Law and You > Labour Laws > The Code on Social Security, 2020 > Payment of Gratuity Under the Social Security Code, 2020 (S. 53)
A gratuity is a form of financial compensation given to employees by an organisation to express their gratitude for the work done. It is a form of acknowledgement of their efforts and contributions to the company’s growth and development. The amount is usually calculated based on the employee’s service tenure and last drawn salary. It serves as a morale booster for employees, recognising their hard work and dedication towards the company. The provisions about Gratuity under the Social Security Code, 2020 provides for the appointment of controlling authorities to settle disputes between employers and employees regarding gratuity payments. Gratuity is usually given to employees who have worked for the company for continuous five years minimum. Employers must obtain insurance coverage for their gratuity liabilities, and failure to comply with the Act can result in penalties and legal action. Chapter V of the Social Security Code, 2020 containing Sections 53 to 58 deals with Gratuity. In this article, let us discuss provisions related to payment of gratuity.
Chapter V of the Social Security Code, 2020 is applicable to every factory, mine, oilfield, plantation, port and railway company, and every shop or establishment in which ten or more employees are employed, or were employed, on any day of the preceding twelve months; and such shops or establishments as may be notified by the appropriate Government from time to time.
Objectives of Chapter V of the Social Security Code, 2020:
- To provide social security to the employees after retirement
- To act as a social security legislation to the wage earning population in industries or establishments.
- Envisioned as a reward for those workers who have served for a long period of time as faithful employees.
- To impose a statutory liability upon employer to provide payment to employees when they suffer from any physical disability or death due to any disease or accident arising out of work
Who is Employee under Chapter V of the Social Security Code, 2020?
According to Section 2(26) of the Social Security Code, 2020 “employee” means any person (other than an apprentice engaged under the Apprentices Act, 1961) (52 of 1961) employed on wages by an establishment, either directly or through a contractor, to do any skilled, semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical, clerical or any other work, whether the terms of employment be express or implied, and also includes a person declared to be an employee by the appropriate Government, but does not include any member of the Armed Forces of the Union.
According to Explanation 1 attached to Section 53 of the Social Security Code, 2020 for the purposes of this Chapter, employee 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.
When does Gratuity is paid?
According to Section 53(1) of the Social Security Code, 2020 gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years,—
(a) on his superannuation; or
(b) on his retirement or resignation; or
(c) on his death or disablement due to accident or disease; or
(d) on termination of his contract period under fixed term employment; or
(e) on happening of any such event as may be notified by the Central Government:
Provided that in case of working journalist as defined in clause (f) of section 2 of the Working Journalists and Other Newspaper Employees (Condition of Service) and Miscellaneous Provisions Act, 1955 (45 of 1955), the expression “five years” occurring in this sub-section shall be deemed to be three years:
Provided further that 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 or expiration of fixed term employment or happening of any such event as may be notified by the Central Government:
Provided also that in the case of death of the employee, gratuity payable to him shall be paid to his nominee or, 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 competent authority as may be notified by the appropriate Government who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed by the appropriate Government, until such minor attains majority.
According to Explanation 2 attached to Section 53 of the Social Security Code, 2020 for the purposes of this section, disablement means such disablement as incapacitates an employee for the work which he was capable of performing before the accident or disease, resulting in such disablement.
Superannuation: means attainment of the age fixed in the contract or the condition of service at the age at which the employee shall vacate his office.
Thus gratuity shall be payable to the employee:
- If he has rendered continuous service not less than 5 years; and
- On his (a) superannuation or (b) resignation or retirement or (c) on his death or disablement or (d) termination of contract or (e) on happening of any such event as may be notified by the Central Government.
The proviso attached to the Section lays down that 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.
To whom the gratuity can be paid
- In the first case, the gratuity shall be paid to the employee himself.
- If an employee passes away, any gratuity due to him must be paid to his nominee or, if no nominee has been made, to his heirs.
- If either of the above-mentioned parties is a minor, the share of the minor must be deposited with the controlling authority, who will invest it for the minor’s benefit in the bank or other financial institution specified until the minor reaches majority, or, if no nominee has been made, to the employee’s heirs.
In Allahabad Bank and others v. All India Allahabad Bank Retired Employees Association, 2009 AIR SCW 7667 case, where the Honourable Court held that pensionary benefits may include both pension amount and gratuity amount, but gratuity amount is a must to be paid to the employees.
Calculation of Amount of Gratuity:
According to Section 53(2) of the Social Security Code, 2020 for every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days’ wages or such number of days as may be notified by the Central Government, based on the rate of wages last drawn by the employee concerned.
According to Explanation 3 attached to Section 53 of the Social Security Code, 2020 for the purposes of this section, it is clarified that in the case of a monthly rated employee, the fifteen days’ wages shall be calculated by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by fifteen.
