INDUSTRIAL LAWS AND SOCIAL SECURITY LEGISLATIONS

PAYMENT OF GRATUITY ACT 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 establishments and for matters connected therewith or incidental thereto

Submitted by: SMRITI SAHNI CORPORATE LAW AND GOVERNANCE LLM 1ST YEAR ROLL NO. 36 Submitted to: Dr. Gade Mallikarjun

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ACKNOWLEDGEMENT

I would like to express my appreciation and gratitude to various people who have shared their valuable time and made possible this project, through their direct and indirect cooperation. I am highly grateful to my honourable professor Dr. Mallikarjun for allowing me to work on this project and provide necessary help. I thank my respected faculties, dear friends and colleagues, who help me in every possible ways, support me and encourage me to explore new dimensions.

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RESEARCH METHODOLOGY

This project is based mainly and heavily on written text material and also on the web source. It is based on the doctrinal method of research. The researcher also expresses his thoughts regarding the secondary sources. The segments are structured and written actively. The writing style is descriptive as well as analytical. This project has been done after a thorough research based upon intrinsic and extrinsic aspect of the assigned topic.

HYPOTHESIS Gratuity is a gratuitous payment given to an employee after his superannuation or retirement. It is necessary to understand the conditions governing and the intended benefits that the Gratuity Act seeks to provide. The main idea behind this research is to understand the provisions under the Gratuity Act and focussing mainly on what constitutes continuous service under the said Act.

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TABLE OF CONTENTS Chapter 1. 2. 3. 4. 5. 6. 7. 8. 9. Particulars Introduction- Object Overview of the Act Scope and Applicability Definitions Concept of Continuous Service Other Provisions Amendments Conclusion Bibliography Page No. 5 7 8 11 13 23 30 38 39

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CHAPTER 1 INTRODUCTION- OBJECT Gratuity paid to workmen is intended to help them after retirement whether the retirement is a result of rules of superannuation or physical disability. The general principle is that by their length of service workmen are entitled to claim a certain amount as retiral benefit. Object of gratuity is to help the workmen for retirement gratuity is a gratuitous payment given to employee on discharge or death. Gratuity as the name itself suggests is a gratuitous payment given to an employee. The Act is not intended to do away with other retiral benefits already existing and available to the employees. In bringing the Act, the legislature clearly intended to confer extra benefits on the employees. The Court, while construing the provisions of the Act, which is a piece of social legislation, must construe them as to help in achieving the object of the legislation. The retiral benefits which stood conferred already on the employees did not militate against the benefit of gratuity. The endeavour must be to see that the retiral benefits schemes already existing and scheme of gratuity under the Act co-exist in a concern. The issue of settlements between employees and employers regarding payment of gratuity before the Act came into force was discussed by the Madras High Court in Kuppuswami v. EID Parry (India) Ltd. Remipet,1 where in the Court held that before 16th September, 1972, when the Act came into force, the term denying gratuity to post 1947 employees and the term regarding option giving up gratuity and taking pension in lieu thereof, were certainly workable and no exception could be taken to them in law. These arrangements or bargains struck
1

1989 (1) LLN 85 (Mad.)

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inter se the parties in the concern could survive only until the Act came into force. After the Act came into force, there could be no denial of gratuity to any particular category of employees and in particular post 1947 employees, despite their coming within the ambit of the Act. Prior to the Act, by opting for and accepting pension, the pre-1947 employees could have foregone gratuity. But, the Act brought about a drastic change providing for a uniform scheme for the payment of gratuity in all the concerns covered under the Act. With regard to pre 1947 employees, the question that arises for consideration is, if they opt for pension, should they lose gratuity? Though this question did not strictly arise for consideration by the Court, yet the Court pointed out that provisions of the Act have an overriding effect on the question of gratuity and implications of Section 142 of the Act cannot be lost sight of.

Act to override other enactments, etc- -The provisions of this Act or any rule made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any enactment other than this Act or in any instrument or contract having effect by virtue of any enactment other than this Act.

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CHAPTER 2 OVERVIEW OF THE ACT

Preamble SECTION 1 2 2A 3 4 4A 5 6 7 7A 7B 8 9 10 11 12 13 14 15 PROVISIONS Short title, Extent, Application and Commencement Definitions Continuous Service Controlling Authority Payment of gratuity Compulsory insurance Power to exempt Nomination Determination of the amount of the Gratuity Inspectors Powers of Inspectors Recovery of Gratuity Penalties Exemption of employer from liability in certain cases Cognizance of Offences Protection of action taken in good faith Protection of Gratuity Act to override other Enactments etc. Power to make Rules

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CHAPTER 3 SCOPE AND APPLICABILITY OF THE ACT

1. SHORT TITLE, EXTENT, APPLICATION AND COMMENCEMENT. (1) This Act may be called the Payment of Gratuity Act, 1972. (2) It extends to the whole of India : Provided that in so far as it relates to plantations or ports, it shall not extend to the State of Jammu and Kashmir. (3) It shall apply 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. (3A) 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) It shall come into force on such date as the Central Government may, by notification, appoint.

