory, mine, oilfield, plantation, port, railway company or shop exempted under section 5) shall be liable to attachment in execution of any decree or order of any civil revenue or criminal court. Thus, the above act is an important social welfare legislation.

The above said act applies to:
  1. every factory, mine, oilfield, plantation, port and railway company;
     
  2. 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;
     
  3. 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. It is pertinent to mention that a shop or establishment to which this Act has become applicable shall continue to be governed by this Act notwithstanding that the number of persons employed therein at any time after it has become so applicable falls below ten.
     
  4. every employee including 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 (including temple etc.) 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.

    However, the above act would not be applicable on trainees and a workman engaged on temporary basis. In Vishwanath Vs. M.P.S.R.T. Corporation, 1987 (55 FLR-I (Supplementary), it was directed by the Hon'ble Court that:
    if the main duties of an employee are only supervisory in nature, then certainly he cannot be excluded from the category of “employee” nor can he be deprived of the benefits of this Act, even though for a short period he is required to discharge additional or incidental functions.

    It is very clear that the above act shall not be applicable to the employees who are governed by any other Act or by any rules providing for payment of gratuity, such as personnel of armed forces and other government servants. It has also been provided in Section 4 (5) of the above act that “nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer.”

    Thus, the employee has a right to select beneficiary provisions of this act or the employer's agreement etc. whichever is better. If for the purposes of computation of quantum of the amount of gratuity the terms of agreement or settlement are better than the act, the employee is entitled for that benefit but the maximum statutory ceiling limit as provided under sub-section (3) of section of the act cannot be reduces by mutual settlement or agreement, as directed by the Hon'ble Court in Bharat Commerce & Industries Verus Ramprasad, 2001 LLR 918 (MP).

When gratuity amount becomes due: The amount of gratuity becomes due on the termination of the employee's employment, after he has rendered continuous service for not less than five years, and the said amount to be paid to the employee or to his nominee by the employer (after death of the employee) on following occasions:
  1. on his superannuation (i.e. on 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 employer shall vacate the employment.
     
  2. on his retirement or resignation (Retirement means termination of the service of an employee otherwise than on superannuation and resignation means termination of service on resigning/leaving the service by the employee at his own accord); or
     
  3. on his (employee's) death or disablement due to accident or disease, provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement: Provided further that 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 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.

The above amount of gratuity requires a mandatory condition of serving continuously for not less than five years, thus, if the services of an employee are terminated before completion of five years then the gratuity amount would not be admissible, however, the said rule shall not be applied in case of termination of service due to death or disablement of the employee.

Further, an employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted 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 order, rules or regulations governing the employees of the establishment), lay off, 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.

Where an employee (not being an employee employed in a seasonal establishment) is not in continuous service as aforesaid, for any period of one year or six months, he shall be deemed to be in continuous service under the employer:
  1. for the said period of one year, if the employee during the period of 12 calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than –
    (i) 190 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) 240 days, in any other case;
     
  2. for the said period of 6 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) 95 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) 120 days, in any other case;
    In above calculation of days 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 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 such period as may be notified by the central government from time to time.
     
  3. where an employee employed in a seasonal establishment, is not in continuous service as per above description, 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.

Can the amount of gratuity be forfeited: The amount of gratuity cannot be forfeited except under the following conditions:

  1. The gratuity of 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.
     
  2. The gratuity payable to an employee may be wholly or partially forfeited:
    (i) of the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or
    (ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.
It is pertinent to mention that the gratuity cannot be forfeited merely in the cases of riotous or disorderly conduct or offences of moral turpitude or an act of violence by an employee, unless the same offence has been committed in the course of employment and subsequently his services were terminated on the grounds of above acts, therefore, termination of services on the above grounds is mandatory condition to forfeit the gratuity amount.

Withholding of gratuity is not permissible under any circumstances other than those enumerated in section 4 (6) of the Act and right to gratuity is a statutory right, as directed by the Hon'ble Court in K.C. Mathew Versus Plantation Corporation of Kerala Ltd., 2001 LLR 123 (Ker).

It was also directed in case oc ‘State of Punjab Versus Labour Court', (1980) I SCRT 953, that a retrenched employee is entitled to gratuity. It is therefore, very much clear that the due gratuity cannot be forfeited except in the conditions provided in Section 4(6) of the Act as described above.

Computation of Gratuity: The gratuity would be computed as and when becomes due, as follows:

  1. 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 : Provided that in the case of a piecerated 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: Provided further that in the case of an employee who is employed in a seasonal establishment and who is riot so employed throughout the year, the employer shall pay the gratuity at the rate of seven days wages for each season.

    [Explanation: 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].
     
  2. The amount of gratuity payable to an employee shall not exceed such amount as may be notified by the Central Government from time to time. Presently the maximum amount of gratuity is Twenty Lakh rupees.
  3. For the purpose of computing the gratuity payable to an employee who is employed, after his disablement, on reduced wages, his wages for the period preceding his disablement shall be taken to be the 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.