General Provision:
For every completed year of service or a part, thereof its excess of six months, the employer has to pay gratuity to an employee at the rate of 15 days wages based on the rate of wages last drawn by the concerned employee. Service beyond six months is rounded up to the next full year for gratuity calculation.
Wages means any emoluments payable to the employee in cash including DA but excluding bonus, commission, HRA, overtime wages and other allowances.
The formula for calculating gratuity is as follows.
Gratuity = (Last drawn salary x Number of years of service x 15)/26
Last drawn salary = Basic Pay + Dearness Allowances (DA)
Here, 15 represents the number of days of salary (also called the gratuity rate) for every completed year of service, and 26 represents the number of working days in a month. The formula assumes that an employee works 26 days a month, and the gratuity calculation is based on the number of completed years of service.
Illustration I:
An employee has worked with an organisation for 10 years and their last drawn salary was Rs 1,00,000 per month, the gratuity calculation would be as follows:
Gratuity = (1,00,000 x 10 x 15) / 26 = 5,76,923/-
The employee is entitled to receive a gratuity payment of Rs 5,76,923/- from their employer.
Illustration II:
An employee had joined a job on 01-08-2004 and retired or got his job terminated on 30-04-2018, with last drawn basic Salary of Rs 30,000 and DA of Rs 13000.
Continuous Service Period = Retirement Date – Joining Date
Continuous Service Period = 30-04-2018 – 01-08-2004
Continuous Service Period = 13 years 8 months 29 days = 14 years
Thus, Gratuity = [(Rs 30,000+Rs 13000)x 14 x 15]/26 = Rs 3,47,307.70/-
The employee is entitled to receive a gratuity payment of Rs. 3,47,307.70/- from their employer.
Provision for Piece-Rated Employee:
The first Proviso attached to the Section 53(2) of the Social Security Code, 2020 lays down that in the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account.
Piece-rated pay is an employment system where the employers pay their employees per item of work completed, rather than per hour or at a fixed yearly salary. In the case of Piece-rated employee, daily wages are computed on the average of the total wages received by him for a period of 3 months immediately preceding the termination of his employment. For this purpose, the wages paid for any overtime work will not be taken into account.
Gratuity = (Average of the total wages in the last 3 months x Number of years of service x 15)/26
Provisions for Employees in Seasonal Establishment:
The second Proviso attached to the Section 53(2) of the Social Security Code, 2020 lays down that in the case of an employee who is employed in a seasonal establishment and who is not so employed throughout the year, the employer shall pay the gratuity at the rate of seven days’ wages for each season:
In the case of an employee employed in a seasonal establishment, and who is not so employed throughout the year, the employer shall pay gratuity at the rate of 7 days wages for each season.
Gratuity = (Average daily wages for a season x 1 x 7)
This is to be calculated for every season and then all gratuities calculated per season should be summed to obtain total gratuity to be paid.
Provisions for Fixed Term Employee:
The third Proviso attached to the Section 53(2) of the Social Security Code, 2020 lays down that in the case of an employee employed on fixed term employment or a deceased employee, the employer shall pay gratuity on pro rata basis.
Threshold Limit of Gratuity:
According to Section 53(3) of the Social Security Code, 2020 the amount of gratuity payable to an employee shall not exceed such amount as may be notified by the Central Government.
The maximum gratuity cannot exceed Rs 20 lakh. Any amount above this is considered ex-gratia, which is voluntary and not legally enforced. This limit is subject to change if the government amends the Code.
Provision for Disabled Employee:
According to Section 53(4) of the Social Security Code, 2020 for the purpose of computing the gratuity payable to an employee who is employed, after his disablement, on reduced wages, his wages for the period preceding his disablement shall be taken to be the wages received by him during that period, and his wages for the period subsequent to his disablement shall be taken to be the wages as so reduced.
Better Terms of Gratuity:
According to Section 53(5) of the Social Security Code, 2020 nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer.
The right of employees to receive better terms of gratuity under any award or agreement or contract with the employer is not taken away by this Code. The gratuity rate can vary from one organisation to another, and employers are required to specify this rate in their employment contracts.
Illustration III:
An employer has specified a gratuity rate of 20% of an employee’s last drawn salary, the calculation of gratuity for an employee with 10 years of service and a last drawn salary of Rs. 1,00,000 per month would be as follows:
Gratuity = (1,00,000 x 10 x 20)/26 = 7,69,230.77/-
Thus, the employee is entitled to receive a gratuity payment of Rs. 7,69,230.77/- from their employer.
Note: Just compare with Illustration I, you will notice that Illustration III gives better terms of gratuity.