SCOPE OF THE ACT The scope of the term establishment under the Act was discussed at length by the Madras High Court in the case of M.S.N. Sundaram Pillai & Co. v. R. Dhastagree,3 where the Court discussed various case laws as well as the Tamil Nadu Shops and Establishments Act, 1947, which provides for the regulation of workers in the shops, commercial establishments, restaurants, theatres and other establishments and for other allied purposes. Sub-section (6) of Section 2 of the Tamil Nadu Shops and Establishments Act defines establishments to mean a
3

1995 (70) FLR 266 (Mad.)

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shop, commercial establishment, restaurant, eating house, resident hotel, theatre or any place of public amusement or entertainment and include such establishment as the State Government may by notification declare to be an establishment for the purpose of this Act. In State of Punjab v. Labour Court, Jullunder,4 the scope and applicability of the provisions of the Gratuity Act with particular reference to Section 1(3) came up for consideration. While analysing the scope and purport of the Gratuity Act, it was held that the Payment of Gratuity Act enacts a complete Code containing the essential conditions for the payment of gratuity and that it creates a right to payment of gratuity and also indicates when the right will accrue and lays down the principles for quantification of the gratuity apart from providing for the recovery of amount making special provisions for payment of compound interest for delayed payments. It was also held that Parliament intended that the proceedings for payment of gratuity due under the Gratuity Act must be taken under that Act and not under any other Act. APPLICABILITY The Act of 1972 is a piece of social welfare legislation enacted with the view to lay down a uniform pattern of payment of gratuity to different categories of employees who are employed in shops and establishments. While interpreting the provisions of the Act, the Court has to bear in mind that welfare legislation must receive liberal construction keeping in view the purpose of the legislation. Therefore, if more than one interpretation can be given to expression any law for the time-being in force in relation to shops and establishments in a State, then the one which advances the object of the legislation will be preferred as against an interpretation which would wholly or partially defeat the legislative intendment. The Court will also refrain from interpreting a beneficent Statute

1979 (39) FLR 353

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like the Act of 1972 in such a manner which may curtail its wide amplitude and result in denial of benefit of gratuity to a class of employees unless it becomes a compelling necessity.5 The Act is a piece of social welfare legislation and deals with the payment of gratuity which is kind of retiral benefit like pension, provident fund etc. As has been explained, gratuity in its etymological sense is a gift, especially for services rendered, or returns for favours received. It has now been universally recognised that all persons in society need protection against loss of income due to unemployment arising out of incapacity to work due to invalidity, old age etc. For the wage earning population, security of income, when the worker becomes old or infirm, is of consequential importance. The provisions contained in the Act are in the nature of social security measures like employment insurance, provident fund and pension. 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 superannuation, or physical disablement or impairment of vital part of the body. The expression, gratuity itself suggests that it is a gratuitous payment given to an employee on discharge, superannuation or death. Gratuity is an amount paid unconnected with any consideration and not resisting upon it, and has to be considered as something given freely, voluntarily or without recompense. It is sort of financial assistance to tide over post-retiral hardships and inconveniences.

Municipal Committee, Thanesar, Distt.Kurukshetra v. A.Nathi Ram, 1998 (3) LLJ (Supp.) 1230 at p.1234

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CHAPTER 4 DEFINITIONS WHO IS AN EMPLOYEE? According to Section 2(e) employee means any person (other than an apprentice) employed on wages, in any establishment ,factory, mine, oilfield, plantation, port, railway company or shop, to do any skilled, semi-skilled, or unskilled, manual, supervisory, technical or clerical work, whether the terms of such employment are express or implied, and whether or not such person is employed in a managerial or administrative capacity, 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. The wage ceiling of `3500 which was earlier in the Act has been removed. With the removal of ceiling on wage every employee will be eligible for gratuity, irrespective of his wage level w.e.f. 24 th May, 1994. Teacher was held to be not an employee (LAB 1C Pat 365) under the Act. The teachers are clearly not intended to be covered by the definition of employee. [ Ahmedabad pvt. Primary Teachers Association v. Administrative Officer, LLJ (2004) SC] OTHER IMPORTANT DEFINITIONS APPROPRIATE GOVERNMENT Section 2(a) 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; 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
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and any dispute connected with the payment of gratuity falls within the jurisdiction of the controlling authority and the appellate Authortiy appointed by the Central Government under Section 3 and 7. FAMILY (h) family, in relation to an employee, shall be deemed to consist of (i) in the 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 : 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; RETIREMENT (q) retirement means termination of the service of an employee otherwise than on superannuation; SUPERANNUATION (r) 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 at the age on the attainment of which the employee shall vacate the employment; WAGES (s) 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.

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CHAPTER 5 CONTINUOUS SERVICE

Section 2A- Continuous Service

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 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. (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 - (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 Order's) Act, 1946 (20 of 1946), or under the Industrial Disputes Act, 1947 (14 of 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 twelve weeks.
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(3) where 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 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.

