Gratuity Law in Pakistan

Gratuity is one of three prevalent retirement benefits in the private sector

employment. The other two are “Pensions and Provident Fund”. It is a “lump-
sum” amount of money payable to a worker on leaving service.

What is gratuity and what laws are governing gratuity in Pakistan?

Gratuity is one of three prevalent retirement benefits in the private sector employment. The other two
are "Pensions (approved Pensions Fund) and Provident Fund". It is a "lump-sum" amount of money
payable to a worker on leaving service (through retirement, death or termination of service) based on
salary (highest or the final salary) and period of service (over and above six months).

Gratuity is actually a benefit for services rendered in the past. It is a reward of good, efficient and
faithful service for a substantial period of time. Before 1972, gratuity was paid by an employer either
on voluntary basis or in consequence of an award by a labor court. However, the Labour Laws
Amendments Ordinance, 1972 made payment of gratuity a legal obligation. Amendments were
subsequently made in the Standing Order 12 of Industrial and Commercial Establishments (Standing
Orders) Ordinance 1968. Gratuity is now a statutory right for workers who have worked at least
twelve months in an organization. The relevant laws governing gratuity in private sector are:

Standing Orders Legislation

 1. The Industrial and Commercial Establishments (Standing Orders) Ordinance, 1968

(applicable in ICT and Balochistan)
 2. Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 (adapted by
the province of Punjab through Amendment Act of 2012)
 3. The Khyber Pakhtunkhwa Industrial And Commercial Employment (Standing Orders) Act,
2013
 4. The Sindh Terms of Employment (Standing Orders) Act, 2015

Payment of Wages Legislation

 1. Payment of Wages Act, 1936 (applicable in ICT and Balochistan)

 2. Payment of Wages Act, 1936 (adapted by the province of Punjab through Amendment Act
of 2014)
 3. The Khyber Pakhtunkhwa Payment of Wages Act, 2013
 4. The Sindh Payment of Wages Act, 2015

Factories Legislation

 1. The Factories Act, 1934

  2. The Factories Act, 1934 (adapted by the province of Punjab through Amendment Act of
2012)
 3. The Khyber Pakhtunkhwa Factories Act, 2013
 4. The Sindh Factories Act, 2015

Shops and Establishments Legislation

 1. The Shops and Establishments Ordinance, 1969

 2. The Shops and Establishments Ordinance, 1969 (adapted by the province of Punjab
through Amendment Act of 2014)
 3. The Khyber Pakhtunkhwa Shops and Establishments Act, 2015
 4. The Sindh Shops and Commercial Establishment Act, 2015

Which Organizations are liable to pay gratuity to their workers?

In accordance with section 1(4) of the Standing Orders Ordinance, 1968 (and its variant in Punjab),
every commercial establishment (employing 20 or more workers) and industrial establishment
(employing 50 or more workers) are required to pay gratuity to a worker once he/she has met the
minimum criteria. The Khyber Pakhtunkhwa Act and the Sindh Terms of Employment (Standing
Orders) Act, 2015 reduce the minimum number of workers in commercial establishments to 10
workers and in industrial establishments to 20 workers. The table below shows all the organizations
liable to pay gratuity to their workers.

Commercial Establishments Minimum Industrial Establishments Minimum

Number of Number of
Workers Workers

The Industrial and Commercial Establishments (Standing Orders) Ordinance, 1968 (applica
ICT, Balochistan and Punjab)

Advertising/commission/forwarding At least 20 Factory At least 50

Agency, clerical department of a factory, workers must workers mu
joint stock company have been have been
employed by the employed b
organization for organizatio
continuous 12 continuous
Insurance company, banking company, months Railways months
bank, broker office, stock exchange
 Club, hotel, restaurant Establishment of a contractor

Cinema, theater, Establishment in connection

with construction industry

The Khyber Pakhtunkhwa Industrial And Commercial Employment (Standing Orders) Act, 2013

The Sindh Terms of Employment (Standing Orders) Act, 2015

Above establishments At least 10 Above establishments At least 20

workers must workers mu
private educational institutions, have been tramway or motor omnibus have been
employed by the service; dock, wharf or jetty; employed b
organization for inland steam-vessel; organizatio
continuous 12 continuous
private health centres, clinical months mine, quarry, oil-field or gas- months
field;
laboratories,

private security agencies plantation;

societies registered under the Societies workshop or other

Registration Act, 1860 (Act establishment in which articles
are produced,
No. XXI of 1860) and the Voluntary Social
Welfare Originations (NGOs, NPOs) adapted or manufactured, with
a view to their use, transport or
sale

Other organizations as declared and notified by the government

What are the qualifying conditions for a worker to earn gratuity?

