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A Legal View Point on Rules of Payment of Gratuity Act, 1972

Ashish M. Shaji

| Updated: Apr 25, 2020 | Category: Compliances, Labour Compliance

Rules of Payment of Gratuity Act

Introduction

Our country has made a vast number of legislations on rules governing employment. Time and again, these rules have regulated the conduct of the relationship between employer and employee. One such legislation is the Payment of Gratuity Act, 1972. The benefit that the employer provides to the employee for his or her services consecutively for five years or more is defined as Gratuity. The Act is just like various other statues like the Minimum Wages Act, Employment and Social Policy, etc. They all come under the umbrella of labour laws, and it specifies the minimum benefits that must be provided to the employees. The Payment of Gratuity Act ensures social security and facilitates the welfare of the employees working in the companies, industries, and different organisations. In this article, we shall have a close look at those rules of Payment of Gratuity Act, 1972.

Scope and objective of the Act

The sole purpose of the Payment of Gratuity Act, 1972 was with a view to provide a gratuity to the employees working in the companies, factories, mines, oilfields, shops or other establishments upon their superannuation, resignation, retirement, death or disablement.

Various definitions to understand the rules of Payment of Gratuity Act

  • Continuous Service- For the purpose of this Act, continuous service means an uninterrupted service during the period of employment. Even if there occurs any interruption in the continuous service it may be due to sickness, accident, lay off, strike or lock-out or such reason where the cessation of work is caused not due to the fault of the employee. If the said interruption extends to six months or a year, then it would render the employee ineligible for gratuity. The person claiming gratuity must have worked in mine or coalfield like establishment for not less than 190 days and 240 days in other areas.
  • Retirement- It means where the services of an employee are terminated other than due to superannuation.
  • Superannuation- This term is used to define the age when an employee attains; he or she has to vacate the employment. The age for such a vacation of employment is fixed in the contract or conditions of service.
  • Controlling authority- It implies an authority appointed for the proper administration of this Act by the appropriate Government. The Government can, upon its discretion, appoint different controlling authority for different areas as well.
  • Disablement- It means whereby an employee is incapacitated for a work that he was able to perform before the occurrence of disease or accident that resulted in such disablement.

Legal Rules of Payment of Gratuity Act

When an employee has rendered his or her services for at least five continuous years on his retirement, superannuation, resignation, death, or disablement, then the employee shall be eligible for payment of gratuity. One notable exception to this rule is that the five years specified above of continuous service is not mandatory in the event of termination of employment due to death or disablement of the employee. A person who has retired shall also be entitled to the payment of gratuity along with his pension. In Allahabad Bank and others vs. All India Bank Retired Employees Association, the court held that the gratuity amount could be paid with the pension. The pension benefits can include the gratuity amount as well, but gratuity amount must be paid at all costs to the employees.

Where an employee suffers death or disablement by accident or disease, then it is the legal obligation of the employer to pay the gratuity amount to the nominee of the employee or the legal heir depending upon the case regardless of the number of years the continuous service has been rendered.

Under the rules of Payment of Gratuity Act, 1972, it provides for a provision wherein minors are legal heirs, and the controlling authority must invest the amount of gratuity in such bank or other financial institutions for the best interests of the minor till he or she attains majority.

The Act further provides that where the services of an employment has been rendered for at least six months, the gratuity amount shall be calculated at the rate of fifteen days of wages based upon the rate of wages drawn last by the concerned employee. However, it must be noted that the amount paid for overtime work shall not be taken into consideration under the rules of Payment of Gratuity Act.

Another rules of Payment of Gratuity Act states that the amount which is payable to an employee must not go beyond twenty months wages and an employee may get better terms of gratuity under any agreement, award or contract with the employer and nothing in this section shall affect such right of the employee.

An employee has the right to seek gratuity for the services rendered by him or her, but the critical thing to know here is that such right can be curtailed under two conditions:

  • If the termination of the employment is due to the wilful omission or negligence of the employee, thereby causing loss, damage, or destruction of property of the employer.
  • And the gratuity payable to the employee can be forfeited wholly in case the services of such an employee has been terminated due to riotous or disorderly conduct or any act of violence or if it constitutes an offence involving moral turpitude provided such offence is committed during the course of the employment by the employee.

Rule of Compulsory Insurance

The rules of Payment of Gratuity Act mandates for compulsory insurance to all employers other than those who belong to the Central Government or State Government by way of Life Insurance Corporation, though employers who have an established and registered gratuity fund in their company are exempted from this provision. For the enforcement of the rules under this section, the Government may make rules as and when necessary. In the event of a violation of this provision by any person, a penalty may be imposed.

Power to Exempt

Under this Act, the appropriate Government has the power to declare any establishment, mine, oilfield, factory, port, plantation, Railway Company or shop establishment exempted from gratuity by issuing a notification, if the Government thinks that the establishment has favourable benefits that is not less than what the Act has been providing. It also applies to any class of employees or any employee.

