From "rhari" : I have the following views on the Payment of Gratuity Act 1972.

a) whether gratuity act is applicable to contract labour

b) whether it is applicable to fixed tenure contractual appointments

In my view a plain reading of the Act shows that in both above cases it is not applicable.This is because Contract labour is not in the employment of the Contractor.They are only Contract labour as defined under the Contract labour Act which gives them special status under the Contract labour Act and hence are eligible only for the benefits specified under the Contract Labour Act which are PF & ESI/Workmen's compensation only.They are not eligible for gratuity,or bonus.

As regards tenure contractual appointments they are also not eligible for gratuity for the reason that the events on the occurrence of which gratuity is payable under the Act are






Now expiry of tenure of employment is not a defined occurence for payment of gratuity and therefore it would not be payable.

Any views on the above interpretations ?? Any case law to support or reject these ??

1st January 2007 From India, Ahmadabad

Hi Hari,
Your interpretation is correct and as along as the person is not an employee of the company, he is not eligible for Gratuity benefits, will send you the relevant doc shortly
Rajendra Sappa
1st January 2007
Hi Hari,

You have raised a very interesting point. Although, technically, the non renewal of contract may not amount to resignation, termination, or retirement, an employee employed by a contractor is covered under the Payment of Gratuity Act, and hence cannot be denied the gratuity on his completion of 5 years of continuous service. His non renewal of contract may perhaps be treated as his retirment from service.

As regards the Fixed term employment, the Act clearly makes a provision that in case the employee ceases to be in employment before completing n 5 years of service, he will be entitled to pro rata payment for the period he was in service.

In my previous employment, we had occasion to dispute the payment of gratuity to contract labour even after completion of 5 years of service, and the matter was referred to the Asstt Labour Commissioner. We were directed to make the payment as per the provisions of gratuity Act. I am sure there must be High Court/Supreme court ruling on this subject. I will check this up and give you a further feed back.

1st January 2007 From India, Nagpur
complete views on payment of gratuity act .........

Gratuity is a lump sum payment to employee when he retires or leaves service. It is basically a retirement benefit to an employee so that he can live life comfortably after retirement. However, under Gratuity Act, gratuity is payable even to an employee who resigns after completing at least 5 years of service.

In DTC Retired Employees v. Delhi Transport Corporation 2001(4) SCALE 30 = 2001 AIR SCW 2005, it was observed that gratuity is essentially a retiring benefit which as per Statute has been made applicable on voluntary resignation as well. Gratuity is reward for good, efficient and faithful service rendered for a considerable period.

Act provides for minimum gratuity only – The Gratuity Act provides only for minimum gratuity payable. If employee has right to receive higher gratuity under a contract or under an award, the employee is entitled to get higher gratuity. [section 4(5)].

Employers liable under the scheme - The Act applies to every factory, mine, plantation, port, and railway company. It also applies to every shop and establishment where 10 or more persons are employed or were employed on any day in preceding 12 months. [section1(3)]. Since the Act is also applicable to all shops and establishments, it will apply to motor transport undertakings, clubs, chambers of commerce and associations, local bodies, solicitor’s offices etc. , if they are employing 10 or more persons.

Employees eligible for gratuity – ’Employee’ means any person (other than apprentice) employed on wages in any establishment, factory, mine, oilfield, plantation, port, railway company or shop, to do any skilled, semi-skilled or unskilled, manual, supervisory, technical or clerical work, whether terms of such employment are express or implied, and whether such person is employed in a managerial or administrative capacity. However, it does not include any Central/State Government employee. [section 2(e)]. Thus, the Act is applicable to all employees - workers as well as persons employed in administrative and managerial capacity.

Gratuity is payable to a person on (a) resignation (b) termination on account of death or disablement due to accident or disease (c) retirement (d) death. Normally, gratuity is payable only after an employee completes five years of continuous service. In case of death and disablement, the condition of minimum 5 years’ service is not applicable. [section 4(1)].

The Act is applicable to all employees, irrespective of the salary.

Amount of gratuity payable - Gratuity is payable @ 15 days wages for every year of completed service. In the last year of service, if the employee has completed more than 6 months, it will be treated as full year for purpose of gratuity. - - In case of seasonal establishment, gratuity is payable @ 7 days wages for each season. [section 4(2)].

