Comprehensive Study Material on the Payment of Gratuity Act, 1972

The Payment of Gratuity Act, 1972 is a significant piece of Indian labor legislation designed to provide financial security to employees upon the termination of their employment. It mandates the payment of gratuity as a form of recognition for long-term service. This study material is structured for easy understanding, covering the Act’s objectives, applicability, key provisions, and updates from amendments. It includes detailed explanations, key definitions as per Section 2 of the Act, and practical insights. Note that the Act has been amended over time, with the most recent major changes introduced by the Payment of Gratuity (Amendment) Act, 2018, which enhanced certain limits and provisions for greater flexibility and employee benefits.

Objectives of the Act

The primary objective of the Payment of Gratuity Act, 1972 is to establish a mandatory scheme for the payment of gratuity to employees in specified establishments. Gratuity serves as a retirement benefit or reward for faithful service, helping employees meet post-employment financial needs. It applies to employees in factories, mines, oilfields, plantations, ports, railway companies, shops, and other establishments employing 10 or more persons. The Act ensures that employees receive a lump-sum payment upon superannuation, retirement, resignation, death, or disablement, promoting social security and industrial harmony. By providing this benefit, the Act aims to incentivize long-term employment and protect workers from economic hardship after years of service.

Applicability and Extent

The Act extends to the whole of India, except for plantations and ports in the State of Jammu and Kashmir (prior to its reorganization). It applies to:

• Every factory, mine, oilfield, plantation, port, and railway company as defined under relevant laws.
• Every shop or establishment within the meaning of any law relating to shops and establishments in force in a state, where 10 or more persons are employed or were employed on any day during the preceding 12 months.
• Any other establishment or class of establishments notified by the Central Government.

Once the Act becomes applicable to an establishment, it continues to apply even if the number of employees falls below 10. The Act came into force on September 16, 1972, as notified by the Central Government. It does not apply to apprentices or employees covered under other gratuity schemes provided by Central or State Government rules.

Key Definitions (As per Section 2 of the Act)

Section 2 of the Act provides precise definitions to ensure clarity in interpretation. These are foundational for understanding the Act’s provisions. Below are the key definitions:

• Appropriate Government: Refers to the Central Government for establishments under its control, those with branches in more than one state, factories under Central control, major ports, mines, oilfields, or railway companies. For all other cases, it is the State Government.
• Completed Year of Service: Means continuous service for one year.
• Continuous Service: As detailed in Section 2A (see separate section below for elaboration).
• Controlling Authority: An authority appointed by the appropriate Government under Section 3 to administer the Act.
• Employee: Any person (excluding apprentices) employed on wages in an establishment to do skilled, semi-skilled, unskilled, manual, supervisory, technical, or clerical work. This includes managerial or administrative employees but excludes those under Central/State Government gratuity rules.
• Employer: The person or authority with ultimate control over the establishment’s affairs, or the appointed supervisor/head in government or local authority cases.
• Factory: As defined in Section 2(m) of the Factories Act, 1948.
• Family: For a male employee – himself, wife, children (married or unmarried), dependent parents, dependent parents of his wife, and the widow and children of a predeceased son. For a female employee – herself, husband, children, dependent parents, dependent parents of her husband, and the widow and children of a predeceased son. Adopted children are considered based on personal law.
• Major Port: As defined in Section 3(8) of the Indian Ports Act, 1908.
• Mine: As defined in Section 2(j) of the Mines Act, 1952.
• Notification: Means a notification published in the Official Gazette (as amended in 2018).
• Oilfield: As defined in Section 3(e) of the Oilfields (Regulation and Development) Act, 1948.
• Plantation: As defined in Section 2(f) of the Plantations Labour Act, 1951.
• Port: As defined in Section 3(4) of the Indian Ports Act, 1908.
• Prescribed: Means prescribed by rules made under the Act.
• Railway Company: As defined in Section 3(5) of the Indian Railways Act, 1890 (now repealed, but reference retained).
• Retirement: Termination of service other than on superannuation.
• Superannuation: Attaining the age specified in the contract or conditions of service for vacating employment.
• Wages: All emoluments earned while on duty or on leave, in cash, including dearness allowance, but excluding bonus, commission, house rent allowance, overtime wages, and other allowances.

These definitions ensure the Act is applied uniformly and prevent misinterpretation in legal proceedings.

Continuous Service (Section 2A)

Continuous service is crucial for eligibility. It means uninterrupted service, including periods interrupted by:

• Sickness, accident, leave, absence without leave (if not treated as a break), lay-off, strike, lock-out, or cessation of work not due to the employee’s fault.

