Gratuity Law in Pakistan

Gratuity is a one of the retirement benefits for long service. Before May 1972, the payment of
gratuity by employer was on voluntary basis, after that it was incorporated in Standing Orders
and becomes a statutory obligation of employers. Since then payment of gratuity is a legal
benefit of eligible worker.
There are three different retirement benefits defined in Standing Order 12(6) i.e. Gratuity or
Provident Fund or Approved Pension Fund. The commercial establishment employed 20 or
more workmen OR any industrial establishment employed 49 or more workmen, directly or
indirectly, during any days of preceding 12-months, are legally liable to offer at least any one of
these retirement benefit.
S.O 12(6) of W.P. Industrial & Commercial (Standing Orders) Ordinance, 1968 defines, where a
workman resigns from service or services are terminated by the employer, for any reason other
than misconduct, shall be entitled for gratuity equivalent to thirty (30) days wages, calculated on
the basis of the (wages admissible to him in the last month of service if he is a fixed-rated
workman or the highest pay drawn by him during the last twelve months if he is a piece-rated
workman), for every completed year of service or any part thereof in excess of six months:
provided that, where the employer has established a provident fund to which the workman is a
contributor and the contribution of the employer to which is not less than the contribution made
by the workman, no such gratuity shall be payable for the period during which such provident
fund has been in existence. Provided further that if through collective bargaining the employer
offers and contributes to an Approved Pension Fund as defined in the Income Tax Ordinance,
2001, and where the contribution of the employer is not less than fifty per cent of the limit
prescribed in the aforesaid Ordinance, and to which the workman is also a contributor for the
remaining fifty per cent or less, no gratuity shall be payable for the period during which such
contributions has been made.]

Which Establishment is Liable to Pay Gratuity?

As per Section 1 of the Ordinance, the provision of gratuity becomes applicable to: every
commercial establishment employing or employed twenty or more workmen and every industrial
establishment employing or employed fifty or more workmen, on any day during the preceding
twelve month.

When Gratuity becomes payable?

Gratuity becomes payable at time of separation from services which could be: (i) by resignation
by the workman, (ii) termination of services by employer due any reason other than misconduct

(in case of proved misconduct employer is not bound to pay gratuity), (iii) in case of death and
(iv) retirement or superannuation of a worker.

Who is entitled for Gratuity?

There are following conditions to check the entitlement of gratuity:
(i) provision of statutory gratuity is applicable on the establishment i.e. industrial or commercial,
in respect to number of workmen employed, as explained above.
(ii) employee is a "workman" as defined in Section 2(i) of this Ordinance as someone who is
employed to do any skilled or unskilled, manual or clerical work. According to various Courts
judgments, it is the nature of duties he is performing rather than his designation or wages
which determine whether he is a "workman" or not.
(iii) length of service should be excess to six months or more.

Rate of Gratuity
Earlier the rate of gratuity was 15-days of wages for each completed year of service and later on
it was revised as 20-days wages. Right now the present rate of gratuity is 30-days wages for
every completed year of service or for any period in excess of six month in the same
establishment.

How to calculate the amount of Gratuity payable?

Following is procedure to calculate the payable gratuity of an eligible worker:

1. Calculate per day wage rate based on 26-days in a

month, by dividing monthly wages by 26-days;
2. Rate per day is multiplied by rate of gratuity which is
30 days wages (i.e. per day wage x 30); and
3. Finally calculate payable amount of gratuity for the
entire service period, the formula is per day wage x
30 (rate of gratuity) x No. of service years
Six-month rule is followed to decide whether to pay gratuity for the last year of service
depending upon whether the service is more or less than six months. For service of more than six
months, gratuity is payable otherwise not.

The 26-days month is defined in the Explanation of Section 3 of the Minimum Wages for
Unskilled Workers Ordinance, 1969 i.e. "month" means a normal working period of twenty-six
days calculated at the rate of forty-eight hours of work per week. Similarly the minimum wages
for skilled and semi-skilled workers is also based on 26 days in a month. The yearly provincial
gazettes specify the same for these categories of workers.

Meaning of Wages for Calculation of Gratuity

All payments or allowances which are regular, permanent and non-contingent in nature, no
matter by what name they are called, are included in wages for the purpose of gratuity. Any
payments which are irregular (unpredictable and/or depend on the goodwill of employer)
or contingent in nature (payable upon existence or disappearance of certain conditions (e.g.,
profit) which could not be predicted in advance) then those payments are not part of wages for
the purpose of calculating gratuity.
In the case of fixed-rated worker, gratuity is to be calculated on the basis of wages admissible to
worker in the last month of service.
In the case of piece-rated worker, gratuity is to be calculated on the basis of highest pay drawn
during the last twelve months, for every completed year of service or any part thereof in excess
of six months.