Section 2-A of the Payment of Gratuity Act speaks of what is continuous service. In the event there is a strike or lock-out which is not on account of the fault of the employee such interruption would not be considered for the purpose of holding that the workman was in continuous employment. However, what is material to note is that there should not be a cessation of relationship of employer and employee. Section 2-A of the payment of gratuity act does not take into consideration a case where the services of the workmen were terminated for whatsoever reason and the said termination has not been set aside or withdrawn. The section does not state that the strike in a public utility service is illegal, only when the conditions mentioned therein are present the strike is illegal.

ANALYSIS 1. This section defines continuous service 2. Continuous service would be uninterrupted service 3. Interruption on account of :i) Sickness, or ii) Accident, or iii) Leave, or iv) Absence from duty without leave except break of service under orders passed under the standing orders, rules or regulations v) Lay-off, or strike, or lock-out, or cessation of work not due to any fault of the employee concerned shall be included in counting the period of continuous service 4. The interruptions may be before or after the commencement of the Act.
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5. Sub-section (2) of the section introduces a legal fiction for continuous service of any one year or six months except for employees employed in seasonal establishments. Employees employed in a seasonal

establishment whose case is not covered by sub-section (1) are dealt with in sub-section (3) of the Section. 6. A person shall be deemed to be in continuous service with the employer(i) For a period of one year if he has actually worked under the employer during the twelve months immediately preceding the date relevant for calculation for not less than1. One hundred and ninety days (190 days) if employed below the ground in a mine or in an establishment which works for less than six days per week; 2. Two hundred forty days (240 days) in any other case (ii) For a period of six months if the employee has actually worked under the employer during the period of six calendar months preceding the date with reference to which calculation is to be madea) Ninety-five days (95days) in a mine or in an establishment which works for less than six days in a week; or b) One hundred and twenty days (120 days) in any other case. 7. The explanation to sub-section enjoins that the days as detailed hereunder be included in actual working daysa) A lay-off (i) under an agreement, or (ii) standing orders, or (iii) Industrial Dispute Act, 1947, or (iv) any other law applicable to the establishment.
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b) Period of leave on full wages earned in previous year c) Absence due to temporary disablement from accident arising out of and in the course of employment d) Maternity leave in case of a female not exceeding twelve weeks

8. Sub-section (3) likewise by legal fiction provides for employees employed in seasonal establishment as to what constitutes continuous service in case of those employees who are not covered by sub-section (1) of the section

In such a case an employee shall be deemed to be in continuous service if he has actually worked for seventy-five per cent of the days the establishment was in operation for one year or six months.

CONSTITUTIONALITY The words not due to any fault of the employee qualify not only the expression cessation of work but also the words sickness, accident, lay-off, strike and lock-out. Hence, it was held that it is not justified to contend that the section is violative of Article 14 of the Constitution for treating the periods of illegal strike or legal lock out as equivalent to the period of actual service rendered by the employee. In Coimbatore District textile Workers Union v. Meenakshi Mills Ltd.6 the Constitutionality of Section 2-A was challenged on two grounds(i) In as much as any unauthorised but unpunished absence would not be a bar to gratuity, the provision could not be treated as a reasonable restriction on the employers fundamental right under Article 19(1)(g) and would not be protected by Article 19(6) of the Constitution.

(1988) 2 LLN 352 (Mad.) (DB)

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(ii)

Additional claims arising on account of the new provision will saddle the employer with unbearable financial burden.

Rejecting these contentions the Court observed: The very object of the amendment is to restore the law laid down by the decision of the Supreme Court in Jeewanlal (1929) Ltd. Workmen7 and therefore, absence from the duty without leave is treated as continuous service excepting in cases specifically mentioned in the section. If an employer had failed to take action against the employee at the appropriate time for his absence from the duty without leave, then he should blame only himself. He cannot contend that he is deprived of an opportunity to punish the employee for his past absence from duty by the retrospective effect of the amendment. A perusal of the Model Standing Orders shows that a habitual absence without leave or absence without leave for more than ten consecutive days was to be treated as misconduct. If for any reason employer had not included such a clause in the standing orders framed for his establishment or if an employer had not taken any action under that clause in spite of the existence of the same in the relevant standing orders, he must have deemed to have waived his right to take action. As rightly contended by learned counsel for respondents, the amended section is only a provision enabling the employer to take advantage of a punishment imposed by him on an employee for absence without leave.

