INSIGHTS OF PAYMENT OF GRATUITY ACT 1972

INSIGHTS OF PAYMENT OF GRATUITY ACT 1972
-Siddharth Macker

WHAT IS GRATUITY?
Gratuity in simple terms is a retirement benefit paid in the form to express gratitude to the
employees who have rendered continuous service for at least five years to incentivise and motivate
them so that they continue working efficiently.
The employee becomes eligible for gratuity after completion of Five (5) years of his service in
most cases. Gratuity is paid to an employee when the employee either retires or resigns or his
employment is terminated or in case of his death. Gratuity as per statutory law is governed and
enforced by the Payment of Gratuity Act 1972, which in turn is administered by the Central
Government.
APPLICABILITY OF THE ACT
• Factory, mine, oilfield, plantation, port and railway company
• Every shop or establishment within the meaning of any law in which ten or more persons
are employed, or were employed, on any day of the preceding twelve months;
• Such other establishments or class of establishments, in which ten or more employees are
employed, or were employed, on any day of the preceding twelve months, as the Central
Government may, by notification, specify in this behalf.
It is pertinent to put forth that once the Act becomes applicable to an organisation implying once an
establishment hires more than 10 employees, the Act shall continue to remain operative even after
the number of employees gets reduced below the minimum requirement.
ELIGIBILITY AND CONTINUOUS SERVICE
An employee who has served for at least five (5) continuous years shall be eligible in most cases for
gratuity. The act has also stipulated and has churned out the definition of continuous service to
ensure clarity in awarding gratuity to the employee. However, the prerequisite of continuous service
as aforementioned shall not be taken into consideration and account for in case of death or
disablement to the extent that the person is unable to provide his services. Thus, in such cases,
gratuity becomes payable without the prerequisite of completion of Five (5) years.
Continuous Service as per the gratuity act is mentioned in section 2A of the act. It stipulates that
gratuity shall be payable to an employee on cease of his employment after he has served for
continuous service for not less than five years. However, it is extremely important to define the
scope of “continuous service”. It essentially implies that an employee shall be implied to be in
continuous service for a period if, for that period, he has been in uninterrupted service. Continuous
service take into its purview and account service which may be interrupted on account of sickness,
accident, leave, absence from duty without leave, lay off, 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.
CALCULATION AND PAYMENT
GRATUITY = LAST DRAWN SALARY (BASIC +DA) × 15/26 × NO. OF YEARS OF SERVICE
The payment of the amount due under this act shall be paid within 30 days from the date it becomes
active i.e. from the day the person retires or his employment is terminated to the person to whom
the gratuity is awarded.
FAILURE TO PAY GRATUITY?
Payment of gratuity is statutory compliance and a right of the employee. There are strict penal
provisions in case of contravention with the provisions laid down under the act-:

• NON-PAYMENT: In a case where an employer fails to make payment of any gratuity
payable to the employee, he shall be punishable with imprisonment for a term which
shall not be less than six months but which may extend to two years.
• Contravention with provisions: An employer who contravenes or makes default in
complying with any of the provisions of the Act or any rule or order made thereunder shall
be punishable with imprisonment for a term which shall not be less than three months but
which may extend to one year or with fine which shall not be less than ten thousand rupees
but which may extend to twenty thousand rupees, or with both.
• False Statement under Act: An employer makes any false statement or false representation to
avoid any payment to be made by himself under the Act or of enabling any other person to
avoid such payment shall be punishable with imprisonment for a term which may extend to
six months or with fine which may extend to ten thousand rupees or with both.