During colonial rule in India, there was no law regulating gratuity. Employers offered gratuity as a gesture of appreciation upon an employee's completion of active service. It was a discretionary payment rather than an entitlement. In the post-independence era, the Supreme Court in Indian Hume Pipe Co. Ltd. v. The Workmen (AIR 1960 SC 251) observed that a one-time gratuity was treated as payment gratuitously made by the employer to his employee at his pleasure, but as a result of a long series of decisions of industrial tribunals gratuity has now come to be regarded as a legitimate claim which workmen can make and which, in a proper case, can give rise to an industrial dispute.

Undoubtedly, there has been a lot of delay and apathy in recognizing gratuity as a right, both by the Legislature and the Courts in India and such delay can be attributed to the historical context of colonial rule, during which labour laws and social security measures were not as developed or prioritised.

Even though payment of gratuity to journalists was provided for in the Working Journalists (Conditions of Service) and Miscellaneous Provisions Act, 1955, however, there was no other law which provided for the payment of gratuity to industrial workers except in states namely Kerala and West Bengal. Subsequently, the Payment of Gratuity Act, 1972, (“Act”) was introduced at the Central level to institutionalise gratuity as a statutory retiral benefit for employees across various sectors.

Understanding the Act and the Global Scenario

The Act applies to factories, mines, oil fields, plantations, ports, railways, motor transport undertakings, companies, and shops, as well as other establishments, provided they employ ten (10) or more workmen. As per Section 4 of the Act, gratuity shall be payable to an employee upon the termination of their employment, provided they have rendered continuous service for a period not less than five (5) years, in the following circumstances: (a) Upon superannuation; (b) Upon retirement or resignation; and (c) Upon death or disablement due to accident or disease.

However, the global trend towards gratuity is more flexible and therefore, there is an ongoing debate and consideration in India about reducing the eligibility period for receiving gratuity. The Standing Committee on Labour (2019-20) received suggestions to reduce the eligibility period for gratuity. Unlike India, countries such as the United Arab Emirates (UAE) prescribe a minimum service period of one year as per Article 51 of the new UAE labour law. A similar approach is followed in other Gulf Cooperation Countries (GCC), for instance, Saudi Arabia, Oman, and Bahrain, where the minimum service period for gratuity is one year. There are also alarming reports of a trend in which many Indian companies terminate their employees just before they become eligible for gratuity. Also, India calculates gratuity based on 15 days of wages for each completed year of service, while other GCC countries like the UAE base it on the employee's basic salary, with 21 days' basic salary per year for the first five years and 30 days' basic salary for each subsequent year. With these global developments and laws, time and again, there is a need felt to align India's gratuity regulations more closely with international standards and provide employees with earlier access to this important employee benefit.

Eligibility under the Act and the new Code

Gratuity, as defined under Section 2(e) of the Act, is payable to "employees", including individuals engaged on wages in various establishments, excluding apprentices. However, the absence of specific provisions for fixed-term contract employees and consultants raises concerns regarding their entitlement to gratuity. While consultants working as independent contractors who charge invoice-backed fees for their services performed for multiple companies might fall beyond the scope of the Act, however, fixed-term contract employees may be subject to gratuity payment under specified conditions. Court rulings, such as National Bal Bhawan v. Vandana ((2020) 165 FLR 1007) stated that the Act's definition of 'employee' encompasses all categories, regardless of employment status, be it regular, ad-hoc, part-time, casual etc. Notably, the proposed Code on Social Security (“Code”) provides that workers engaged under Fixed Term Employment (“FTE”) shall receive all benefits available to permanent employees, including gratuity eligibility after one year of service.

Gratuity Insurance

Under Section 4A of the Act, every employer is required to acquire a mandatory insurance policy for their liability towards gratuity payments under the Act, once notified by the 'Appropriate Government.' The appropriate government for establishments with offices in more than one state is the Central Government, while for other establishments, it's the State Government. Previously, Andhra Pradesh, Kerala and Telangana had enforced Section 4A, making it mandatory to acquire insurance in these states. On January 10, 2024, the Government of Karnataka notified the Karnataka Compulsory Gratuity Insurance Rules, 2024, becoming the fourth state to do so.

An important point to be noted here is whether an employee is entitled to gratuity beyond the statutory limit when the employer opts for insurance yielding a higher amount. This was addressed in Chandrasekharan Nair G. and others v. Kerala State Co-operative Agricultural and Rural Development Bank Ltd. (2017 (4) KLT 276), the Court held that the liability to pay gratuity does not get shifted to the insurer by the compulsory insurance and the effect is only that the maturity value of the master policy would go to the credit of the dues of the employee. Any amount in excess of the gratuity due would also go to the employee.

Legal Protections

Gratuity payments are legally protected to ensure employees' retirement benefits are not compromised by external factors such as legal claims or financial troubles of the employer. Further, in the case of Smt. N.R. Indira v. The State of Telangana (W.P.No. 1034 of 2021), the High Court of Telangana observed that pension and gratuity amounts of retired employees are protected from attachment for the satisfaction of a court decree, as per Section 60(1)(g) of the Civil Procedure Code, 1908. Further, issues like delays in gratuity payments are addressed within the Act and employers are required to pay interest on delayed payments unless the delay is because of the actions of the employee.  Section 7(3A) of the Act states that if the employer fails to pay the gratuity amount within the designated period, then such employer shall be liable to pay simple interest from the date on which the gratuity becomes payable to the date of payment. It may also invite a jail term of up to a year or two for non-payment in certain circumstances.

Whether the gratuity is payable for extended years of employment

The Act mandates gratuity payment to employees with a minimum of five (5) years of continuous service upon termination due to superannuation, retirement, resignation, death, or disablement. Superannuation, as per Section 2(r), refers to the age specified in the employment contract for retirement. Retirement, defined in Section 2(q) signifies the cessation of employment, excluding cases of superannuation. Notably, the Act doesn't impose an upper age limit for gratuity eligibility. Employees continuing beyond retirement fulfilling the five-year service criterion, are entitled to gratuity upon termination.

In a recent judicial pronouncement, the Supreme Court of India in the case of G.B. Pant University of Agriculture and Technology V. Sri Damodar Mathpal (Petition(s) for Special Leave to Appeal (C) No(s). 1803/2018) held that merely exercising the option by an employee, to avail the benefit of extension of the age of retirement to 60 years could not operate against his entitlement to gratuity. The Court further held that exercising of an option would not deprive the employee of gratuity until and unless it had been exempted after prior approval of the appropriate Government under Section 5 of the Act.

Conclusion

With the timely enforcement of new gratuity rules and implementation of new labour codes, Indian legislators are on the path to realise their commitment to bridge the gap between domestic and international laws on this subject matter and are well preparing the system to universalise social security by extending gratuity to gig workers, contract workers and fixed term employees, etc.

Author: Antra Ahuja (Senior Associate)