Gratuity: Entitlement and Continuous Service

Three provisos, and each is examinable.

First proviso, working journalists. For a working journalist as defined in clause (f) of section 2 of the Working Journalists and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act 1955, the expression "five years" shall be deemed to be three years.

Second proviso, when five years is not needed. Completion of five years' continuous service shall not be necessary where the termination is due to:

• death; or
• disablement; or
• expiration of fixed term employment; or
• the happening of a notified event.

Third proviso, death. On the death of an employee, gratuity payable to him is paid to his nominee, or if no nomination has been made, to his heirs; and where a nominee or heir is a minor, the minor's share is deposited with the competent authority, who invests it for the minor's benefit in a bank or financial institution until he attains majority.

Put clause (d) and the second proviso together and you have the change. A fixed term employee gets gratuity when his term expires, and he does not need five years. That is new, and it is the single most likely short question out of this Chapter.

Section 53(2), the rate. For every completed year of service, or part thereof in excess of six months, the employer shall pay gratuity at the rate of fifteen days' wages, or such number of days as the Central Government may notify, based on the rate of wages last drawn by the employee.

Three provisos to sub-section (2):

• for a piece-rated employee, daily wages are computed on the average of the total wages received for the three months immediately preceding the termination, and overtime wages are not taken into account;
• for an employee in a seasonal establishment who is not employed throughout the year, gratuity is paid at seven days' wages for each season;
• for an employee on fixed term employment, or a deceased employee, gratuity is paid on a pro rata basis.

Section 53(3), the ceiling. The amount of gratuity shall not exceed such amount as may be notified by the Central Government. The Code fixes no figure.

Section 53(4), disablement. Where an employee is employed after his disablement on reduced wages, his wages for the period before the disablement are taken as those he actually received then, and for the period after it as the reduced wages.

Section 53(5), better terms. Nothing in the section affects the right of an employee to better terms of gratuity under any award, agreement or contract with the employer.

Three Explanations. Explanation 1: for this Chapter, "employee" does not include a person holding a post under the Central or a State Government governed by another Act or by rules providing for payment of gratuity. Explanation 2: "disablement" means such disablement as incapacitates an employee for the work he was capable of performing before the accident or disease resulting in it. Explanation 3 is the arithmetic: for a monthly rated employee, fifteen days' wages are calculated by dividing the monthly rate of wages last drawn by twenty-six and multiplying by fifteen.

Section 53(6): forfeiture

Notwithstanding sub-section (1):

• (a) the gratuity of an employee whose services have been terminated for any act, wilful 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 may be wholly or partially forfeited if the services of the employee have been terminated (i) for his riotous or disorderly conduct or any other act of violence, or (ii) for any act which constitutes an offence involving moral turpitude, provided the offence is committed by him in the course of his employment.

Learn the difference between (a) and (b). Under (a) forfeiture is mandatory ("shall be forfeited") but limited to the amount of the damage. Under (b) forfeiture is discretionary ("may be") but may be whole or partial.

And note the condition running through both: the services must have been terminated for the stated cause. That is the point of the leading case.

Jaswant Singh Gill v. Bharat Coking Coal Ltd., (2007) 1 SCC 663.

Facts. Jaswant Singh Gill was a Chief General Manager with Bharat Coking Coal. Disciplinary proceedings alleging misconduct were begun while he was in service and continued after he superannuated, under rules 34.2 and 34.3 of the company's conduct rules, which permitted the disciplinary authority to withhold gratuity during the pendency of proceedings. His gratuity was withheld.

Held. The appeal was allowed. The Payment of Gratuity Act prevails over non-statutory rules framed by the employer. Sub-section (6) of section 4 opens with a non obstante clause and permits forfeiture only where the employee's services have been terminated for one of the causes it lists. An employee who has retired on superannuation has not had his services terminated, so the condition on which the power to forfeit depends never arose, and the gratuity could not be withheld.

Why it matters here. Twice over. It establishes that gratuity is a statutory right which service rules cannot cut down. And it fixes the precondition for forfeiture, which is easy to state and easy to get backwards. Note the statute: it was decided on section 4(6) of the Payment of Gratuity Act 1972, repealed by item 6 of section 164(1) of this Code. Section 53(6) reproduces section 4(6) in the same terms, including the non obstante clause and the three grounds, so the reasoning applies to the Code without adjustment. Say so when you cite it.

