The Payment of Gratuity Act, 1972

Transcription

1 The Payment of Gratuity Act, 1972 Practical compliance reference Handbook Evaluer on In this handbook we will address the following: Employment Law What the Gratuity Act means and its applicability. Understanding how gratuity is calculated. Checklist and dos and don ts for an establishment.

2 1.1 INTRODUCTION TO THE GRATUITY ACT Payment of gratuity is in the nature of retiring benefit to employees who have rendered long term service to an establishment and have thus contributed to the propensity of the organization. Liability for the payment of gratuity arises on the date of cessation of employment. Under the Payment of Gratuity Act, 1972 (the Gratuity Act ) gratuity is money payable to an employee after he has rendered continuous service for a minimum period of five years; a) on employee s superannuation; ii) on his / her retirement or resignation; or iii) on his / her death or disablement 1 due to accident or disease. Completion of continuous service of five is necessary in normal circumstance. However, when termination of employment is due to death or disablement of employee the five year threshold will not be applicable. 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 legal heirs. 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. 1.2 APPLICABILITY The Gratuity Act applies to every factory, as well as 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 12 (twelve) months. A shop or establishment to which the Gratuity Act has become applicable shall continue to be governed by the Act notwithstanding that the number of persons employed therein at any time after the Act has become applicable falls below ten. Additionally, by an amendment made by Act 34 of 1994 dated May 24, 1994 it has been provided that the provisions of the Gratuity Act be extended to all persons employed on wages in the establishment covered under the Act by removing the wage ceiling under clause (e) of section EMPLOYEES ELIGIBLE FOR GRATUITY 1 According to the Gratuity Act, disablement means such disablement as incapacitates an employee for the work which he was capable of performing before the accident or disease resulting in such disablement.

3 Employee means any person (other than apprentice) 2 employed on wages / salary in any establishment, factory or shop, to do any skilled, semi-skilled or unskilled, manual, supervisory, technical or clerical work, whether terms of such employment are express or implied, and whether such person is employed in a managerial or administrative capacity. However, it does not include any central or state government employees. Thus, the Gratuity Act is applicable to all employees and workers of a factory or establishment including persons employed in administrative and managerial capacity irrespective of salary. 1.4 CAN EVERY EMPLOYEE CLAIM GRATUITY UNDER THE GRATUITY ACT? Not necessary. An employee should be a regular one. Where a person is called whenever there is work and paid wages for the work done, he will not be an employee within the meaning of the Gratuity Act. It has also been held that a person, who is not an employee, engaged by way of contract of employment to work continuously from day-to-day but is offered work whenever available and paid wages, he will not be treated as an employee CALCULATION OF GRATUITY WAGES FOR THE GRATUITY CALCULATION The term wages as defined in clause (s) of section 2 of the Gratuity Act 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. It includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages or any other allowance paid. In Anglo French Textile Limited vs. P.O Labour Court 4, it has been held that incentive wages are also included in the definition of wages as contained in section 2 (s) of the Gratuity Act GRATUITY CALCULATION FORMULA Gratuity is payable at 15 (fifteen) days wages for every completed year of service, based on wages last drawn by the employee. Gratuity calculation formula: 2 The Orissa High Court in Orissa Mining Corporation Limited, Bhubaneswar vs. Controlling Authority (1994 LLR 789) has held that a trainee, other than an apprentice under the Apprenticeship Act, 1961 will be an employee under the Gratuity Act. 3 Velukutty Achhary vs. Harrisons, Malayalam Limited, 1993 LLR 20 (Ker HC) Lab IC 202: (1981) 58 FJR 252: 1981 (I) LLN 522 (Mad HC)

4 15 days wages based on last wage received number of completed years of service. How to calculate 15 days: Basic salary last drawn 15 Explanation: 26 i. Service period on excess of six months in the subsequent years will be treated as one year for calculation of gratuity. Thus if an employee has worked for five years and six months it will be treated as six years. A day less than six months will not be counted as a year. ii. iii. In case of seasonal establishment, gratuity is payable at seven days wages for each season. In other words, a person who not employed throughout the year, gratuity is payable at the rate of seven days wages for each season. The method of calculating of seven days wages is the same as in cases of non-seasonal employees. Total amount of gratuity will not be more than Rs 10, 00,000 (ten lakh) CASE STUDY FOR GRATUITY CALCULATION Case scenario: Mr. A joined an establishment on February 1, 1980 at Rs 2,500 (two thousand five hundred) per month. His wages were raised to Rs 5,000 (five thousand) per month in January 1, Mr. A retires on January 1, The amount of gratuity payable to Mr. A shall be: Mr. A joins on : February 1, 1980 Retires on : January 1, 2000 Total service : 19 years 11 months, i.e. 20 years for gratuity calculation His last drawn monthly salary was Rs 5,000 (five thousand).

