Gratuity: Nomination, Determination and Recovery

Section 55(4), acquiring a family later. If he has no family when he nominates, the nomination may be in favour of any person. But if he subsequently acquires a family, that nomination forthwith becomes invalid, and he shall make a fresh nomination in favour of one or more members of his family within the prescribed time.

Section 55(5) and (6), change. A nomination may be modified at any time, subject to sub-sections (3) and (4), after written intimation to the employer in the prescribed form. If a nominee predeceases the employee, that nominee's interest reverts to the employee, who must make a fresh nomination in respect of it.

Section 55(7), custody. Every nomination, fresh nomination or alteration must be sent by the employee to his employer, who shall keep it in his safe custody.

The design is that gratuity on death goes to the family and not to whomever the employee chose in a quarrel. A nomination outside the family is valid only while there is no family, and it dies automatically the moment one appears.

Section 56: determination, payment and dispute

This is the operative section of the Chapter, and it has nine sub-sections.

Section 56(1), application. A person eligible for gratuity, or someone authorised in writing to act for him, shall send a written application to the employer, within the time and in the form the appropriate Government prescribes.

Section 56(2), the employer's own duty. As soon as gratuity becomes payable, the employer shall, whether or not an application has been made, determine the amount and give notice in writing both to the person to whom it is payable and to the competent authority, specifying the amount determined.

That is the sub-section to quote when an employer says the worker never applied. The duty to determine and give notice is not conditional on an application.

Section 56(3), thirty days. The employer shall arrange to pay the amount within thirty days from the date it becomes payable.

Section 56(4), interest. If it is not paid within that period, the employer shall pay simple interest from the date it became payable to the date of payment, at such rate not exceeding the rate notified by the Central Government from time to time for repayment of long term deposits.

The proviso excuses that interest only where both conditions are met: the delay is due to the fault of the employee, and the employer has obtained permission in writing from the competent authority for the delayed payment on that ground.

Section 56(5), disputes. Where there is a dispute as to the amount, the admissibility of a claim, or who is entitled to receive the gratuity:

• (a) the employer shall deposit with the competent authority such amount as he admits to be payable;
• (b) the employer, the employee or any other person raising the dispute may apply to the competent authority in the prescribed form for a decision;
• (c) the competent authority shall, after due inquiry and after giving the parties a reasonable opportunity of being heard, determine the matter, and if any amount is found payable, direct the employer to pay it, or that amount as reduced by what he has already deposited;
• (d) the competent authority shall pay the amount deposited, including any excess, to the person entitled;
• (e) as soon as may be after a deposit, the competent authority shall pay it to the applicant where he is the employee, or where the applicant is not the employee, to the nominee, or the guardian of a minor nominee, or the heir, if satisfied there is no dispute as to the applicant's right.

Note the structure of clause (a). Even a disputing employer must pay in what he admits. The dispute is only about the difference.

Section 56(6), powers. For an inquiry under sub-section (5) the competent authority has the same powers as a court trying a suit under the Code of Civil Procedure 1908 in respect of: enforcing attendance and examining on oath; requiring discovery and production of documents; receiving evidence on affidavits; and issuing commissions for the examination of witnesses.

Section 56(7). Any such inquiry is a judicial proceeding within the meaning of section 193 and section 228, and for the purpose of section 196, of the Indian Penal Code 1860. In plain terms, lying to the competent authority is punishable as if it were lying to a court.

Section 56(8), appeal. A person aggrieved by an order under sub-section (5) may appeal, within sixty days of receiving the order, to the appropriate Government or such other authority as it specifies.

Two provisos. The appellate authority may extend the period by a further sixty days if satisfied the appellant was prevented by sufficient cause. And no appeal by an employer shall be admitted unless he either produces a certificate from the competent authority that he has deposited the amount required under sub-section (5), or deposits that amount with the appellate authority.

Section 56(9). The appellate authority may, after giving the parties a reasonable opportunity of being heard, confirm, modify or reverse the decision.