Section 54: continuous service

Five years of "continuous service" does not mean five years without a day off. Section 54 defines it in three clauses.

Clause (A), the basic rule. An employee is in continuous service for a period if he has, for that period, been in uninterrupted service, including service interrupted on account of:

sickness; accident; leave; absence from duty without leave, so long as no order treating that absence as a break in service has been passed under the standing orders, rules or regulations governing the establishment; lay-off; strike; lock-out; or cessation of work not due to any fault of the employee;

and it does not matter whether that service was rendered before or after the commencement of the Code.

Two things there repay attention. Even unauthorised absence does not break service unless the employer has actually passed an order treating it as a break, under the governing standing orders or rules. And a strike does not break continuity.

Clause (B), the deeming rule for a non-seasonal establishment. Where an employee is not in continuous service under clause (A) for a period of one year or six months, he is deemed to be in continuous service for that period if he has actually worked for the employer:

The Explanation to clause (B) adds four categories to the days "actually worked":

1. days he was laid off under an agreement or as permitted by standing orders made under the Industrial Employment (Standing Orders) Act 1946, or under the Industrial Disputes Act 1947, or under any other law applicable to the establishment;
2. days he was on leave with full wages, earned in the previous year;
3. days he was absent due to temporary disablement caused by accident arising out of and in the course of his employment;
4. in the case of a female, days she was on maternity leave, so however that the total period of such maternity leave does not exceed twenty-six weeks.

The fourth is worth naming in an answer on women and social security. Maternity leave up to twenty-six weeks counts as days worked for the purpose of qualifying for gratuity, so having a child does not cost a woman her service qualification.

Clause (C), seasonal establishments. Where an employee in a seasonal establishment is not in continuous service under clause (A) for one year or six months, he is deemed to be in continuous service for that 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 that period.

A worked example

Shalini has worked at a garment factory for six years and eight months. Her last drawn wages, as defined in section 2(88), are 26,000 rupees a month. She resigns.

Is she entitled? Yes. She is resigning under section 53(1)(b) after more than five years' continuous service.

How many years count? Six completed years, plus eight months, which is a part in excess of six months, so it counts as a seventh. Seven years.

What are fifteen days' wages? Explanation 3 gives the arithmetic for a monthly rated employee: divide the monthly wages last drawn by twenty-six and multiply by fifteen. So 26,000 divided by 26 is 1,000, multiplied by 15 is 15,000 rupees.

Total gratuity? 15,000 multiplied by 7 years, that is 1,05,000 rupees, subject to the ceiling notified under section 53(3).

Now change the facts. Shalini was absent without leave for two months in her third year, and the employer never passed any order treating it as a break in service.

Does that break her continuity? No. Clause (A) of section 54 expressly includes absence from duty without leave within uninterrupted service, unless an order treating it as a break has been passed under the standing orders, rules or regulations governing the establishment. None was.

Change them again. Shalini was on a written two year fixed term contract which has just expired.

Does she get gratuity with only two years' service? Yes. Section 53(1)(d) covers termination of the contract period under fixed term employment, and the second proviso removes the five year requirement for expiration of fixed term employment. By the third proviso to section 53(2), it is paid pro rata.

And if she had been dismissed for setting fire to the employer's godown, causing 40,000 rupees of damage? Section 53(6)(a) applies: her services were terminated for an act causing damage to the employer's property, so her gratuity is forfeited to the extent of the damage, that is 40,000 rupees, and the balance remains payable.

If instead she superannuated while a disciplinary inquiry into that fire was still pending? Following Jaswant Singh Gill, her services have not been terminated for one of the listed causes; she retired on superannuation. The precondition for forfeiture under section 53(6) never arose and the gratuity cannot be withheld.

What this does NOT mean

Five years is not always required. The second proviso to section 53(1) removes it for death, disablement, expiry of fixed term employment and a notified event; and the first proviso reduces it to three years for a working journalist.

Continuous service is not continuous attendance. Sickness, accident, leave, unauthorised absence not treated as a break, lay-off, strike, lock-out and no-fault cessation are all included by clause (A).

Fifteen days' wages is not half a month's wages. Explanation 3 divides by twenty-six, not by thirty or thirty-one, because it counts working days.

Forfeiture is not automatic on misconduct. Both limbs of section 53(6) require that the services have been terminated for the stated cause, and clause (b)(ii) additionally requires that the offence involving moral turpitude was committed in the course of employment.