Wages shall consist of basic plus D.A, as per last drawn salary. However, allowances like bonus, commission, HRA, overtime etc. are not to be considered for calculations. [section 2(s)].

In case of employees paid on monthly wages basis, per day wages should be calculated by dividing monthly salary by 26 days to arrive at daily wages e.g. if last drawn salary of a person (basic plus DA) is Rs. 2,600 per month, his salary per day will be Rs. 100 (2,600 divided by 100). Thus, the employee is entitled to get Rs. 1,500 [15 days multiplied by Rs. 100 daily salary] for every year of completed service. If he has completed 30 years of service, he is entitled to get gratuity of Rs. 45,000 (Rs. 1,500 multiplied by 30). Maximum gratuity payable under the Act is Rs. 3.50 lakhs (the ceiling was Rs. 1,00,000 which was increased to 2.50 lakhs on 24.9.97 by an ordinance which was later increased to Rs 3.50 lakhs while converting the ordinance into Act].

Maximum gratuity payable – Maximum gratuity payable is Rs 3.50 lakhs. [Section 4(3)]. [Of course, employer can pay more. Employee has also right to get more if obtainable under an award or contract with employer, as made clear in section 4(5)].

Income-Tax exemption - Gratuity received upto Rs. 3.50 lakhs is exempt from Income Tax. Gratuity paid above that limit is taxable. [section 10(10) of Income Tax Act]. - - However, employee can claim relief u/s 89 in respect of the excess amount.

No Compulsory insurance of gratuity liability – Section 4A provides that every employer must obtain insurance of his gratuity liability with LIC or any other insurer. However, Government companies need not obtain such insurance. If an employee is already member of gratuity fund established by an employer, he has option to continue that arrangement. If an employer employing more than 500 persons establishes an approved gratuity fund, he need not obtain insurance for gratuity liability. - - However, this section has not yet been brought into force. Hence, presently, such compulsory insurance is not necessary.

Gratuity cannot be attached - Gratuity payable cannot be attached in execution of any decree or order of any civil, revenue or criminal court, as per section 13 of the Act.

i hope same is in order.

any comments ......

1st January 2007 From India, Bahadurgarh
I agree with points of Mr. Hari. Gratuity shud not be payable to a contractual employee. We have appointed one labour contractor for providing housekeeping services for one yr and not paying gratuity. We are paying ESI, PF, Bonus and leave as statutory payments. Earlier we were not ready to pay bonus and leave but after discussion in management, it was decided to pay both as the responsibility to ensure these payments is of prncipal employer only.
Can anyone support the above with some cases / law.
Law is written but it is the interpretation which differs and creates confusion.
13th June 2008 From India, Mumbai
Dear Mr.Hari,
My views are;
*Considering the Contractor as seperate entity, workers working with the contractors would be eligible for Gratiity from contarctor subject to cmpliance of other mendatory conditions like completion of continuous five yeras service ect.
*Since this is also social security legislation and therefore if contractor fails to pay the amount of gratuity the worker would raised the demand before principal employer
*It is then contractors responsibility to get the amount of gratuity from respective employers (as a part of commercial terms he has ensure) for the period/tenure such worker deployed
Kinldy repond if the views are clear and logical.
16th June 2008 From India, Mumbai
hi hari
applicable and eligiable is lot of differnence in that, this grauity act will applicable to all employees wnen he is completed one year service but eligable for grauity five year service,
santhosh Nk
19th June 2008 From India
Dear All, i am still not clear whether Gractuity is payable to fix term employer below five years if not what about in case of death. Trushit
31st January 2009 From India, Ahmadabad
hi, very sumple dear,
if any employee( i.e. directly, -hoc,dailywages, badli,casual, contractual and fix) completed 1 yr than applicable Gratuity Act and complited 5 yr service than compalsary eligible Gratuity Act. My dear in short u read defination of employee under tha said Act. this your proper it clear? ifany query under the labour laws u mail me
with regards,
Paresh M.Vyas
Advocate & Labour laws Consultant(M)
31st January 2009 From India, Mumbai
Dear Pareshbhai,Thanks a lots for quick reply but Dear Sir,what about following issues.Does Gratuity attract for contractual employment for fixed tenure of employment?what about in case of death?if death occurs then gratuity would payable up to 58 years/retirement or till the duration of fixed tenure?if we have supporting judgement regarding above i will be very thankful to the groupThanks
6th February 2009 From India, Ahmadabad
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