CONTINUOUS SERVICE- Meaning thereof

Section 2A defines continuous service. According to this section, if an employee renders continuous service for a period of 240 days in a year he will be deemed to have continued in service for one year. This deeming provision contained in Section 2A must be applied in interpreting the period of five years
7

AIR 1961 SC 1567

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mentioned in Section 4 (1). Section 2(b) also supports the interpretation because as per the said section completed year of service means continuous service for one year. Therefore, these provisions are emphatic in stating that if the employee serves continuously for a period of 240 days in a year, he must be deemed to have been continuously served for one year.8 But the onus is on the workman to prove that he has rendered continuous service for 240 days. The definition of the expression continuous service in the Payment of Gratuity Act indicates that as long as employee is in service and his service has not been terminated, mere absence or not reporting for duty or ceasing to work for no fault of the employee, the employee is deemed to be in service. There should not be cessation of relationship of employer and employee. Section 2A of Payment of Gratuity Act does not take into consideration a case where the services of a workman are terminated for whatever reason and the said termination had not been set aside or withdrawn.9

CONTINUOUS SERVICE: Break: Scope of The definition of continuous service contemplates that the break in the service must be due to the fault of the employee. The definition does not support the contention, that when the contract of service comes to an end on paper, there occurs a break in continuity of service even though the employee had continued to work with the employer without any physical break in service. Such an interpretation would defeat the object of the Act. In a case where the services have been continued, the employee would be entitled to gratuity for the entire period of service, as it would amount to continuous service within the meaning of the Act.

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Mettur Beardshell Ltd. V. Regional Labour Commr. 1998 LLR 1072 (Mad.) Baburam Rameshwar v. Phoenix Mills Ltd. 1998 4 LLN 533

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In Maharashtra State Textile Corpn. Ltd. v. Gopal Balu Saikar,

10

respondent

was in employment since 1967 of textile Mill owned by Western India Spinning and Manufacturing Mills, which was closed due to financial difficulty from July 1976. On 13-1-1977, the Court ordered the winding up of the company and appointed the official Liquidator as Liquidator of the company. The petitioner as an authorised person, took charge of the management of the said company on 1-8-1977 under the Section 18-FA of Industries (development and Regulation) Act, 1951. On restarting of mill, the respondent was re-employed afresh on 1411-1977. Controlling Authority as also Appellate Authority held that petitioner liable for payment of gratuity for the entire period from 1967, hence the petition. Allowing the petition, a single judge of Bombay High Court held : in the result, I find that the impugned order is not sustainable since it imposes liability on the petitioners to pay gratuity to Respondent No. 1 for a period of about 18years right from April 1966 till his superannuation in 1983. There is a clear break in service of Respondent No. 1 from 13th January, 1977 by reason of Section 445 (3) of the Companies Act till her was re-employed n 14th November, 1977. Therefore, applying section 10(2) of the Nationalization Act the petitioner cannot be held liable for payment of gratuity to 1st respondent for the period prior to the taking over the management of the undertaking.

CONTINUOUS SERVICE: not working for 240days in a year: effect

One of the causes for interruption of service given in the main part of the definition is cessation of work not due to any fault of the employee concerned. In other words cessation of work for which the employee is not responsible has been ignored for the purposes of finding out whether the employee has rendered continuous service. Conversely, there may be cases where there may be cessation of work which may be exclusively due to the fault of the employee.
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2003 1 Cur LR 677 (Bom.)

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An employee may remain absent without leave. The question is how is such a period to be treated when the Court has to find out whether an employee has rendered continuous service or not. The Legislature has provided in the explanation for those cases where an employee is not in uninterrupted service for one year. Putting it differently, the opening words of the first explanation clearly show that the explanation was intended to deal with the case of an employee whose services are interrupted. The employee dealt with by the first explanation is obviously a person who is not covered by the main part of the definition of continuous service. The main part of the definition of continuous service deals with an employee in uninterrupted service. While the first explanation deals with an employee who is not in uninterrupted service for one year, this fact itself is sufficient to indicate that while the main part of the definition in Section 2(c) deals with generally with the concept of continuous service, the first explanation deals only with the case of an employee who is not in uninterrupted service for one year. By that explanation, in the case of those who are not in uninterrupted service for one year, the Legislature has introduced a fiction and by the fiction it is provided that if the employee has been actually employed by the employer within the twelve month immediately preceding the year for not less than 190 days, if employed below the ground in a mine or 240 days in any other case, except when he is employed in a seasonal establishment, then such employee shall be deemed to be in continuous service. An artificial meaning has, therefore been given to the words continuous service by fictionally treating an employee who is not in uninterrupted service for one year as being in continuous service provided he is actually employed for the number of days referred to in the explanation. The second explanation is also a provision for artificially treating an employee in a seasonal establishment to be in continuous service. Under the second explanation an employee of a seasonal establishment is to be deemed to be in continuous service if he has actually worked for not less than 75% of the number of days on which the establishment
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was in operation during the year. Normally an employee could not be said to be in continuous service in a year by working only for a number of days but the Legislature has now given an artificial meaning to the concept of continuous service. It has to be remembered that the definition of continuous service has been given for the purpose of Section 4(1), a claim under which would necessarily entail an enquiry as to whether an employee has to render continuous service, therefore, the meaning of the words continuous service cannot be read in isolation and the purposes for which these words have been defined become very relevant in order to appreciate the import of the definition. Continuous service in order to be rendered must no doubt presuppose a contract of employment. But a contract of employment between a master and a servant is not the same thing as rendering continuous service. The two are not synonymous. It is well known that gratuity is in nature of retiring benefit to those workmen who have rendered long and unblemished service to the employer and has thus contributed to the prosperity of the employer. The concept of gratuity was explained by the Supreme Court in Delhi Cloth and General Mills Company Ltd. v. Workmen11. The Supreme Court observed as follows: Gratuity paid to workmen is intended to help them after retirement on superannuation death, retirement, physical incapacity, disability or otherwise. The object of providing a gratuity scheme is to provide a retiring benefit to workmen who have rendered long and unblemished service to the employer and has thereby contributed to the prosperity of the employer. It is one of the efficiency devices and is considered necessary for an orderly and human elimination from industry of superannuated or disabled employees who, but for such retiring benefits would continue in employment even though they function inefficiently. It is not paid to an employee gratuitously or merely as a matter of
11