Payment of Gratuity in case of Death of Worker

In case of death of a workman, gratuity is payable to the legal dependents of a workman. As
mentioned above, death may not necessarily occur on duty but the worker should be in
continuous service at that time. The amount of gratuity, in this case, is transferred to "Workmen
Compensation Commissioner" who will then allocate this amount to the dependents of a worker.
The dependents of a deceased worker include "his widowed mother, his own widow, minor son
and unmarried daughter". The Commissioner shall proceed with the allocation of the deposit
amount to the dependents of the deceased in accordance with the provisions of Section 8 of the
Workmens Compensation Act, 1923. If the employer fails to deposit the gratuity amount then
the dependents of the deceased may submit an application to Commissioner for the recovery.

Important points to be remembered regarding

payment of gratuity:
Gratuity has no connection with loss or profit or the
financial position of an employer; it has to be paid to
eligible worker.
Completed year of service means a period of 12months service counted from the date of first

appointment in the same establishment. It does

mean calendar year, financial year or any other
period.
The period of service which is 6-months or less, will
not be considered for payment of gratuity.
Retirement on attaining the age of superannuation is
treated as termination of service by employer and
voluntary retirement is considered resignation by
worker.
Legally employer is bound to offer only one
retirement benefit out of three. However, employer
at its sole discretion may also offer provident fund or
worker unions have to right to negotiate and get
more benefits simultaneously.

Gratuity is paid on last drawn salary with final settlement after resignation. Last
salary * number of years of your service (e.g) Last Salary = 50,000 Duration of
Service = 5 Gratuity Payable = 250,000 An employee gets entitled for gratuity
after 6 months of service as per Law in Pakistan but most of the companies
consider employees entitled after one year. @Ahsan Saleen Ahmed If a company
doesn't follow the rules the company can be sued.

Good article Asif sb, there are my two questions: 1) What about those
organizations where gratuity is calculated by last drawn salary multiply by number
of years of service (without calculated his wage of 26 days). 2) What about those

organizations where there is two off days in a week, there we calculate wage of
22 days?

At this point, we have to be very clear that for workers we have to get guidelines
from Labour Laws of Pakistan and for management cadre employees (which are
not covered under Labour Laws of Pakistan) the terms defined in
contract/appointment letter, HR Policy Manual and organization practices will
prevail. Legally only workers are entitled for statutory retirement benefits i.e.
Gratuity or Provident Fund or Approved Pension Fund, as per defined criteria in
Standing Orders. For management cadre staff, organizations have a right to
define their rules and regulations by their own, to govern routine employment
affairs and benefits also. So, there are a lot of organizations offering gratuity to
their management staff under different terms & conditions, which could not be the
same or aligned with the terms defined in Standing Orders. As, organization is
not legally bound to offer retirement benefit to their management cadre employee,
mostly it is offered only as goodwill gesture, employment norm, to compete, or to
maintain equality across the organization.

1) The organizations which are not complying with provisions of laws

definitely answerable for their wrong practices. Aggrieved person have a
right to pursue his/her case and could recover illegal or wrong deduction
from wages or gratuity. Section 15 of Payment of Wages Act 1936 deals
with - Claims out of deductions from wages or delay in payment of wages
and penalty for malicious or vexatious claims. Provincial Government may
by notification appoint any Commissioner for Workmens Compensation or

any other Officer to hear the applications or claims regarding illegal

deductions or non-payment of wages, including the matters related to
Gratuity or Provident Fund. Further, the application or claim must be
presented within three years from the date on which the deduction from the
wages was made or from the date on which the payment of the wages was
due to be made, as the case may be. Commissioner or Wage Authority
may impose a penalty to employer, if found guilty, ten times of the amount
deducted and also direct employer to pay delayed or deducted wages. 2)
The organization having 22-working days are also legally bound to
calculate wages on the basis of 26-days as fixed by Law. Employer, at its
own cost, wish and will, may give any relaxation in daily working hours or
reduce working days in a month, as a goodwill gesture or to be competitive
in the market.

Just want to add for exceptions where gratuity may not be payable to workers .....
for "Provident Fund" it must be a contributory PF where contribution of employer
must not less theen the contribution of worker and for "Approved Pension Fund"
as defined in Income Tax Ordainance 2001, contribution of employer is not less
than 50% of the limit prescribed in the Ordinance.