In D. S. Purwar v. Elphinstone Spinning and Weaving Mills, 1986 (53) FLR 600 (Bom) case, the Bombay High Court held that claim of gratuity on the basis of agreement is outside the scope of adjudication under the Payment of Gratuity Act, 1972.
In Beed District Central Co-Operative Bank Ltd. v. State of Maharashtra, 2007 I L.L.J. (SC) case, the Supreme Court held that Section 4(5) of the payment of Gratuity Act, 1972 did not contemplate the workman being at liberty to opt for better terms of gratuity under contract, even while availing beneficial provisions of the Act. He had to opt for either of them and not the best terms of both. That is the option is open to the employee either to receive gratuity under the statute or under contract but not best terms of both.
Forfeiture of Gratuity:
According to Section 53(6)(a) of the Social Security Code, 2020 notwithstanding anything contained in Section 53(1), 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.
In Bombay Gas Public Ltd. Co. v. Papa Akbar, (1990) II L.L.J. 220 (Bom) case, the Bombay High Court held that the provisions of Section 4(6)(a) of the Payment of Gratuity Act, 1972 do not come into operation unless there is a termination on the grounds set out therein. The statutory provision for forfeiture of gratuity must be construed strictly. Court commented that merely stating the employee went on an illegal strike and thereby caused a heavy loss to the company is not a ground for denying gratuity.
According to Section 53(6)(b) of the Social Security Code, 2020 the gratuity payable to an employee may be wholly or partially forfeited—
(i) if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or
(ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided such offence is committed by him in the course of his employment.
In Bharat Gold Mines Ltd. v. Regional Labour Commissioner, 1986 53 FLR 340 (Karn) case, where a workman was guilty of theft committed bin the course of employment. In the opinion of the management the offence amounted to an offence involving moral turpitude and the workman was dismissed on that ground and his gratuity was forfeited. The Karnataka High Court held that, in cases of employee theft involving moral turpitude, gratuity is wholly forfeited in accordance with Section 4(6)(b) of the Payment of Gratuity Act, 1972. In light of this, the employer cannot withhold the employee’s owed gratuity when service has not been terminated for any of the aforementioned reasons.
In Jaswant Singh Gill v. Bharat Coking Coal Ltd., 2007 I L.L.J. 795 (SC) case, where gratuity was not paid to the General Manager on account of disciplinary proceedings under the Coal India Executives Conduct Discipline and Appeal Rules, 1978. The Supreme Court held that the Act must prevail over the Rules which were not statutory. The provisions of Section 4(6)) of the Payment of Gratuity Act, 1972 must be observed. The termination of services for causes enumerated in Section 4(b) of the Act was imperative the Court added.
In Travancore Plywood Industries v. Regional Joint Labour Corporation of Kerala, (1996) II LLJ 85 KER case, it was decided that the employee’s gratuity could not be withheld just because the employer’s land had not been abandoned by the employee. Therefore, under Section 4(6) of the Payment of Gratuity Act, 1972, an employee’s unwillingness to turn over inhabited corporate property is not a sufficient reason to deny gratuity.
In Air India Ltd. v. the Appellate Authority 1999 (81) FLR 900 case, the Bombay High Court held that gratuities cannot be withheld from departing employees because they did not vacate their service quarters.
In Hindalco Industries Ltd. v. Appellate Authority, (2004) III LLJ 148 ALL case, the Allahabad High Court held that in accordance with Section 4(6)(a) of the Act, the quantum of forfeiture must be determined, necessitating an order, which can only be issued after providing the employee with an opportunity.
In Manager, Western Coalfields Ltd. v. Prayag Modi, W.P.No.20795/2016 case, the Madhya Pradesh High Court held that an employee’s gratuity may only be withheld in accordance with the Act’s established procedure. The employer does not have unrestricted authority to decide to withhold the gratuity at his whim.
Conclusion:
The payment of gratuity is a significant aspect of employee compensation and retention. The Social Security mandates gratuity payments to employees upon termination or retirement, based on tenure and salary. Compliance with these laws is essential to avoid legal repercussions. Gratuity payments contribute to employee welfare by providing financial security after retirement or during job transitions. This can enhance employee satisfaction and loyalty. Offering gratuity can improve an employer’s reputation, making it easier to attract and retain talent. It can also lead to increased productivity and morale among employees. For both employees and employers, gratuity requires careful financial planning. Employers need to ensure they have adequate reserves to meet these obligations, while employees should consider gratuity as part of their long-term financial planning. On a broader scale, gratuity payments can contribute to economic stability by ensuring that retirees have a source of income, thereby reducing the burden on social security systems.
Thus, gratuity is an essential component of employee compensation that benefits both employees and employers, but it requires careful legal, financial, and policy considerations to be effectively managed.