Nomination of family members

The rules of Payment of Gratuity Act make it mandatory for the employee to prescribe the name or names of the nominee after completing one year of service. Such nominee should be among the family members of the employee, and any other nominee shall be void in case of a family. If there is any alteration or fresh nomination, then such a change must be conveyed to the employer by the employee who will keep it in his safe custody. 

Process of receiving the amount of Gratuity and procedure followed in case of a dispute between employer and employee

The person who shall be entitled to receive the amount of gratuity must send an application in writing to the employer regarding the same. The employer will then calculate the amount of gratuity payable and provide a notice to the concerned employee and the controlling authority in writing. The said payment must be paid to the employee within 30 days from the date the amount was payable to the employee. In case the payment is not paid within the time limit, it will result in payment of simple interests, but having said that, if the delayed payment is due to the employee, then the simple interests shall not be needed to be paid by the employer.

In case any dispute arises between the employee and the employer, the matter shall be referred to the controlling authority, and the resolution proceedings presided by the controlling authority shall be as a judicial proceeding. The controlling authority, just like in a judicial proceeding, has the authority to order for the presence of any person for examination, production of relevant documents, and, if required, may issue commissions for the examination of witnesses. Once the inquiry is completed and the parties are given due opportunity of being heard, the controlling authority shall, after determining the matter, pass appropriate orders. The party aggrieved by the decision may appeal to the Government.

Recovery of Gratuity Amount payable by the Employer

In case an employer delays in paying the gratuity amount within the prescribed time limit, then the controlling authority has the power to issue a certificate to the collector on behalf of the aggrieved and recover the said amount along with the compound interest payable decided by the Government and then pay it to the aggrieved.

These above-mentioned rules of recovery can be exercised under two essential conditions, namely:

  • The controlling authority shall provide the employer with a reasonable opportunity to express the cause of such an act;
  • The interest amount to be paid shall not exceed the amount of gratuity payable under this Act.

Penal rules of Payment of Gratuity Act, 1972 and Appointment of Inspectors

Any contravention to the provisions of the Act shall invite penal action. The Act enlists certain penalties, which are mentioned below.

  1. Where a person makes a false representation, or a false statement with intent to avoid any payment shall be punished with an imprisonment of six months and or fine of up to Rs. 10000.
  2. In case of failure to comply with the provisions of this act will lead to imprisonment for a minimum of three months, and that may extend up to 1 year or a fine of Rs. 10000 that may extend to Rs. 20000.
  3. If the employer fails to pay the gratuity amount then it will lead to offence under the Act, and the employer shall be punished with imprisonment of minimum of 6 months and that may extend up to two years except if the court gives adequate reason for less payment.

An important rule to know here is considering the exemption of the employer from liability. Where an employer is charged with any offence under this Act, he or she may be exempted from any liability if they provide reasonable reason for their conduct of the act or if the act has been committed by some other person without their knowledge. The other person specified here shall be charged with the same offence, if found guilty, as the employer.

The Government has the authority to appoint an inspector/s who are deemed to be a public servant under the relevant section of the Indian penal Code with an object to ascertain whether any provisions or the rules of Payment of Gratuity Act are being violated with or not complied with and may take appropriate measures for the fulfillment of all the provisions or the rules of Payment of Gratuity Act, 1972.

Cognizance of offences

The court shall not take cognizance of offences punishable under the Act except when the gratuity amount to be paid has not been paid or recovered in 6 months from the date of expiry of the prescribed time. In such an event, the Government may authorise the controlling authority to make a complaint, and the controlling authority must make a complaint to the MM (Metropolitan Magistrate) or Judicial Magistrate of first class within 15 days of such authorisation.

It’s pivotal to understand that the controlling authority’s action shall be protected if such action is taken in good faith or under any rule or any order, and it shall not be under any legal proceeding.

Protection of gratuity under the Act

No gratuity payable under the rules of Payment of Gratuity Act shall be liable to attachment in the execution of any order or decree of a court. However, if the employee agrees to a deduction from the amount, then that amount can be recovered.

Different forms and their uses under Gratuity

The different kinds of forms under gratuity and their uses are enumerated below.

Form F To make Nomination
Form G To make Fresh Nomination
Form H Modification in Nomination
Form I Application for the payment of gratuity
Form J Application for the payment of gratuity by the nominee
Form K Application for the payment of gratuity by legal heir
Form L It is issued by the employer to the employee mentioning the amount and date of payment
Form M It is issued by the employer citing the cause for rejection of gratuity
Form N Application by an employee to labour commission
Form O It is issued by the authority for appearance for case hearing
Form P Summons by authority for case appearance
Form R Order from the authority to make gratuity payment

Conclusion


The rules of Payment of Gratuity Act 1972 are significant legislation provided for the welfare of the employees. The amount of gratuity motivates the employees to work more effectively and productively for the company or an organisation. The Act completely covers the essential rules relating to the payment of gratuity, and it overrides any other Acts in relation to statues. If the provisions or the rules of payment of gratuity act are sincerely followed by the employer and employees, then only its ultimate motive will be achieved.

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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