Deemed continuous service for:

• One year: If the employee has worked 190 days (in underground mines or establishments working fewer than 6 days a week) or 240 days (in other cases) in the preceding 12 months.
• Six months: 95 days or 120 days, respectively, in the preceding 6 months.

Days counted include lay-off periods under agreements, paid leave earned in the previous year, accident-related disablement absences, and maternity leave. For female employees, maternity leave is now up to 26 weeks (amended from 12 weeks in 2018). In seasonal establishments, service is deemed continuous if the employee worked 75% of the operational days in the period.

Eligibility for Gratuity (Section 4)

Gratuity becomes payable upon termination after at least 5 years of continuous service in cases of:

• Superannuation.
• Retirement or resignation.
• Death or disablement due to accident or disease.

The 5-year requirement is waived for death or disablement. In case of death, payment goes to the nominee or heirs (deposited with the controlling authority if minors are involved). Disablement means incapacity preventing the employee from performing prior duties.

Calculation of Gratuity (Section 4)

Gratuity is calculated at 15 days’ wages for each completed year of service (or part exceeding 6 months), based on the last-drawn wages.

• Formula for monthly-rated employees: (Last monthly wages / 26) × 15 × Number of years.
• For piece-rated: Average daily wages from the last 3 months (excluding overtime).
• Seasonal establishments: 7 days’ wages per season.
• Maximum ceiling: ₹20,00,000 (enhanced from ₹10,00,000 via the 2018 amendment; the government can notify changes).
• Post-disablement: Wages before and after are considered separately.
• Better terms under contracts or awards are not affected.

Nomination Process (Section 6)

Employees with at least 1 year of service must nominate recipients for gratuity in case of death, using prescribed forms. Nominations favor family members; non-family nominations are void. Amounts can be distributed among multiple nominees. Modifications require written notice. If a nominee dies, a fresh nomination is needed. Employers maintain nominations in safe custody.

Forfeiture of Gratuity (Section 4)

Gratuity can be wholly or partially forfeited if:

• Termination due to willful negligence causing property damage (forfeited to the extent of damage).
• Riotous/disorderly conduct, violence, or moral turpitude offense during employment.

Protection of Gratuity (Section 13)

Gratuity cannot be attached by any court decree in civil, revenue, or criminal proceedings, ensuring it reaches the employee or heirs.

Compulsory Insurance and Gratuity Fund (Section 4A)

Employers (except government-controlled) must obtain insurance from the Life Insurance Corporation or other prescribed insurers for gratuity liabilities. Exemptions apply for approved gratuity funds in large establishments (500+ employees). Registration with the controlling authority is mandatory. Failure to pay premiums/contributions leads to liability for payment with interest.

Determination, Payment, and Disputes (Section 7)

• Employees apply for gratuity in prescribed form.
• Employer determines amount, notifies, and pays within 30 days.
• Delayed payment attracts simple interest (unless employee at fault).
• Disputes over amount or eligibility: Employer deposits admitted amount; controlling authority inquires and decides.
• Appeals to appropriate Government within 60 days (extendable).

Recovery of Gratuity (Section 8)

If unpaid, controlling authority issues a certificate to the Collector for recovery as land revenue arrears, including compound interest (not exceeding gratuity amount).

Inspectors and Powers (Sections 7A & 7B)

Government appoints inspectors with powers to inspect premises, demand information, examine employees, and seize documents under the Code of Criminal Procedure.

Penalties (Section 9)

• False statements: Up to 6 months imprisonment or ₹10,000 fine.
• Non-compliance: 3 months to 1 year imprisonment or ₹10,000-₹20,000 fine.
• Non-payment: 6 months to 2 years imprisonment.

Exemptions (Section 5)

Government can exempt establishments or employees if better benefits are provided, without prejudice to rights.

Other Important Provisions

• Overriding Effect (Section 14): Prevails over inconsistent laws or contracts.
• Good Faith Protection (Section 12): No liability for actions in good faith.
• Cognizance of Offenses (Section 11): Only on government complaint.
• Rule-Making Power (Section 15): Governments can make rules; Central rules laid before Parliament.
• Employer Liability Exemption (Section 10): Can shift blame to actual offender with proof of diligence.

This Act has evolved through amendments to align with changing economic needs, with the 2018 changes enhancing maternity provisions and gratuity ceilings for better employee welfare. For practical application, consult the latest notifications and rules.