AIR 1970 SC 919

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boon; it is paid to him for long and meritorious service rendered by him to the employer. It is this concept of reward for long and meritorious service that is incorporated in Section 4(1) of the Act. Long and meritorious service would contemplate that an employee has in fact rendered service and it was not enough to qualify for the gratuity if he was merely on the muster-roll of the employer under a subsisting contract of employment. If the service of the employee is interrupted due to the strike for a fault of the employee then such employee shall be deemed to be continuous service. However, where the absence due to strike is an account of default of the employee, such period of absence cannot be considered as uninterrupted service and he would not be eligible for gratuity for the particular year if he does not complete 240 days in the year by excluding such period of absence due to strike on account of the mistake of the employee.12

CONTINUOUS SERVICE: Holidays covered The term continuous service means uninterrupted service and includes service which is interrupted by sickness, accident, leave, lay-off, strike or a lock-out or cessation of work not due to any fault of the employee concerned whether such uninterrupted or interrupted service was rendered before or after the commencement of the Act. Thus, Sundays, weekly holidays and national or festival holidays are to be included in the computation of the period of continuous service under Section 2A of the Gratuity Act.13

12 13

Kaleeswarar Mills A Unit v. Asstt. Labour Commr. 2003 (1) LLJ 231 Sri Ahilandeshwari Mills Ltd. V. Asstt. Commr. Of Labour 1999 LLR 576 (Mad.)

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CHAPTER 6 OTHER PROVISIONS Section 3 Controlling Authority The appropriate Government may, by notification, appoint any officer to be a controlling authority, who shall be responsible for the administration of this Act and different controlling authorities may be appointed for different areas This Section authorises the appropriate Government, both Central and State to appoint a controlling authority. The controlling authority would be responsible for the administration of the Act.

Section 4 Payment of Gratuity (1) 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 : 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. Explanation : For the purposes of this section, 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.

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(2) 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 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 : Provided further that in the case of an employee who is 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. 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. (3) The amount of gratuity payable to an employee shall not exceed three lakhs and fifty thousand rupees. (4) 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. (5) 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. (6) Notwithstanding anything contained in sub-section (1), (a) 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. (b) 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

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(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. For the purpose of claiming gratuity under the Act, the employee must have rendered continuous service for a period of 5years. Where such period of service has not been rendered gratuity shall not be paid under the Act. Where an employee claims gratuity on the basis of an agreement it was held in D.S. Purwar v. Elphinstone Spinning and Weaving Mills14, that claim of gratuity on the basis of an agreement is outside the scope of adjudication under the Payment of Gratuity Act, 1972. In Duncan Agro industries Limited v. Subanna B.15 the question involved for determination was whether the workmen were entitled for gratuity for the period of service rendered before coming into force of this Act. It was held that gratuity is payable to an employee who has rendered continuous service of not less than five years and continuous service in view of the provisions of Section 2(c) which defines continuous service as service whether rendered prior or after commencement of the Act, workmen would be entitled for gratuity for the period of service rendered prior to or after the commencement of the Act. In Rashtriya Mill Mazdoor Sangh v. National Textile Corporation (South Maharashtra) Ltd. & others16 it was held that liability to pay gratuity arises on the date of resignation, superannuation or retirement etc. such liability if arises prior to the date of taking over the management of textile undertakings by the National Textile Corporation, would be that of owners of Textile undertakings and not of National Textile Corporation.

14 15

1986 (53) FLR 600 (Bom) (1984) I LLJ 96 (AP) 16 (1996) I LLJ 787 (SC)

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Further it was held in Bakshish Singh v. M/s. Darshan Engineering Works and others17, that 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 the financial capacity of the employer to bear its burden and the said provisions are a reasonable restrictions on the right of the employer to carry on his business within the meaning of Article 19(6) of the Constitution. Hence Section 4(1)(b) of the Act is valid and legal. Section 4(6) - In Bharath Gold Mines Ltd. v. Regional Labour Commissioner,18 a workman was guilty of theft committed in the course of employment. In the opinion of the management the offence amounted to an offence involving moral turpitude and the workman was dismissed on this ground and hence the gratuity was forfeited. It was held that after the amendment of the year 1984 notice to show cause against forfeiture of gratuity was mandatory and its non-compliance renders the forfeiture illegal. In Ravindra Kumar Nangia v. Rashtriya Chemicals and Fertilizers Ltd.19 the petitioner was an employee of the respondent. His services came to an end simpliciter on attaining the age of 58 years i.e. the age of superannuation. His services were not terminated on any grounds mentioned in Section 4(6) of the Act. On refusal to release payment of his gratuity in view of certain case pending against him, the employee approached the High Court. Allowing the petition by the employee the High Court held observed that the services of the petitioner were not terminated due to any act, wilful omission or negligence causing damage to the property of the employer or due to his riotous act or disorderly behaviour or due to an offence involving moral turpitude. But the service came to an end simpliciter on his attaining age of superannuation of 58
17 18

