CHAPTER EIGHT

PAYMENT OF GRATUITY ACT, 1972

Learning Objective
After completion of this Chapter, the student is able to understand,

impart knowledge to the students about the legal frame work pertaining to payment of gratuity.

Meaning and the scope of gratuity, and its payment provisions

UNIT STRUCTURE
8.1 Introduction
8.2 Concepts
8.3 Applicablity-Section 1(3)
8.4 Who Is An Employee
8.5 Other Important Definitions
8.6 When Is Gratuity Payable-Section 4(1)
8.7 To Whom Is Gratuity Payable
8.8. Amount Of Gratuity Payable
8.9 Forfeiture Of Gratuity- Section 4(6)
8.10 Rights And Obligations Of Employers And Employees- Section 7
8.11 Recovery Of Gratuity Section 8
8.12. Protection Of Gratuity Section 13
8.13. Inspectors Section 7a And 7b
Summary
Review Questions

8.1 INTRODUCTION
Gratuity is a word derived from a Latin word Gratuitas which simply means a Gift. In the industrial
sector, it can be treated as a gift from the employer to his employee for the services rendered to his
establishment by him for the development and prosperity of the same. Gratuity is a benefit, which an
employee gets at the time of retirement or when he leaves the establishment. Gratuity is a amount (as a
lump sum payment) which is paid by an employer to his employee after he has rendered continuous
service for not less than five years: On his superannuation
On his retirement or resignation
On his death or disablement due to accident or disease.
However, 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.

8.2 CONCEPTS
The Payment of Gratuity Act has been amended from time to time to bring it in tune with the
prevailing situation. Recently the Act has been amended twice to enhance the ceiling on amount of
gratuity from Rs.3.50,000 to Rs.10,00,000 as well as to widen the scope of the definition of
employee under section 2 (e) of the Act. These amendments have been introduced by the Payment
of Gratuity (Amendment) Act, 2010 with effect from May 24, 2010.

8.3 APPLICABLITY-SECTION 1(3)

Every factory, mine, oil-filed, plantation, port and railway company.
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 10 or more persons are
employed or were employed on any day of the preceding 12 months.
Such other establishment or class of establishments in which 10 or more
e m p l o ye e s , a r e e m p l o y e d o r w e r e e m p l o y e d o n a n y d a y o f t h e p r e c e d i n g
1 2 m o n t h s a s t h e C e n t r a l Government may, by notification, specify in this regard.
.
NOTIFIED ESTABLISHMENTS
As may be specified by Central Government by way of notification in the Official Gazette.
CONTINUED APPLICABILITY OF THE ACT

If the provisions of the Act become applicable to a shop or establishment once , the Act shall continue
to apply to such shop or establishment even if the number of employees falls below 10.
The Act shall apply to
Educational Institutions
Employees working in Temple
Establishments includes commercial and non commercial establishments :
Case law : Indian Red Cross Society Vs Vidyaben
Accordingly Indian Red Cross Society is liable to pay gratuity to its employees.
Case law : High Court Bar Association Vs Deputy Labour Commissioner, Allahabad
High Court Bar Association not being a shop or establishment, is not covered under the Act.
8.4 WHO IS AN EMPLOYEE
Employee means any person (other than an apprentice ) who is employed for wages, whether the terms
of 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. Teachers have been also covered under the definition of employee.
(Case law: Ahmedabad Private Primary Teachers Association v. Administrative Officer, AIR 2004
SC 1426)

8.5 OTHER IMPORTANT DEFINITIONS

Appropriate Government Section 2 (a)
In relation to any of the following establishment, AG means CG
Belonging to, or under the control of, the Central Government,
Having branches in more than one State,
Of a factory belonging to, or under the control of the Central Government.
Of a major port, mine, oilfield or railway company, the Central Government.

