This blog is written by Samriddhi Sinha, a 4th year Student of Brainware University.
Introduction:
The term “gratuity,” generally understood as the amount of money distributed to an employee upon termination of employment, is subject to a criterion of eligibility To receive the bonus, a person must have worked for at least five years. In India, this provision, the Payment of Gratuity Act, 1972, which has employment laws similar to the Minimum Wages Act, 1948. It provides minimum rights to employees to contribute to their social security Act in various sectors, and is essential social security measures for employees involved in companies and organizations.
Payment of Gratuity Act, 1972, applies to establishments employing ten or more persons. Its main purpose is to provide social security benefits to employees after retirement, even if the retirement is due to retirement or due to physical disability or loss of basic bodily function. Consequently, the Gratuity Payment Act, 1972, plays an important role in creating economic welfare in safeguarding the economic welfare of salaried persons employed in various sectors, industries and industries. For an employee to assert the right to receive gratuity, a minimum of five years of service with the organization is a prerequisite.
History of the Bill
Gratuity Payment Act, 1972 which provides for the payment of gratuity to employees in India from the labor and industrial conditions of the country. Prior to the enactment of this act, there was no specific statutory provision to provide financial security to employees upon retirement, retirement or death and the need for such legislation became more apparent as India industrialized and the trade unions expanded it.
To address this gap and recognize the need for retirement benefits for employees, the Payment of Gratuity Act Bill was introduced in Parliament in 1971. The Bill was debated and passed debate in both Houses of Parliament, resulting in many amendments and amendments.
On August 21, 1972, the Compensation Bill received Presidential assent, marking an important milestone in the extension of rights and benefits for the Indian labor Act came into force on September 16, 1972 . 1972 with the primary objective of providing graduate workers with a certain period of economic security for continued service to their employers
Over the years, the Code has undergone changes and changes in line with changing economic conditions and labor migration. It has a vital role to play in improving the well-being of workers in various sectors, ensuring their financial stability upon retirement or termination of employment
Today, the Payment of Gratuity Act, 1972, forms an integral part of the Indian labor law, and is a testament to the country’s commitment to protect the interests of its workers and redeem their dedicated services for the nation’s industry and economic development.
Object of the Act
Payment of Gratuity Act, 1972, states its main objective to establish a uniform system for allocating gratuity to employees across the country This objective is to eliminate the possibility of disparate treatment for employees working for organizations with states in various forms have been eliminated.
On August 21, the parliamentary bill received parliamentary approval and subsequently came into effect on September 16 of the same year. The Act casts a wide net of applications, covering all branches of central, state and local government, as well as the armed forces and local government units, which fall under that Act Notably, some private sectors may also be covered to meet certain standards in the government Act.
This statutory measure establishes gratuity as an extension of financial compensation in recognition of an employee’s dedicated service and unwavering commitment to the employing organization’s primary purpose and to ensure equity and consistency in the treatment of employees at the national level, especially when their professional responsibilities require cross-border flexibility.
Important Provisions
| S. No. | PROVISIONS | BRIEF OF PROVISIONS |
| 1. | SECTION 2-Definition | This section provides meanings for various terms used in the Act. It defines terms such as “appropriate Government,” “completed year of service,” “continuous service,” “employee,” “employer,” “factory,” “family,” “major port,” “mine,” “notification,” “oilfield,” “plantation,” “port,” “prescribed,” “railway company,” “retirement,” “superannuation,” and “wages.” This clause ensures clarity and understanding of key terms used throughout the act. |
| 2. | SECTION 2A-Continuous Service | This section defines “continuous service” for the purpose of the act. It states that an employee is considered to be in continuous service if they have been in uninterrupted service, including periods of sickness, accident, leave, lay off, strike, lock-out, or cessation of work not due to their fault. It further explains that if an employee is not in continuous service, they can still be deemed to be in continuous service under certain conditions, such as having worked for a specified number of days within a year or six months. Additionally, it provides provisions for employees in seasonal establishments, ensuring they are also eligible for gratuity based on their actual working days. |
| 3. | SECTION 4- Payment of Gratuity | This section mandates gratuity payment to employees serving continuously for five years upon termination, covering events like retirement or death. There’s a waiver for the five-year requirement in cases of death or disablement. Gratuity is calculated at 15 days’ wages per completed year, capped at ₹3,50,000. It outlines rules for calculating gratuity for employees on reduced wages and addresses forfeiture scenarios for misconduct. |
| 4. | Section 4A -Compulsory Insurance | This section requires employers, except those under Central or State Government control, to secure insurance for gratuity liabilities. Exemptions apply to employers with existing approved gratuity funds or those establishing such funds. Employers must register establishments and fulfill insurance or fund requirements. The appropriate Government formulates rules, including penalty provisions for non-compliance. “Approved gratuity fund” aligns with its definition in the Income-tax Act, 1961. |