Section 57: compulsory insurance

Section 57(1), the obligation. With effect from such date as the appropriate Government notifies, every employer other than one belonging to or under the control of the Central or a State Government shall obtain insurance for his liability to pay gratuity, in the manner prescribed by the Central Government, from an insurance company regulated by the Authority as defined in section 2(1)(b) of the Insurance Regulatory and Development Authority Act 1999. The proviso permits different dates for different establishments, classes of establishments or areas.

Section 57(2), the exemptions. The appropriate Government may exempt from sub-section (1), subject to prescribed conditions:

• an employer who had already established an approved gratuity fund for his employees and wishes to continue that arrangement; and
• every employer employing five hundred or more persons who establishes an approved gratuity fund in the manner prescribed.

Section 57(3), registration. Every employer shall, within the prescribed time, get his establishment registered with the competent authority, and no employer shall be registered unless he has taken the insurance or established an approved gratuity fund.

Section 57(4). The appropriate Government may provide for the composition of the Board of Trustees of an approved gratuity fund, and for recovery by the competent authority of the gratuity payable to an employee from the insurer, or from the Board of Trustees.

Section 57(5), the sanction. Where an employer fails to pay the premium or the contribution to an approved gratuity fund, he is liable to pay the amount of gratuity due, including any interest for delayed payment, forthwith to the competent authority.

The Explanation gives "approved gratuity fund" the meaning assigned in section 2(5) of the Income-tax Act 1961.

Section 57 is the answer to "what protects the worker if the employer goes broke?", and it is worth naming as a salient feature of the Code. The route is insurance first, an approved gratuity fund as the alternative for large or already provided employers, and registration made conditional on one or the other.

Section 58: the competent authority

Section 58(1). The appropriate Government may, by notification, appoint any officer of that Government having the prescribed qualifications and experience to be a competent authority for implementing any provision of the Chapter, for a specified area.

Section 58(2). Where more than one competent authority is appointed for an area, the appropriate Government may regulate the distribution of business by general or special order.

Section 58(3). A competent authority may, for deciding a matter referred to him, choose one or more persons possessing special knowledge of a relevant matter to assist him in holding the inquiry.

A worked example

Mohan retires on superannuation from a printing works on 30 April after eleven years. His gratuity works out to 2,20,000 rupees. He makes no application.

Must the employer wait for one? No. Section 56(2) requires the employer, as soon as gratuity becomes payable and whether or not an application has been made, to determine the amount and give written notice both to Mohan and to the competent authority.

By when must it be paid? Within thirty days from the date it became payable: section 56(3).

It is paid four months late. What follows? Simple interest from the date it became payable to the date of payment, at a rate not exceeding that notified by the Central Government for repayment of long term deposits: section 56(4). The employer escapes interest only if the delay was Mohan's fault and he obtained written permission from the competent authority for the delay on that ground.

The employer says only 1,50,000 rupees is due. Under section 56(5)(a) he must deposit with the competent authority the amount he admits, that is 1,50,000. Either party may then apply under clause (b), and the competent authority determines the dispute after due inquiry and a reasonable opportunity of being heard.

The competent authority holds 2,20,000 is due. The employer wants to appeal. He may, within sixty days of receiving the order, to the appropriate Government or the authority it specifies. But his appeal will not be admitted unless he produces a certificate that he has deposited the amount required under sub-section (5), or deposits it with the appellate authority: the second proviso to section 56(8).

He is seventy days late because he was in hospital. The first proviso allows an extension of a further sixty days where the appellate authority is satisfied he was prevented by sufficient cause.

The employer becomes insolvent before paying. Section 57(1) required him to insure his gratuity liability with a regulated insurer, unless exempted under section 57(2). Under section 57(4) the appropriate Government may provide for recovery by the competent authority from the insurer. If he never paid the premium, section 57(5) makes him liable to pay the gratuity, with interest, forthwith to the competent authority.

Now suppose Mohan had died in service, having nominated his brother while unmarried, and having married two years later. Under section 55(4) the nomination in favour of the brother became invalid forthwith when he acquired a family, and Mohan was required to make a fresh nomination in favour of a family member. Failing that, the third proviso to section 53(1) pays the gratuity to his heirs.