In relation to any other establishment, AG means State Government. [Section 2(a)]

Family:
Family, in relation to an employee, shall be deemed to consist of:
In 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,
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. [Section 2(h)]
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.
Any 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 :
SEC 2 Q "Retirement" means termination of the service of an employee otherwise than on
superannuation;
Superannuation :
SEC 2 R "Superannuation", in relation to an employee, means, (i) the attainment by the employee of such age as is fixed in the contract or conditions of service
as the age on the attainment of which the employee shall vacate the employment; and
(ii) in any other case, the attainment by the employee of the age of fifty-eight years;
Wages:
SEC 2 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.
Controlling Authority

SEC 2 (d) and 3 Controlling Authority means an authority appointed by Appropriate Government
Under Section 2 (d)
As per section 3 , Appropriate Government may, by notification in the Official Gazette, appoint any
officer to be a controlling authority, who shall be responsible for the administration of this Act,
Appropriate Government may appoint different controlling authorities for different areas.
Completed year of service
Completed year of service means continous service for one year Section 2 (b).
Continous Service
According to Section 2A, for the purposes of this Act:
An employee shall be said to be in continuous service for a period if he has, for that period
been in un- interrupted 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 orders, rules or regulations governing the employees of the establishment), layoff,
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.
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.
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:
190 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.
240 days in any other case.
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:
90 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.

 120 days in any other case.

If an employee seasonal establishment is not in continous service of 1 year or 6 months , he
shall be deemed to be in continous service for such period, if he has actually worked for not less
than 75% of the number of days on which the establishment was in operation during such
period.
While computing the days the employee actually worked shall be included on the following
grounds : The days during which the employees was laid off
The days during which he has been on leave with full wages
The days on which he was absent due to temporary disablement caused by accident arising
out of and in the course of his employment.
The days during which the female employee was on maternity leave, so however, that the
total period of such maternity leave does not exceed twelve weeks.
Service is not continuous, in case of legal termination of service and subsequent reemployment.

Gratuity cannot be claimed on the basis of continuous service on being taken back in service
after break in service of one and a half year on account of termination of service for taking part
in an illegal strike, where the employee had accepted gratuity for previous service and later
withdrawn from the industrial dispute (Baluram v. Phoenix Mills Ltd., 1999 CLA Bom.19).
8.6 WHEN IS GRATUITY PAYABLE-SECTION 4(1)
Gratuity is payable to a person

Resignation
Superannuation
Retirement
Termination on account of disablement
Death

Payable only after an employee completes five continous years of service. However in the case
of death or disablement, the condition of minimum 5 years of continous service is not applicable.
8.7 TO WHOM IS GRATUITY PAYABLE
The employee
In the case of death of the employee, it shall be paid to his nominee and 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.
8.8. AMOUNT OF GRATUITY PAYABLE
Gratuity is calculated on the basis of continuous service as defined above i.e. for
every completed year of service or part in excess of six months, at the rate of fifteen
days wages last drawn.
The maximum amount of gratuity allowed under the Act is Rs. 10 lakh. The ceiling on
the amount of gratuity from Rs.3.50 lakh to Rs.10 lakh has been enhanced by the
Payment of Gratuity (Amendment) Act, 2010.

NOMINATION
Compulsory: Every employee who has completed 1 year of service is compulsorily required to
make a nomination.
Within 30 days : The nomination must be made within 30 days of completion of 1 year of
service.
Favour : Employee has a family the nomination must be made in favour of one or more
members of the family.
Any person : If employee does not have a family the nomination may be made in favour of any
person.
Fresh Nomination : If the employee subsequently acquires a family, such nomination shall
forthwith become void, and the employee shall , within 90 days , make a fresh nomination in
favour of one or more members of his family.
Distribute :The employee may distribute the amount of gratuity amongst morethan one
nominee.
Vary: The nomination made by an employee may be varied by him at any time.
Written notice : For this purpose the employee shall give written notice to his employer.
Nominee Expired : If the nominee dies before the death of the employee, the employee shall
make a fresh nomination.
Existence: Nomination comes into operation from the date of receipt of the same by the
employer.
Safe custody : Every nomination, fresh nomination and modification of nomination shall be sent
by the employee to the employer , who shall keep the same in safe custody.
Service Particulars : The employer shall verify the service particulars of the employee as given
in the nomination form.