| 5. | Section 7- Determination of the amount of gratuity | This section outlines the process for gratuity payment disputes. Individuals or their representatives must submit written applications to the employer for gratuity payment within prescribed timelines. Upon determination of the gratuity amount, the employer notifies the individual and the controlling authority. Gratuity must be paid within thirty days, with provisions for interest in case of delay. Disputes are resolved through depositing the admitted amount with the controlling authority, followed by an inquiry. The controlling authority conducts inquiries with powers akin to judicial proceedings. Aggrieved parties can appeal to the appropriate Government or specified authority within sixty days, with provisions for extension. Appeals are heard, and decisions can be confirmed, modified, or reversed by the appellate authority. |
| 6. | Section 8 – Recovery of Gratuity | This section stipulates that if an employer fails to pay the gratuity amount within the specified time to the entitled person, the controlling authority can issue a certificate to the Collector. Upon receiving the certificate, the Collector is mandated to recover the amount along with compound interest as specified by the Central Government. The interest rate is determined from the date of expiry of the prescribed payment time. Before issuing the certificate, the employer must be given a chance to provide reasons against it. However, the interest payable should not surpass the gratuity amount. |
| 7. | Section 10 – Exemption of employer from liability in certain cases | This section allows employers charged with offences under the Act to accuse another individual as the actual offender, provided they give the complainant three days’ notice. If the employer proves due diligence and lack of knowledge or involvement in the offence, the alleged offender is convicted, relieving the employer of liability. If the alleged offender cannot be brought to court within a set period, the employer may be convicted instead. The employer’s testimony and witnesses can be examined during proceedings. |
| 8. | Section 13 – Protection of Gratuity | Gratuity payments under this Act and those exempted for certain employees cannot be seized to settle any court orders or debts. |
Penal Provisions
| 9. | Section 9 -Penalties | 1) Making false statements to avoid payments under this Act is punishable by up to six months’ imprisonment or a fine up to ten thousand rupees, or both. 2) Employers violating this Act face imprisonment for three months to one year, or a fine from ten to twenty thousand rupees, or both. Non-payment of gratuity may lead to imprisonment for six months to two years, unless the court decides otherwise for justifiable reasons. |
LANDMARK CASES
- BHARAT GOLD MINES LTD. V. REGIONAL LABOUR COMMISSIONER ILR 1986 KAR 2755
In the case the Karnataka High Court ruled on the issue of gratuity forfeiture in cases of employee theft involving moral turpitude. The court held that under Section 4(6)(b) of the Payment of Gratuity Act, gratuity can be wholly forfeited in cases where an employee has been terminated due to acts involving moral turpitude, such as theft. However, the court emphasized that an employer cannot withhold an employee’s owed gratuity if the service termination was not linked to any of the specified reasons, such as theft or moral turpitude. Therefore, the court clarified that gratuity cannot be forfeited by the employer unless the termination of service is explicitly due to acts falling within the purview of Section 4(6)(b) of the Act.
- TRAVANCORE PLYWOOD INDUSTRIES V. REGIONAL JOINT LABOUR COMMISSIONER OF KERALA 1996(73)FLR1413
In this case, the issue before the court was whether an employee’s gratuity could be withheld solely because the employee refused to vacate company-provided accommodation upon termination of employment. The court ruled that under Section 4(6) of the Payment of Gratuity Act, 1972, an employee’s unwillingness or failure to vacate occupied company premises does not constitute sufficient grounds to deny or withhold gratuity. The court emphasized that gratuity is a statutory benefit intended to provide financial security to employees upon retirement or termination of service, and it should not be subject to forfeiture based solely on issues unrelated to the employee’s service or conduct. Therefore, the court held that an employer cannot withhold an employee’s gratuity merely because the employee has not vacated company-provided accommodation, unless such refusal is directly linked to misconduct or breaches specified under the Act. This decision reaffirmed the importance of upholding employee entitlements to gratuity as per statutory provisions and ensuring that its forfeiture is justified based on legitimate grounds related to the employee’s conduct or service termination.
- UNION BANK OF INDIA V. SHRI D.C. CHATURVEDI (CIVIL WRIT PETITION 4486/2021)
In this recent judgment by the Delhi High Court, the court emphasized the procedural requirements that must be fulfilled before forfeiting gratuity. The court highlighted three essential elements that need to be met: notification, quantification, and hearing. According to the court’s ruling and the accepted legal view, an employer seeking to forfeit an employee’s gratuity must first notify the employee about the intention to forfeit, specify the amount to be forfeited (quantification), and provide the employee with an opportunity to be heard (hearing). Failing to adhere to these procedural safeguards can render any attempt to forfeit gratuity invalid. This judgment underscores the importance of due process and fair treatment of employees’ entitlements under gratuity laws, ensuring that forfeiture decisions are made transparently and with proper consideration of employee rights.