A worker is entitled to gratuity if the following four conditions are satisfied.

1. Industrial and Commercial Establishments (Standing Orders) Ordinance 1968 (or any of its variants) is applica
that establishment (whether commercial or industrial) i.e. it must have the minimum number of workers as menti
above
2. A person has to be a workman as defined in Standing Orders Ordinance 1968. A workman is "any person emp
in any industrial or commercial establishment to do any skilled or unskilled, manual or clerical work for hire or
reward".
3. He/she must be a permanent workman. If a worker is temporary, badli, probationer or a contract worker, he/sh
not eligible for gratuity under the law.
4. The minimum qualifying employment period is twelve months or above. However, if a worker has worked ov
months in a specific year, he will be entitled to gratuity of one year. Thus, in essence, gratuity is payable for mor
six months of employment.

What are the qualifying events for payment of gratuity to a worker?

An employee is entitled to gratuity when:

1. He resigns from his service (voluntary retirement or voluntary redundancy in exchange for
financial benefits like golden handshake schemes)
2. His organizations terminates his services due to reasons other than misconduct
3. He dies while in service of his employer (it is not necessary that employee should be on duty
at the time of death)
4. He reaches the superannuation age and retires

However, if an employee's services were terminated on account of misconduct (like harassment,

theft etc.), gratuity would no longer be admissible to him.

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".

What is the rate of gratuity and how is it calculated?

In accordance with the provisions of law, rate of gratuity is "thirty (30) days wages for every
completed year of service or any period in excess of six months". Any employment period exceeding
six months will be considered as one year. Originally, gratuity was set at 15 days' wages for every
completed year of service. In 1973, the rate was revised to 20 days' wages. In 1994, it was further
revised to 30 days' wages for every completed year of service or any period in excess of six
months.

The basis for calculation of wages is "wages admissible to a fixed-rate worker in the last month of his
service" or "the highest drawn pay by a piece-rate worker during the preceding twelve months".
Wages for gratuity calculation are the "gross wages" including all permanent and regular allowances
(like house rent allowance, cost of living allowance and conveyance allowance), however, these
don't include any such contingent or unpredictable payments like temporary relief to workers (e.g.
flood relief) or bonus provided by the employer. Other than wage rate, the second determining factor
in gratuity calculation is the time period a worker has served with an establishment/organization. Any
length of service higher than six months over the number of years of service is considered as one
 year for the purpose of gratuity calculation. Whereas any length of service less than six months is
not included in the course of calculating gratuity.

Consider the following illustration:

Date of joining/first appointment in an establishment 01st September, 1989

Date of voluntary retirement/resignation 30th April, 2015
Gross salary paid in 2015 Rs. 30,000
Temporary relief (flood relief) 5,000
Bonus (at the end of year indicating profitable situation for firm) 10,000
Total length of service 25 years and 8 months
Admissible period for calculation of gratuity 26 years
To calculate gratuity, Last drawn monthly gross pay Rs. 30,000
Pay per day 30,000/26(working days)=1153.85
One year gratuity (pay per day*30) 1153.85*30=34615.4
Gratuity for the whole period served i.e. 26 years 26*34,615.4=Rs. 900,000.4

Note: If the employment period in above example was 25 years and 4 months, gratuity would be
payable only for 25 years.

Wages for workers are determined on a 26-day month basis as defined in the Minimum Wages for
Unskilled Workers Ordinance, 1969. Minimum wage notifications, issued by the provincial
governments, also determine wages for unskilled, semi-skilled and skilled workers on a 26-day
basis.