Return: The employer shall return one copy of the nomination form to the employee , as
acknowledgement.
8.9 FORFEITURE OF GRATUITY- SECTION 4(6)
Section 4(6)(a) provides that the gratuity of an employee whose services have been
terminated for any act of willful omission or negligence causing any damage or loss to, or
destruction of, property belonging to the employer, gratuity shall be forfeited to the extent of
the damage or loss or caused. The right of forfeiture is limited to the extent of damage. In
absence of proof of the extent of damage, the right of forfeiture is not available (LLJ- II-1996515 MP).
Section 4(6)(b) deals with a case where the services of an employee have been terminated:
For riotous and disorderly conduct or any other act of violence on his part.
For any act which constitutes an offence involving moral turpitude provided that such
offence is committed by him in the course of his employment.
CASE LAWS
Wazirchand Vs Union of India and Others
An employee continued to occupy the house given to him by his employer even after
superannuation and the employer charged penal rent from him and offered to pay the balance
amount of the gratutity , it was held to be valid .
Bharat Gold Mines Ltd Vs Regional Labour Commissioner
When an offence of theft under law involves moral turpitude, gratuity stands wholly forfeited
inview of section 4(6) of the Act
Travancore Plywood Industries Ltd Vs Regional joint Labour Commissioner
Refusal by an employee to surrender land belonging to the employer is not a ground to withhold
gratuity.
Air India v. Authority under the Act, 1999 CLA 34 Bom. 66

Assignment of gratuity is prohibited, it cannot be withheld for non vacation of service

quarters by retiring employees.
EXEMPTIONS- SECTION 5

The exemption may be given by Appropriate Government

The exemption can be given only by way of notification in the Official Gazette
The exemption shall be subject to such conditions as may be specified in the notification
The exemption may be given if Appropriate Government is of opinion that the employees
are in receipt of gratuity not less favourable than the benefits provided under this Act.

The Controlling Authority and the Appellate Authority

The controlling authority and the Appellate Authority are two important functionaries in the
operation of the Act. Section 3 of the Act says that the appropriate Government may by
notification appoint any officer to be a Controlling Authority who shall be responsible for the
administration of the Act. Different controlling authorities may be appointed for different areas.
Section 7(7) provides for an appeal being preferred against an order of the Controlling
Authority to the appropriate Government or such other authority as may be specified by the
appropriate Government in this behalf.

8.10 RIGHTS AND OBLIGATIONS OF EMPLOYERS AND EMPLOYEES- SECTION 7

Application for payment of gratuity :
Application by whom ?

An employee who is eligible for payment of gratuity

Any person authorized in writing by such employee
Nominee of the employee if the deceased employee had made a nomination
Legal heir of the employee if the deceased employee had not made any nomination.

Application to Whom
Application shall be made to the employer.
Manner of making application
The application shall be made within 30 days from the gratuity becomes payable.
If the date of superannuation or retirement of the employee is known in advance , the
employee may apply to the employer before 30 days of date of superannuation or
retirement.
The application shall require the employer to pay the gratuity to the employee
Determination of Amount of Gratuity
Determination by employer
As soon as the gratuity becomes payable, the employer shall determine the amount of
gratuity.
The employer shall give notice to the person to whom gratuity is payable as well as the
controlling authority.The notice shall speicify the amount of gratuity determined by the
employer.
The employer has to determine the gratuity , and give notice to the person to whom
gratuity is payable and controlling authority irrespeictive of the fact whether an
application for payment of gratuity has been made or not.
Payment of Gratuity
Time limit
Within 30 days of gratuity becoming payable, the employer shall pay the gratuity to the person to
whom it is payable.
Default by employer
If the employer fails to pay the gratuity within 30 days of gratuity becoming payable, he shall be
liable to pay simple interest at such rate as may be notified by Central Government from time to
time.

Default by employee
The interest shall be paid for the period starting with the due date of payment of gratuity and
ending with the actual date of payment of gratuity.
The employer shall not be liable to pay any interest if
Delay in payment of gratuity is due to the fault of the employee.
The employer has obtained permission in writing from the controlling authority for
delayed payment on such ground.
Dispute as to Gratuity
Nature of Dispute

Dispute may arise as to

The amount of gratuity payable
The admissibility of any claim of an employee for payment of gratuity.
The person entitled to receive the gratuity.

Duty of employer incase of dispute

Incase of dispute employer shall deposit
With the controlling authority
Such amount as he admits to be payable by him.
Inquiry by Controlling authority
The controlling authority shall hold an inquiry.The proceedings before the controlling
authority shall be deemed to be judicial proceedings.
The controlling authority shall give a reasonable opportunity of being heard to the parties
concerned.
The controlling authority shall determine the gratuity payable .If amount determined by
the controlling authority is more than the amount deposited by the employer, the
controlling authority shall direct the employer to pay the balance amount.
Powers of Controlling authority
The following powers vested in a Civil Court

Summoning and enforcing the attendance of any person and examining him on oath.
Requiring the discovery and production of documents
Receiving evidence on affidavits.
Issuing commissions for the examination of witnesses or documents.