5 The gratuity for the period of 20 complete years = 15 days wages IMPORTANT = Basic salary last drawn CLARIFICATIONS PAYMENT OF 26 GRATUITY WHEN NO NOMINATION = Rs 5, HAS BEEN MADE In the case of 20 death of employee, 26 gratuity payable to him shall be paid to his = Rs 57, 692 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 (section 4 of Gratuity Act) INTEREST ON LATE PAYMENT An employer shall arrange to pay the amount of gratuity within 30 (thirty) days from the date it becomes payable. If the amount of gratuity is not paid within 30 (thirty) days from the date it becomes payable, the concerned employer shall pay simple interest at 10% (percentage ten) 5 per annum. However, the amount of interest payable by the employer, however, shall in no case exceed the total amount of gratuity payable under the Gratuity Act CALCULATION OF GRATUITY WHEN AN EMPLOYEE HAS BEEN WORKING FOR 22 (TWENTY TWO) DAYS IN A MONTH It is immaterial whether the employee has been working for 22 (twenty two) days or more in a month. Gratuity will be calculated as if an employee is working for 26 (twenty six) days in a month. Reference is made to one case, decided by the Bombay High Court, wherein it has been held that the payment of gratuity to an employee working in an establishment for 22 (twenty two) days in a month will be calculated at 26 (twenty six) days working in a month. 6 5 The rate of interest for delayed payment of gratuity has been fixed at by amendment by Act 22 of May and Baker (I) Ltd. Bombay v s. J.S Cutinho, National Union of Commercial Employees, 1991 LLR 375 (Bombay High Court)

6 1.6.4 CLAIMING GRATUITY BEFORE 5 (FIVE) YEARS OF SERVICE Gratuity can be claimed before the expiry of 5 (five) years only in cases where the termination of employment of an employee is due to death or disablement. In the case of death, gratuity payable is 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 GRATUITY TO EMPLOYEES ENGAGED THROUGH A CONTRACTOR Neither the Contract Labour Act, nor the Gratuity Act provides that a principal employer can be held liable to pay gratuity to the workers engaged through a contractor. However, the Madras High Court has held that even though the liability to pay gratuity is that of the contractor, but by virtue of section 21 (4) of the Contract Labour Act, in case the contractor fails to make payment to eligible workers, the principal employer can be made liable to make payments towards gratuity to the workers of the contractor. The same can later be recovered from the contractor COMPLETED YEAR OF SERVICE For every completed year of service in excess of six months, the employer shall pay gratuity to an employee at the rate of 15 (fifteen) days wages based on the rate of wages last drawn by the employee concerned. The expression complete year of service means continuous service for one year. An employee is deemed to be in continuous service for a period of one year or six months if during the said period of one year or six months he has actually worked for 240 (two hundred forty) days or 120 (one hundred twenty) days. It has been held that the concept of continuous service contemplates rendering service for 240 (Two hundred forty) days in a year. The employee though eligible for gratuity, will not be entitled for those years when he has not rendered service for 240 (two hundred forty) days. 8 The Madras High Court has held that an employee rendering continuous service for a period of 240 (two hundred and forty) days in a year, i.e. fifth year will be deemed to have continued in service 7 Madras Fertilizer Limited vs. Controlling Authority under the Gratuity Act, 2003 LLR 244 (Madras HC) 8 Bombay Union Dying and Bleaching Mills vs. Narain Tukaram More, 1980 (II) LLJ 424 (Bombay HC)