Gratuity is calculated on the basis of gross wages including all those allowances and fringe benefits
which are of permanent, regular and non-contingent in nature. The irregular and non-contingent
payments (bonus, profit, payment for annual leave etc.) are not part of wages for the purpose of
calculating gratuity. In the case of fixed-rated workers, gratuity is calculated on the basis of wages
payable to a workers in the last month of service. In the case of piece-rated workers, gratuity is
calculated on the highest pay drawn during the last 12 months.

What is the difference between gratuity, provident fund, and pension fund?
As mentioned before, gratuity and provident fund are two different retirement benefits under the
Standing Orders Ordinance 1968. Workers don't have legal right to both of these benefits. It is rests
with an employer's discretion to decide as to whether he wants to set up provident fund or provide
gratuity at the end of employment or grant both of these benefits voluntarily. The law can't force an
employer to provide either of these benefits or both the benefits simultaneously.

Gratuity is usually awarded in addition to other benefits payable to an employee. However gratuity is
not payable during the period an employer has set up a provident fund in his establishment with at
least 50% of the contribution by the employer and the remaining by employee. The sum of both of
these contributions would be payable to a workman even if he resigns or is dismissed from service
for any reason including misconduct (remember gratuity is not admissible in case of misconduct).
However, the law does not stop an employer to provide both gratuity and provident fund to its
employees. What is provided in the law is the minimum legal protection i.e. floor and not the ceiling.
Both the Khyber Pakhtunkhwa and Sindh Standing Orders Acts further provide that the amount paid
to the worker under provident fund must not be less than the amount of gratuity admissible to such
worker.

It must be emphasized here though that after a 2007 amendment, there is also a provisions for an
Approved Pension Fund. If, agreed through collective bargaining, an employer offers and contributes
to an “Approved Pension Fund” as defined in the Income Tax Ordinance, 2001 (XLIX of 2001), and
where the contribution of the employer is at least 50% of the limit prescribed in the aforesaid
Ordinance, and to which the workman is also a contributor for the remaining 50% or less, no gratuity
is payable for the period during which such contributions has been made. The Pension Fund option
is not provided under the Khyber Pakhtunkhwa and Sindh Standing Orders Acts.

It is interesting to note however that in the case of misconduct, an employer is not required to pay
gratuity however if a Provident Fund is maintained, the workman is entitled to receive the amount
standing to his credit in the provident fund, including the contributions of the employer to such fund,
even if he resigns or is dismissed from service.

If an employer refuses to pay gratuity or is paying less than the due amount, what
should a worker (or his dependents) do?
The first step to get gratuity is to apply to the employer for payment of the due amount. If there are
delays on the employer side or employer is paying less than the due amount, the aggrieved party
(worker or his dependents, in case of his death) can file a claim to the Commissioner appointed
under section 15 of the Payment of Wages Act 1936. The complaint to the Workmen Compensation
Commissioner's office can be filed within three years of the incidence of the act. A Workmen
Compensation Commissioner is the officer of directorate of labor welfare and every district has a
designated Commissioner for labor related matters.

How is gratuity paid to the worker's dependents in the case of worker's death?
In the event of a worker's death, gratuity is payable to the legal dependents of a worker. The amount
of gratuity, as calculated above, is transferred to the Workmen Compensation Commissioner,
appointed under the Workmen Compensation Act 1923. The Commissioner then allocates the
amount to the worker's dependents who are defined as the widow, minor son (under 18 years), and
unmarried daughter, or a widowed mother. The amount of gratuity is allocated among the
dependents in accordance with the provisions of section 8 of the Workmen’s Compensation Act,
1923 (or its provincial variants).

Some points to remember

1. Gratuity is payable on completion of 12 months of service after first day of employment. It is not
related to calendar year (January to December) or fiscal or financial year (July to June) or any other
arbitrary period.

2. Gratuity is payable for more more than six months of employment. If the period of employment is
less than 6 months, no gratuity is payable.

3. As stated above, employer is required to provide only one benefit: Gratuity or Provident Fund or
Pension Fund. However, under a collective agreement/memorandum of understanding, the
employer may provide multiple benefits or the rate of gratuity may be raised from 30 days' wages to
40-45 days' wages.
4. Unlike Bonus or workers' participation in profits, gratuity has no connection with the financial
position of the employer. It must be paid to an eligible worker at the end of service, whether by
superannuation or resignation or death or termination (for any reason other than misconduct).