(1994) I LLJ 197 (SC) (1986) 53 FLR 340 (Karn) 19 (2002) I LLJ 648 (Bom.)

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years. It was further observed that even till date f the order of the High Court i.e., October 10. 2001 which was more than seven years after his superannuation no departmental action has been initiated. In these circumstances, the High Court held that the impugned action of the employer respondent not to release gratuity payable to the petitioner was beyond time under the relevant rules of conduct and discipline of respondent and hence could not be sustained. Section 7 Determination of the amount of gratuity payable (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 to the employer, within such time and in such form, as may be prescribed, for payment of such gratuity. (2) As soon as gratuity becomes payable, the employer shall, whether an application referred to in sub-section (1) 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. (3) The employer shall arrange to pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable. (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 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) (a) 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
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the gratuity, the employer shall deposit with the controlling authority such amount as he admits to be payable by him as gratuity. (b) Where there is a dispute with regard to any matter or matters specified in clause (a), the employer or employee or any other person raising the dispute may make an application to the controlling authority for deciding the dispute. (c) 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. (d) The controlling authority shall pay the amount deposited, including the excess amount, if any, deposited by the employer, to the person entitled thereto. (e) As soon as may be after a deposit is made under clause (a), 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. (5) For the purpose of conducting an inquiry under sub-section (4), the controlling authority shall have the same powers as are vested in a court, while trying a suit, under the Code of Civil Procedure, 1908 (5 of 1908), in respect of the following matters, namely :(a) enforcing the attendance of any person or examining him on oath; (b) requiring the discovery and production of documents; (c) receiving evidence on affidavits; (d) issuing commissions for the examination of witnesses.

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(6) Any inquiry under this section shall be a judicial proceeding within the meaning of sections 193 and 228, and for the purpose of section 196, of the Indian Penal Code, 1860 (45 of 1860). (7) Any person aggrieved by an order under sub-section (4) 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 under subsection (4), or deposits with the appellate authority such amount. (8) 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.

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CHAPTER 7 AMENDMENTS TO THE PAYMENT OF GRATUITY ACT, 1972 The Payment of Gratuity (Amendment) Bill, 2009 as passed by both the Houses of Parliament has amended the definition of employee contained in the Payment of Gratuity Act, 1972 for covering teachers in private institutions. For the information of the readers, it may be pointed out here that the Payment of Gratuity Act, 1972 has been amended five times so far. The amendments made are as given below:(i) The first amendment made by the Payment of Gratuity (Amendment) Act, 1984 inter alia provides for raising the wage limit for coverage from Rs.1000/to Rs.1600/- per month and appointment of Inspectors. This amendment was brought into force w.e.f. 1.7.1984. (ii) The second amendment made by the Payment of Gratuity (Second Amendment) Act, 1984 inter alia re-defined the term continuous service and provided for grant of exemption to a class of employees from the operation of the Act. This amendment came into force from 18.5.1984. (iii) The third amendment made by the Payment of Gratuity (Amendment) Act, 1987 inter alia provided for:(a) raising the wage limit for coverage from Rs.1,600/- to Rs.2,500/- per month, which was further raised to Rs.3,500/- p.m. w.e.f. 1.12.1992. (b) replacing the ceiling of twenty months wages for payment of grat uity by a monetary ceiling of Rs.50,000/(c) making it obligatory for the employers to pay simple interest at a specified rate if the gratuity is not paid within 30 days from the date it falls due. (d) Compulsory insurance/setting of gratuity fund for payment of gratuity. The amendments at (a) to (c) above were brought into force w.e.f. 1.10.1987. The amendment at (d) has not been brought into force so far. In fact, this particular provision is being reviewed in view of certain subsequent

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developments. The rate of simple interest mentioned at (c) above has been fixed at 10% per annum w.e.f. 1.10.1987. (iv) The fourth amendment made by the Payment of Gratuity (Amendment) Act, 1994 inter alia provided for:(a) Doing away with the wage ceiling altogether for coverage under the Payment of Gratuity Act, 1972; (b) Enhancing the ceiling of the maximum amount of gratuity from Rs.50,000/to Rs. one lakh. This amendment came into force w.e.f. 24.5.1994. (v) The Fifth Amendment made by the Payment of Gratuity (Amendment) Act, 1998 has enhanced the ceiling on maximum amount of gratuity from Rs. one lakh to Rs.3.50 lakh with effect from 24.9.1997.