7 for one year. Accordingly, an employee who has put in his service for ten months and 18 (eighteen) days for the fifth year subsequent to first four years should be deemed to have completed continuous service of five years and is entitled to gratuity GRATUITY TO A RETRENCHED EMPLOYEE Gratuity is payable to an employee on termination of his employment. Retrenchment also means termination of service. Therefore, retrenchment of an employee would fall within the scope of section 4 (1) of the Gratuity Act and the retrenched employee shall be entitled to gratuity under that provision WILL A TRAINEE HAVING WORKED FOR 5 (FIVE) YEARS BE ENTITLED TO GRATUITY? Yes, it has been held that a trainee being different from an apprentice will be included in the definition of employee. 10 In another case the Madras High Court has also held that for the purpose of entitlement of gratuity, the period spent on training will be taken into consideration CAN GRATUITY BE ADJUSTED AGAINST LOAN TAKEN BY AN EMPLOYEE? Amount of gratuity is not liable to be adjusted towards any amount drawn by the employee as personal loan or housing loan 12. The gratuity of an employee is fully protected and even if there is a decree by the court, it cannot be recovered from the amount of gratuity as payable, much less adjustment of loan as taken by an employee from the employer. The entire amount of gratuity is out of the purview of attachment or other adjustments and therefore immunity under section 13 of the Gratuity Act will be available ATTACHMENT OF GRATUITY PAYABLE TO LEGAL HEIRS If the gratuity is payable to the employee then it is not liable to attachment. But if the employee is dead, obviously the gratuity cannot be deemed to be payable to the employee. 9 State of Punjab vs. Labour Court, Jalandhar, AIR 1979 SC 1981: 1980 (I) LLN 39 SC 10 Chairman cum Managing Director, Orissa Mining Corporation Limited, Bhubaneswar vs. Controlling Authority, 1994 LLR 789 (Ori HC) (DB) 11 S. Arunachalam vs. Managing Director, Southern Structurals, Pattabhiram, Madras, 2001 (91) FLR 689 (Mad HC) 12 Yada Laxmi vs. A.P State Coop. Bank, Hyderabad, 2006 LLR 451: 2006 (108) FLR Yada Laxmi vs. AP State Co-operative Bank, Hyderabad, 2006 (108) FLR 1178: 2006 LLR 451 (AP HC)

8 If the said gratuity becomes payable to the heirs of the employee, the same becomes attachable in the hands of the employer WILL AN EMPLOYEE BE ENTITLED TO GRATUITY ON HIS RE-EMPLOYMENT? No. Re-employment of an employee after clearance of dues will not amount to continuous service to be eligible for payment of gratuity. E.g. if an employee is discharged from service in August 1977 and reemployed in July 1979, the period of service before discharge in August 1977 cannot be treated as continuous service for calculating gratuity FORFEITURE OF GRATUITY Gratuity of an employee, whose services have been terminated for any act, will-full 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. The gratuity payable to an employee may be wholly or partially forfeited; i) if 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. Moral turpitude means an act which is harmful to society in general GRATUITY ON RESIGNATION An employee satisfying the conditions with regard to length of service (i.e. five years of service) will be entitled to gratuity under Gratuity Act even if he resigns from service. This has also been held by the Delhi High Court RETIREMENT ON ATTAINING THE AGE OF 58 Initially when the Gratuity Act was enacted it was provided that an employee will be entitled to gratuity on attaining the age of 58 (fifty eight) years and having retired, but the said provision has been deleted from the provisions of the Gratuity Act. Hence, now irrespective of the age of an employee, he will be entitled to gratuity provided he has rendered minimum five years of service. Additionally, the age of superannuation of an employee is also not 14 Ramwati vs. Krishana Gopal, 1988 (I) CLR 253 (Del HC) 15 Taxmaco Limited vs. Ram Dhan, 1992 (II) CLR 256: 1992 LLR 369 (Del HC)

9 relevant for the purpose of payment of gratuity on his retirement or resignation. An employee therefore cannot be refused gratuity for the period of service rendered beyond the age of superannuation MODE OF PAYMENT OF GRATUITY Gratuity shall be paid in cash or if so desired by the payee, in demand draft or bank cheque to the eligible employee, nominee or legal heir, as the case may be. Intimation about the details of payment shall also be given by the employer to the controlling authority of the area DO EDUCATIONAL INSTITUTIONS / TEACHERS COME UNDER THE PREVIEW OF GRATUITY ACT Educational institutions employing more than ten persons on any day preceding 12 (twelve) months have been covered by the Gratuity Act. 16 Teachers, who were excluded from the preview of the Act by a judgment of the Supreme Court, have been covered by Payment of Gratuity (Amendment) Act, NOMINATION i. Each employee, who has completed one year of service, i.e. service of at least 240 (two hundred forty) days in the period of 12 (twelve) calendar months preceding the date of employment, shall make in form F, nomination for the purpose of payment of gratuity. The nomination is required to be submitted in duplicate within 30 (thirty) days of the completion ii. iii. of one year of service. If an employee has a family at the time of making a nomination, the nomination shall be made in favour of one or more members of his family, and any nomination made by such employee in favour of a person who is not a member of his family, shall be void. If at the time of making a nomination the employee has no family, the nomination may be made in favour of any person or persons but if the employee subsequently acquires a family, such nomination shall forthwith become invalid and the employee shall make, within such time as may be prescribed, a fresh nomination in favour of one or more members of his family. 16 Notification No. S.O. F. No. S / 1 / 95 / SS II, dated April 3, 1997.

10 iv. An employee may in his nomination, distribute the amount of gratuity payable to him amongst more than one nominee. v. Modification of nomination by employee: The employee has discretion to modify the nomination made by him. The modification sought should not tend to benefit a stranger in disregard to the legitimate claim of members of his family.