Appeal against the order of controlling authority

Appeal : Any person aggrieved by an order of the controlling authority may prefer an appeal
with Appropriate Government or such authority as Appropriate Government may specify in this
behalf hereafter called as appellate authority.
Receipt : The appeal may be filed within 60 days of receipt of order of the controlling
authority.However if the appellate authority is satisfied that the applicant was prevented by
sufficient cause from filing the appeal within the specified period of 60days , it may admit the
appeal within a further period of 60 days.
Deposit: Appeal by employer shall not be admitted unless at the time of preferring the appeal,
the employer has deposited with the appeallate authority a sum equal to the amount of gratuity
determined by the controlling authority.
Reasonable opportunity : The appellate authority shall give a reasonable opportunity of being
heard to the parties concerned.
Decision: The appellate authority may confirm , modify or reverse the decision of the controlling
authority.
8.11 RECOVERY OF GRATUITY SECTION 8
If the employer fails to pay gratuity within the prescribed time within 30 days of
termination of employment .
The controlling authority is empowered to issue a certificate to the collector to recover
the amount of gratuity.
Before issue of such certificate, the controlling authority shall give the employer a
reasonable opportunity of being heard.

 The employer shall also be liable to pay compound interest as such rate as may be
notified by Central Government from time to time.
The interest shall be paid starting from the date of expiry of prescribed period for
payment of gratuity and ending with the actual date of payment of gratuity.
However the interest payable shall not exceed the amount of gratuity payable.
The gratuity shall be recovered by the collector in the same manner as if it were arrears of
land revenue. The gratuity so recovered shall be paid to the person entitled to payment of
gratuity.
8.12. PROTECTION OF GRATUITY SECTION 13
Gratuity payable to an employee shall not be liable to attachment in execution of any decree or
order of the Civil or Revenue or Criminal Court. It is immaterial as to whether the gratuity is
payable to the employee Under the Act in an establishment exempted under section 5.
8.13. INSPECTORS SECTION 7A AND 7B
Manner of Appointment
The inspectors shall be appointed by Appropriate Government by notification in the
Official Gazette.
Every inspector shall be deemed to be a public servant within the meaning of section 21
IPC.
Number and Jurisdiction
Such number of inspectors may be appointed AG
AG may define the area to which the authority of an inspector shall extend.Where two or
more inspectors are appointed for the same area.
AG may distribute or allocate work to be performed by them.

Powers of Inspectors
To call such information from the employer .

 To enter into and inspect at all reasonable times any premises of any establishment
factory, mine oilfield, plantation, port or railway company or shop to which this act
applies , any books, registers, records, notices and other documents.
To examine the employer and his servants.
To make copies and take extracts of any books, registers , records , notices and other
documents.
To exercise such other powers as may be prescribed.
Purpose of Appointment
To ascertain whether or not the provisions of the Act have been compiled with by an
employer.
Duties of Owners etc.
Any person required to produce any accounts, books, register or other documents or to
give information by an inspector shall be legally bound to : Produce accounts, books, registers or other documents required by the inspector.
Give information required by the inspector.
SUMMARY
Gratuity is a sort of retiring benefit to the workmen who have rendered long and unblemished
service to the employer. The main object of this Act is to provide for a scheme for the payment of
Gratuity to employees engaged in different prescribed establishments. Different provisions of the
Act covers payment of gratuity, reduction and forfeiture of gratuity, recovery of gratuity,
compulsory insurance, nomination, inspectors and his power, appropriate Government power.
Moreover under Section 7(4) (a) dispute regarding gratuity, under section 7 Procedure of
Determination of Gratuity and under Section 4 and 7 Payment of Gratuity are provided.

REVIEW QUESTIONS
Write short notes on Concept of Continuous service for the payment of gratuity under the
Payment of Gratuity Act, 1972?
Write short notes on Rights and obligations of the employer and employee under the
Payment of Gratuity Act, 1972?
Write short notes on Forfeiture of Gratuity under the Payment of Gratuity Act, 1972 ?

 Write short notes on Protection of Gratuity under the Payment of Gratuity Act, 1972 ?
Difference between Partial forfeiture and Total forfeiture of gratuity under the Payment of
Gratuity Act, 1972 ?