Background of the present amendments Before the enactment of the Payment of Gratuity Act, 1972, there were two State Laws providing for payment of gratuity. These were the Kerala Industrial Employees Payment of Gratuity Act, 1970 and the West Bengal Employees Payment of Gratuity Act, 1971. The question of having a Central Legislation on the subject was discussed in the Labour Ministers Conference held in New Delhi on 24 and 25 August, 1971 as also the Indian Labour Conference held on 22 and 23 October 1971 and general consensus was reached for enacting a Central Legislation on payment of gratuity. Accordingly, a Central Law modelled largely on the pattern of West Bengal Employees Payment of Gratuity Act, 1971 was enacted and is known as the Payment of Gratuity Act, 1972. It was brought into force with effect from the 16.9.1972 vide S.O. No.601 (E) dated 16.9.1972 and it extends to whole of India. The Act has been recently extended to the State of Sikkim w.e.f. 1.11.1995. The Act provides for payment of gratuity to employees employed in any factory, mine, oilfield, plantation, port, Railway Company and in any shop or establishment employing ten or more workers. It has also been extended to motor transport undertakings
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employing ten or more workers. Under the Act, gratuity is payable at the rate of fifteen days wages for every completed year of service or part thereof in excess of six months subject to a monetary ceiling of Rs.3.50 lakh. In case of employees employed in seasonal establishments, gratuity is payable at the rate of seven days wages. A worker is entitled to gratuity in the contingency of superannuation, retirement, resignation, death or disablement due to accident or disease, subject to completion of five years continuous service. The condition of five years is however, not applicable in case of death or disablement. Further, it does not make any discrimination between casual, contract, temporary and permanent worker who has completed the prescribed period of five years continuous service as defined in section 2A of the Act. The liability for payment of gratuity vests in the employer. Gratuity is payable in addition to pension or contributory provident fund, if any. The Payment of Gratuity Act, 1972 was made applicable to local bodies with effect from 8.1.1982. Therefore, the schools under the control of local bodies were covered under the Act with effect from 8.1.1982 itself. However, the employees of other educational institutions were facing denial of gratuity as they were not covered under the Act. The employees of the Government schools are already entitled to gratuity under the extant rules of the Government governing gratuity and pension but the employees of the private schools were having no legal entitlement to gratuity. As gratuity is an old age retiral social security benefit, it was considered desirable to extend the benefit of the Payment of Gratuity Act, 1972 to all employees employed in all educational institutions having ten or more persons. Accordingly, the Central Government extended the provisions of Payment of Gratuity Act, 1972 to the educational institutions employing 10 or more persons vide the Ministry of Labour and Employment Notification No. S.O. 1080 dated 3 April 1997. The Notification came into force w.e.f 19.4.1997, date when it was published in the Gazette of India. In an appeal filed before the Supreme Court in the case of Ahmedabad Private Primary Teachers' Association v.
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Administrative Officer and others, AIR 2004 SC 1426, the Apex Court in its judgment dated 13.1.2004 ruled that teachers are not entitled to gratuity under the payment of Gratuity Act, 1972 in view of the fact that teachers do not answer description of definition of employee under section 2 (e) of the Payment of Gratuity Act, 1972. The ruling also, inter alia, states that non-use of wide language similar to definition of employee as is contained in section 2(f) of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 reinforces the conclusion that teachers are not covered in the definition. The observations of the Supreme Court are as follows:Our conclusion should not be misunderstood that teachers although en gaged in very noble profession of educating our young generation should not be given any gratuity benefit. There are already in several States separate statutes, rules and regulations granting gratuity benefits to teachers in educational institutions which are more or less beneficial than the gratuity benefits provided under the Act. It is for the Legislature to take cognizance of situation of such teachers in various establishments where gratuity benefits are not available and think of a separate legislation for them in this regard. That is the subject matter solely of the Legislature to consider and decide. Keeping in view the observations of the Supreme Court as mentioned above the definition of employee under section 2(e) in the existing Act has been proposed to be widened in keeping with the spirit of the Act. Existing Definition of employee under Section 2 (e) of the Payment of Gratuity Act, 1972 Section 2 (e) : employee means any person (other than an apprentice) employed on wages in any establishment, factory, mine, oilfield, plantation, port, railway company or shop, to do any skilled, semi-skilled, or unskilled, manual, supervisory, technical or clerical work, whether the terms of such employment are express or implied, and whether or not such person is employed in a managerial or administrative capacity, but does not include any such person who holds a post under the Central Government or a State Government and is
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governed by any other Act or by any rules providing for payment of gratuity. The amendment has retained the basic features of the definition of the term employee as given in the Payment of Gratuity Act, 1972, while widening its scope and adopted the definition of employee as follows:Amended Definition Section 2(e) : employee means any persons (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. The Government has made the amendment with retrospective effect from April 3, 1997. The Government has also introduced Payment of Gratuity (Amendment) Bill, 2010 in Parliament seeking to raise the current gratuity ceiling from Rs. 3.5 lakh, in the light of the Sixth Pay Commission report that recommended raising it to Rs. 10 lakh. The Bill has been passed by both the Houses of Parliament recently. After having discussed the amendments introduced, let us briefly discuss the salient features of the Payment of Gratuity Act, 1972 so as to have an understanding of the basic provisions of the Act. As mentioned earlier, the Payment of Gratuity Act, 1972 was enacted and brought into force from 16 September 1972. The Act provides for scheme for payment of gratuity to the employees employed in factories, mines, oilfields, plantations, ports, railway companies, shops and other establishments and matters connected therewith or incidental thereto. Extent and Application