11 1.7 RETURNS, FORMS AND RECORDS, TO BE MAINTAINED AND SUBMITTED S. No Compliance requirement Source verification Due date Responsibility for compliance NOTICE OF OPENING, CHANGE AND CLOSURE OF FACTORY / ESTABLISHMENT 1. Notice of opening: Submit a notice of opening of establishment to the controlling authority of the area. [Rule 3 (1) of Payment of Gratuity 2. Notice of change: Submit a notice of change, as and when there is a change of name, address etc of business. Form A Within 30 days of the Gratuity Act / Rules becoming applicable Form B Within 30 days of change Employer Employer [Rule 3 (2) of Payment of Gratuity 3. Notice of closure: Submit a notice of closure, to the controlling authority when the establishment decides to close down the establishment / factory. Form C At least 60 days before intended closure Employer [Rule 3 (3) of Payment of Gratuity NOMINATION

12 4. Nomination: Fill nominations for each employee who has completed one year of service in the establishment. Form F Within 30 days of completion of one year of service Employee and employer [Section 6 and Rule 6 of Payment of Gratuity 5. Fresh nomination: An employee who had no family at the time of making the above mentioned nomination shall, if he subsequently acquires family make a fresh nomination in favour of his family. Form G Within 90 days of acquiring family Employee [Section 6 (4) and Rule 6 (3) of Payment of Gratuity (Central) Rules, 1972] 6. Modification of nomination: Notice of modification of a nomination shall be submitted in duplicate in form H to the employer by the concerned employee. Form H As and when necessary Employee [Rule 6 (4) of Payment of Gratuity APPLICATION FOR GRATUITY BY EMPLOYEE 7. Application for gratuity by an employee: An employee who is eligible for payment of gratuity shall apply to the employer in form I. [Rule 7 (1) of Payment of Gratuity Form I Within 30 days from the date gratuity becomes payable Employee

13 8. Application for gratuity by nominee: A nominee of an employee who is eligible for payment of gratuity shall apply to the employer. [Rule 7 (2) of Payment of Gratuity 9. Application for gratuity by a legal heir: If no nomination has been made then the legal heir of the concerned employee who is eligible for payment of gratuity shall apply to the employer. Form J Within 30 days from the date gratuity becomes payable Form K Within 1 year from the date gratuity becomes payable Employee Employee [Rule 7 (3) of Payment of Gratuity NOTICE FOR PAYMENT OF GRATUITY 10. Notice for payment of gratuity: If the claim for gratuity is found admissible, the employer shall issue a notice to the applicant employee, nominee or legal heir, as the case may be, specifying the amount of gratuity payable. Form L Within 15 days of receipt of application for payment of gratuity Employer [Rule 8 (1) of Payment of Gratuity 11. Notice rejecting claim for payment of gratuity: If the claim for gratuity is not found admissible, the employer shall issue a notice to the applicant employee, nominee or legal heir, as the case may be, specifying the reasons why the claim for gratuity is Form M Within 15 days of receipt of application for payment of gratuity Employer

14 not considered admissible. [Rule 8 (1) (ii) of Payment of Gratuity DISPLAY OF ACT / RULES 12. Abstract of the act and rules: Employer to display abstract of the Gratuity Act and Rules in English and in the language understood by majority of the employees near main entrance of the factory or establishment. (Rule 20 of Payment of Gratuity 13. Name of designate officer: Employer shall display a notice at the main entrance of establishment / factory specifying the name of the officer with designation authorized by the employer to receive on its behalf notices under the Gratuity Act. (Rule 4 of Payment of Gratuity Form U As and when the Gratuity Act becomes applicable NA As and when the Gratuity Act becomes applicable. Employer Employer PENALTY 14. Whoever, for the purpose of avoiding any payment to be made by himself under this Act or of enabling any other person to avoid such payment, knowingly makes or causes to be made any false statement or false representation shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to Rs 10,000 (ten thousand) or with both. 15. An employer who contravenes, or makes default in complying with, any of the

15 provisions of the Gratuity Act or any rule or order made there under 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 fine which shall not be less than Rs 10,000 (ten thousand) but which may extend to Rs 20,000 (twenty thousand), or with both. 16. Where the offence relates to non-payment of any gratuity payable under this Act, the employer shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to two years.

16 For further information please contact: Disclaimer: This handbook is not an advertisement or any form of solicitation. This handbook has been compiled for general information of the public and does not constitute professional guidance or legal opinion. Readers should obtain appropriate professional advice. Delhi Bangalore Chandigarh