Action to be taken for payment of Gratuity: The following actions are required to be taken for payment of due gratuity:

  1. A person who is eligible for payment of gratuity under this Act or any person authorised, in writing, to act on his behalf, shall send a written application (provided in the Form ‘I' of The Payment of Gratuity (Central) Rules, 1972) to the employer, within 30 days from the date the gratuity became payable. Provided 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, shall apply ordinarily within 30 days from the date of gratuity became payable in Form ‘J' of The Payment of Gratuity (Central) Rules, 1972. An application for payment of gratuity filed after the expiry of the above period of 30 days, shall also be entertained by the employer, if the applicant adduces sufficient cause for the delay in preferring his claim, and no claim for gratuity under the Act shall be invalid merely because the claimant failed to present his application within the specified period.,
     
  2. As soon as gratuity becomes payable, the employer shall, whether an application as referred above has been made or not, determine the amount of gratuity and if the claim is found admissible on verification, issue a notice in Form ‘L' of The Payment of Gratuity (Central) Rules, 1972 to the applicant employee/nominee or legal heir, as the case may be, specifying the amount of gratuity payable and fixing a date, not being later than the 30th day after the date of receipt of the application for payment thereof; and if the claim for gratuity is not found admissible, the employer shall issue a notice in form ‘M' of The Payment of Gratuity (Central) Rules, 1972, to the applicant employee/nominee or legal heir as the case may be, specifying the reasons why the claim for gratuity is not considered admissible.
     
  3. If the amount of gratuity payable is not paid by the employer within the specified period, the employer shall pay, from the date on which the gratuity becomes payable to the date on which it is paid, simple interest at such rate, not exceeding the rate notified by the Central Government from time to time for repayment of long-term deposits, as that Government may, by notification specify : 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.

  4. (i) If there is any dispute as to the amount of gratuity payable to an employee under this Act or as to the admissibility of any claim of, or in relation to, an employee for payment of gratuity, or as to the person entitled to receive the gratuity, the employer shall deposit with the controlling authority such amount as he admits to be payable by him as gratuity.

    (ii) Where there is a dispute with regard to any matter or matters specified above, the employer or employee or any other person raising the dispute may make an application to the controlling authority for deciding the dispute.

    (iii) The controlling authority shall, after due inquiry and after giving the parties to the dispute a reasonable opportunity of being heard, determine the matter or matters in dispute and if, as a result of such inquiry any amount is found to be payable to the employee, the controlling authority shall direct the employer to pay such amount or, as the case may be, such amount as reduced by the amount already deposited by the employer.
     
  5. The controlling authority shall pay the amount deposited, including the excess amount, if any, deposited by the employer, to the person entitled thereto.
     
  6. As soon as may be after a deposit is made by the employer, the controlling authority shall pay the amount of the deposit
    (i) to the applicant where he is the employee ; or

    (ii) where the applicant is not the employee, to the nominee or, as the case may be, the guardian of such 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.
     
  7. For the purpose of conducting an inquiry regarding dispute in determination of amount of gratuity, the controlling authority shall have the same powers as are vested in a court, while trying a suit, under Code of Civil Procedure, 1908, in respect of the following matters, namely:
    (i) enforcing the attendance of any person or examining him on oath ;
    (ii) requiring the discovery and production of documents ;
    (iii) receiving evidence on affidavits ;
    (iv) issuing commissions for the examination of witnesses.
     
  8. Any person aggrieved by an order of the Controlling Authority may, within sixty days from the date of the receipt of the order, prefer an appeal to the appropriate Government or such other authority as may be specified by the appropriate Government in this behalf: Provided that the appropriate Government or the appellate authority, as the case may be, may, if it is satisfied that the appellant was prevented by sufficient cause from preferring the appeal within the said period of sixty days, extend the said period by a further period of sixty days. Provided further that no appeal by an employer shall be admitted unless at the time of preferring the appeal, the appellant either produces a certificate of the controlling authority to the effect that the appellant has deposited with him an amount equal to the amount of gratuity required to be deposited, or deposits with the appellate authority such amount.
     
  9. The appropriate Government or the appellate authority, as the case may be, may, after giving the parties to the appeal a reasonable opportunity of being heard, confirm, modify or reverse the decision of the controlling authority.
From the above discussion it may be summarized that gratuity is a statutory right of an employee and it becomes due on termination of services of an employee by way of superannuation, retirement or resignation or on employee's death or disablement due to accident or disease. An employee who serves continuously for not less than five years with an employer, is entitled to claim the gratuity as and when it becomes due.

The amount of gratuity cannot be forfeited except under the conditions as provided in the act. Now it is imperative for the employer to pay the gratuity to entitled persons as and when it becomes due, however, every now and then there are instances when the employer, whether knowingly or unknowingly, fails to comply the provisions of the Payment of Gratuity Act, 1972 and thus which makes the employer liable to be punished with imprisonment or with penalty or both, under the Act. Hence, the employer must engage an efficient mechanism to effectively comply with the provisions of the above act for payment of gratuity to entitled persons, as and when it becomes due.

Written By: Kapil Kishor Kaushik, Advocate

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