What this does NOT mean

An employee's failure to apply does not excuse the employer. Section 56(2) imposes the duty to determine and give notice regardless.

A dispute does not suspend the whole payment. Section 56(5)(a) requires the employer to deposit what he admits.

Interest is not discretionary. Section 56(4) says the employer "shall pay" it, and the proviso excuses it only on two cumulative conditions.

A nomination outside the family is not simply overridden later. If there was a family at the time, it is void under section 55(3). If a family is acquired afterwards, it becomes invalid forthwith under section 55(4).

Compulsory insurance is not yet universal in practice. Section 57(1) operates from a date to be notified, and the proviso allows different dates for different establishments, classes and areas.

Limits and criticism

Section 57 depends on notification. The protection it offers begins only from a notified date, and the proviso permits that date to differ across establishments and areas.

The employer's appeal deposit is heavy. He must have deposited or must deposit the amount required under section 56(5) before his appeal is even admitted.

"Any officer of that Government" is a wide qualification for a competent authority who exercises civil court powers and conducts a judicial proceeding under section 56(7).

The interest rate is capped by reference to long term deposit rates, which may be well below the commercial cost of the delay to the employee.

Quick revision

• Section 55: nomination by an employee who has completed one year; may be split among several nominees; must be to family if he has one, and a nomination outside the family is void; if he has no family it may be to anyone, but becomes invalid forthwith if he acquires one; modifiable on written intimation; a predeceasing nominee's interest reverts; the employer keeps it in safe custody.
• Section 56: employee applies, but the employer must determine and give notice to the employee and the competent authority whether or not he applies; pay within thirty days; simple interest for delay, excused only if the delay is the employee's fault and the competent authority permitted it in writing; on a dispute the employer deposits what he admits; the competent authority decides after due inquiry and a hearing, with Code of Civil Procedure powers, the inquiry being a judicial proceeding; appeal within sixty days, extendable by sixty more for sufficient cause; no employer's appeal admitted without the deposit; the appellate authority may confirm, modify or reverse.
• Section 57: compulsory insurance of the gratuity liability with an IRDA regulated insurer, from a notified date, except Government employers; exemption for an employer with an existing approved gratuity fund and for one employing five hundred or more who establishes one; registration conditional on insurance or a fund; recovery from the insurer or trustees; failure to pay the premium makes the gratuity payable forthwith to the competent authority.
• Section 58: the appropriate Government appoints any qualified officer as competent authority for an area; may distribute business between several; the authority may co-opt experts to assist an inquiry.

Test yourself

1. An employee never applied for his gratuity. Is the employer free of the obligation until he does? No. Under section 56(2) the employer must, as soon as gratuity becomes payable and whether or not an application has been made, determine the amount and give written notice to the person entitled and to the competent authority.

2. Within what time must gratuity be paid, and what follows if it is not? Within thirty days from the date it becomes payable: section 56(3). Otherwise the employer pays simple interest from the due date to the date of payment, at a rate not exceeding that notified by the Central Government for repayment of long term deposits: section 56(4).

3. On what two conditions is that interest excused? Both must be met: the delay must be due to the fault of the employee, and the employer must have obtained permission in writing from the competent authority for the delayed payment on that ground.

4. An unmarried employee nominates his cousin, then marries. What is the position? Under section 55(4) the nomination becomes invalid forthwith on his acquiring a family, and he must make a fresh nomination in favour of one or more members of his family within the prescribed time.

5. What must an employer do before his appeal under section 56(8) is admitted? He must either produce a certificate from the competent authority that he has deposited the amount required under section 56(5), or deposit that amount with the appellate authority: the second proviso.

6. What is the sanction if an employer never pays the premium on his gratuity insurance? Under section 57(5) he becomes liable to pay the amount of gratuity due, including any interest for delayed payment, forthwith to the competent authority.

7. Which employers may be exempted from compulsory insurance? Those belonging to or under the control of the Central or a State Government are outside section 57(1) altogether. Beyond that, the appropriate Government may exempt an employer who had already established an approved gratuity fund and wishes to continue it, and every employer employing five hundred or more persons who establishes an approved gratuity fund in the prescribed manner: section 57(2).