The Code fixes no maximum. Section 53(3) leaves the ceiling to notification.

Limits and criticism

The ceiling is executive. Section 53(3) caps gratuity at a notified amount, so the real value of the entitlement is set outside Parliament.

Five years remains a long qualifying period for a permanent employee, in a labour market where job tenure is short, even though fixed term employees are now relieved of it. The result is the odd position that a two year fixed term employee is entitled while a four year permanent employee is not.

Forfeiture under clause (b) is discretionary and unstructured. The Code says the gratuity "may be wholly or partially forfeited" and gives no criteria for choosing.

Clause (B) of section 54 rewards the six day week. An employee in an establishment working less than six days a week qualifies on 190 days, but one in a six day establishment needs 240.

Quick revision

• Section 53(1): gratuity on termination after five years' continuous service, on (a) superannuation, (b) retirement or resignation, (c) death or disablement, (d) expiry of fixed term employment, (e) a notified event.
• First proviso: working journalist, three years. Second proviso: no five year requirement for death, disablement, expiry of fixed term employment, or a notified event. Third proviso: on death, to the nominee, else the heirs; a minor's share goes to the competent authority to invest until majority.
• Section 53(2): fifteen days' wages for every completed year, or part over six months, on wages last drawn. Piece-rated: average of three months, excluding overtime. Seasonal: seven days' wages per season. Fixed term or deceased: pro rata.
• Explanation 3: monthly wages divided by twenty-six, multiplied by fifteen.
• Section 53(3): ceiling notified, not in the Code. Section 53(5): better terms under an award, agreement or contract are preserved.
• Section 53(6): (a) shall be forfeited to the extent of the damage where services terminated for an act, wilful omission or negligence damaging the employer's property; (b) may be wholly or partially forfeited for riotous or disorderly conduct or violence, or an offence involving moral turpitude committed in the course of employment. Both need termination of service: Jaswant Singh Gill.
• Section 54(A): continuous service includes sickness, accident, leave, unauthorised absence not treated as a break by order, lay-off, strike, lock-out, and no-fault cessation.
• Section 54(B): deemed continuous on 240 days in twelve months, or 190 below ground in a mine or in an establishment working less than six days a week; 120 days in six months, or 95 in those cases. Days worked include lay-off, earned leave with full wages, absence from temporary disablement by employment accident, and maternity leave up to twenty-six weeks.
• Section 54(C): seasonal establishment, seventy-five per cent of the days the establishment operated.

Test yourself

1. State the rate of gratuity and show how fifteen days' wages is computed for a monthly rated employee. Fifteen days' wages for every completed year of service, or part in excess of six months, based on the rate of wages last drawn: section 53(2). By Explanation 3, the monthly rate of wages last drawn is divided by twenty-six and the quotient multiplied by fifteen.

2. An employee on a written three year fixed term contract completes it and leaves. Is he entitled to gratuity? Yes. Section 53(1)(d) covers termination of the contract period under fixed term employment, and the second proviso to section 53(1) provides that five years' continuous service is not necessary where the termination is due to expiration of fixed term employment. It is paid pro rata under the third proviso to section 53(2).

3. A worker was on strike for six weeks. Does this break his continuous service? No. Clause (A) of section 54 includes service interrupted on account of a strike within uninterrupted service.

4. How many days must a worker actually work in twelve months to be deemed in continuous service for a year? 240 days in the ordinary case, or 190 days if he is employed below ground in a mine or in an establishment which works for less than six days in a week: section 54(B)(a).

5. Does maternity leave count as days actually worked? Yes, up to a total of twenty-six weeks: Explanation (iv) to clause (B) of section 54.

6. An employee is dismissed for causing 20,000 rupees of damage to the employer's machinery. What happens to his gratuity of 3,00,000 rupees? Under section 53(6)(a) it is forfeited to the extent of the damage caused, that is 20,000 rupees. The remaining 2,80,000 rupees is payable.

7. Can an employer withhold gratuity from an employee who retired on superannuation while a disciplinary inquiry was pending? No. Following Jaswant Singh Gill v. Bharat Coking Coal Ltd., forfeiture under what is now section 53(6) requires that the employee's services have been terminated for one of the listed causes. A retirement on superannuation is not such a termination, so the power never arises, and the employer's own service rules cannot enlarge the statutory position.