Need and Significance
The Payment of Gratuity Act, 1972, holds significant importance in the Indian legal framework as it plays a crucial role in safeguarding the financial interests and well-being of employees, particularly those in the organized sector. Below are some key aspects highlighting the significance of this Act:
One of the primary objectives of the Payment of Gratuity Act is to provide financial security to employees. It ensures that employees who have dedicated a significant portion of their lives to a particular organization are rewarded with a gratuity amount upon retirement, superannuation, resignation, or in cases of disablement or death. This financial cushion helps employees and their families maintain their standard of living and meet various financial obligations.
The Act recognizes and rewards the loyalty and long-term commitment of employees to their employers. By mandating the payment of gratuity for employees with a minimum of five years of continuous service, it incentivizes employees to stay with an organization for an extended period, contributing to stability and productivity.
The Act is a manifestation of the government’s commitment to social welfare and the protection of employee rights. It ensures that employees are not left without financial support during crucial life events such as retirement or in the unfortunate event of death or disability. This aligns with the principles of social justice and economic well-being.
While the Act places an obligation on employers to provide gratuity to eligible employees, it also serves as an incentive for employers to create a conducive work environment that encourages employee retention. Employers who adhere to the Act’s provisions are more likely to attract and retain talented individuals.
The Payment of Gratuity Act provides a clear legal framework for the calculation, payment, and administration of gratuity. This clarity reduces disputes between employers and employees and ensures fairness in gratuity-related matters.
By ensuring that retirees and their families have a financial cushion, the Act indirectly contributes to the economic stability of the country. It reduces the burden on social welfare systems and promotes self-reliance among retirees.
Criticism and limitations
The Payment of Gratuity Act, 1972, while well-intentioned, has faced several criticisms and challenges over the years. Here are some of the key criticisms of the Act:
- Limited Coverage: One of the primary criticisms of the Act is its limited coverage. It only applies to establishments with ten or more employees. This leaves a substantial portion of the workforce, particularly those in small-scale industries and the informal sector, without the benefits of gratuity. This limitation results in unequal treatment of employees and excludes many vulnerable workers from its provisions.
- Eligibility Criteria: The Act mandates that an employee must have completed at least five years of continuous service to be eligible for gratuity. This criterion can be restrictive, especially in industries where job turnover is high. Employees who leave an organization before completing five years are left without any gratuity benefits, despite their contributions to the organization.
- Inadequate Gratuity Amount: The Act places a cap on the maximum gratuity amount, which was last revised in 2010. The maximum limit of Rs. 10 lakhs is considered insufficient, especially in today’s economic climate with rising living costs and inflation. This cap has not kept pace with the changing economic landscape, and many argue that it should be increased to provide more meaningful financial security to retirees.
- Dependency on Employer’s Discretion: The Act leaves the calculation of gratuity in the hands of the employer. This can lead to disputes and potential underpayment, as employers may interpret the rules differently or be reluctant to pay higher amounts. Employees often have to rely on the goodwill of their employers to receive their rightful gratuity.
- Lengthy Processing Time: The Act stipulates that gratuity should be paid within 30 days of becoming payable. However, in practice, this timeline is often not adhered to, leading to delayed payments for employees. The prolonged processing time can cause financial strain on retirees who depend on this amount for their post-retirement expenses.
- Lack of Portability: Gratuity benefits are typically tied to a specific employer. When employees change jobs or organizations, they do not have the option to transfer their gratuity benefits to the new employer. This lack of portability limits employees’ flexibility and may discourage them from exploring better job opportunities.
- Exclusion of Certain Categories: The Act excludes certain categories of employees, such as agricultural workers and casual laborers, from its purview. This exclusion can lead to a lack of social security for these vulnerable groups, making them susceptible to financial hardships during retirement or in case of disability.
Conclusion:
The Act established a gratuity system and ensured that employees were rewarded for their loyalty and service. It addresses important issues such as eligibility, scholarship calculations and maximum scholarship limits.
However, the Act is not without limitations and criticism. Small businesses that have faced challenges with their limited coverage, stringent eligibility standards and free cash flow adequate in today’s economic climate are concerned about staffing inequalities, the exclusion of certain categories of employees and the non-portability of benefits
In light of this criticism, there is a critical need to review and amend the Compensation Act to make it more inclusive, fair and reflective of changing socio-economic conditions. The changes should aim to expand coverage, consider revising eligibility criteria, and adjust maximum retirement limits to provide financial security improved for retirees.
Despite its imperfections, the Act is an important step towards recognizing the value of employee contributions and the right to dignified retirement. This principle emphasizes that an individual’s long-term commitment to his or her work should be recognized and rewarded. As the Indian workforce evolves, the Payment of Gratuity Act must evolve with it, ensuring that it continues to play a meaningful and relevant role in employment law in the coming years.
In this context, a comprehensive review and amendment of the Code should be a priority, taking into account the changing needs and expectations of employees, while maintaining the fundamental principle of providing financial security for employees at in their retirement years.
[1] Allahabad Bank and Others v. All India Allahabad Bank Retired Employees Union (2009), Civil Appeal No. 1478 of 2004