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The Act extends to whole of India except plantations in the State of Jammu and Kashmir. It applies at present 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; and (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 these powers, the Central Government has so far extended the provisions of the Act to the various classes of establishments, where ten or more persons are employed or were employed on any day of the preceding twelve months as mentioned above. Excluded Categories of Employees The definition of employee in Section 2(e) specifically excludes from the purview of the Act, any 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. Eligibility Conditions Gratuity is payable to every employee, other than an apprentice, in an establishment to which the provisions of the Act applies, on termination of his employment either due to superannuation or retirement or resignation, subject to completion of continuous service for not less than five years, Gratuity is also payable in case of termination of service due to death or disablement, due to accident or disease and there is no condition of service in these two contingencies. Quantum of Gratuity

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For every completed year of service or part thereof in excess of six months, the employees, other than the seasonal employees are entitled to gratuity at the rate of fifteen days wages based on the rate of wages last drawn. The employees of seasonal establishment who do not work throughout the year are entitled to gratuity at the rate of seven days wages for each season. These provisions do not, however, affect the right of an employee to receive better terms of gratuity under any award or agreement of contract with the employer. Limit for Payment of Gratuity The employers have to pay the gratuity within thirty days from the date it becomes due, if the gratuity is not paid within the prescribed time limit, the employer is required to pay the amount of gratuity with interest as specified by the Government from time to time. Grant of Exemption Section 5(1) of the Payment of Gratuity Act gives power to the appropriate Government to exempt any establishment, factory, mine, oilfield, plantation, port, railway company or shop from the operation of the provisions of this Act, if in the opinion of the appropriate Government, employees of such shop etc. are in receipt of gratuity or pensionary benefits not less favourable than the benefits conferred under this Act. There is a similar provision for grant of exemption to a class of employees in Section 5 (2) of the Act. Administration of the Act The Central Government is responsible for administration of the Act in relation to the following:(a) factories or establishments belonging to or under the control of the Central Government; (b) establishments having branches in more than one State; and (c) major ports, mine oilfields or railway companies. The State Government is responsible for administration of the Act in all other cases. The Central Government have appointed Chief Labour Commissioner
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(Central) and Regional Labour Commissioner (Central) and Assistant Labour Commissioners (Central) as the Controlling/ Appellate Authorities under the Act for their respective areas. Procedure for the Settlement of Dispute, Relating to Payment of Gratuity: If there is any dispute about the amount of gratuity payable to an employee, the employee may make an application to the Controlling Authority of the area for taking necessary action. The Controlling Authority shall issue a certificate for the amount of gratuity dues to the Collector who shall recover the same as arrears of land revenue and pay the same to the person entitled to receive the gratuity. Any person aggrieved by the order passed by the Controlling Authority can prefer an appeal to the Appellate Authority. Penalties for Non-Payment of Gratuity: Where the offence relates to non-payment of gratuity payable under the Act, the employer shall be punishable with imprisonment for a term which shall not be less than three months but which may extend to one year or fine which shall not be less than 10 thousand rupees but extend to twenty thousand rupees or both.

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CHAPTER 8 CONCLUSIONS The Payment of Gratuity Act is a comprehensive social security legislation providing for the retiral benefit to an employee on his superannuation. It is apparent that the Payment of Gratuity Act enacts a complete Code containing detailed provision, covering all essential features of a scheme for payment of gratuity act. It creates the right to payment of gratuity, indicates when the right will accrue, and lays down the principles for quantification of gratuity. For wage-earning population security of income, when the worker becomes old or infirm, is of consequential importance. The provision for social security measures, retiral benefits like gratuity, provident fund and pension (known as triple benefits) are of special importance. In bringing the Act on the statue book, the intention of the legislature was not only to achieve uniformity and reasonable degree of certainty but also to create and bring into force a selfcontained, all embracing, complete and comprehensive code relating to gratuity as a compulsory statutory retiral benefit. 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 superannuation, or physical disablement or impairment of vital part of body. Thus it is a sort of financial assistance to tide over post retiral hardships and inconveniences.

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Bibliography 1) Kharbanda Commentaris on Payment of Gratuity Act, 1972, Law Publishing House, eighth revised edition 2011 2) K.D. Shrivastava, Payment of Gratuity Act, Eastern book Company, 2005 Edition 3) Manupatra 4) S.N.Mishra, Industrial and Labour Laws 5) Goswami, Industrial and Labour Laws

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