Understanding Gratuity Eligibility: How Should I Calculate and Apply It for an Employee?

Hi friends,

Can anyone give me an explanation for the following queries?

1) If an employee joined in Nov. 00 and left the job in July 05, the total period of service amounts to 4 years and 9 months.
Query: Is this employee eligible for Gratuity?

In the increment letter, the company mentioned that after 4 years of service, he is eligible for 30 days of gratuity.
Query: Do I have to give the full 30 days or can I provide only 15 days as per the act?

If I have to provide 30 days, should I consider the earlier 4 years as well in the calculation?

The employee is in a staff cadre, and we are paying a monthly salary for 30 days.
Query: How should I calculate the gratuity – based on 30 days or 26 days?

What does the law say on this issue?

Thanks in advance,
Prashant

Dear Raj,

I am not able to find any law stating an employee can claim Gratuity before completion of 5 Years.

As per the Payment of Gratuity Act, 1972:
4. PAYMENT OF GRATUITY. (1) 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: Provided 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:

Provided further that in the case of the 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 nominee or heirs are a minor, the share of such minor shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such a bank or other financial institution, as may be prescribed, until such a minor attains majority.

Explanation: 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.

(2) 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 based on the rate of wages last drawn by the employee concerned:

Provided 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:

Provided further 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.

Explanation: 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.

Rest of this, my friend, the Act says:

(5) 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.

Hope you have a clear idea... :-P

Dear Prashant,

If you follow the Payment of Gratuity Act, you need not pay Gratuity since the employee had left the organization without completing five years of service with you, the minimum service required to be eligible for one to get Gratuity.

I presume that your increment letter is issued after one year of service. As such, he will get gratuity after 4 years from then (date of increment). If it is to be interpreted as 30 days gratuity for the whole years of service and not as 30 days per year of service, the amount of gratuity will be something less than what is to be paid as per the Act. The Act will permit anything more than what is to be paid as per the Act but will not entertain an amount less beneficial to the employee. Therefore, from the point of law, it shall only be interpreted as 30 days per year, and if it is clearly stated in the letter that the gratuity is 30 days for 5 years or 4 years as the case may be, the same will not be enforceable by law. Anyway, it is really a mistake committed by you while drafting appointment letters/increment letters. While drafting appointment letters/increment letters, always keep away from statutory contributions and payments which are not in our hands. You need just to say that "EPF/ESI/Gratuity... as per law applicable from time to time." Many companies make similar mistakes even knowingly, just to improve the morale of workers.

For all employees under time scale (those who are not piece-rated), the amount of gratuity is calculated by dividing the monthly salary (Basic + DA only) by 26 and multiplying the same by the number of years of service.

Regards,

Madhu.T.K

I would like to add one thing over here that recently I came to know from one of my friends that there is a Supreme Court ruling which states as follows:

As per the latest judgment of the honorable Supreme Court - An employee is eligible for gratuity if he has completed 4 years of continuous service and 240 days of continuous work in the 5th year.

I am trying to get a copy but still have not been able to obtain it. If anybody gets it, please share it.

Dear Rajeev,

That was a judgment of the Madras High Court. Still, the provision of completing 5 years is in force. The rest is okay.

Regards,
ACCHR

Dear Verma,

I have also heard about a similar judgment, but I do not have a copy of the same. However, it is controversial regarding the eligibility of gratuity, which will be decided by the date of joining and completion of 5 years from such date. Until a verdict is received, I prefer to err on the side of caution and interpret it as 5 years from the date of joining.

Regarding a specific year for which gratuity will be due, there are directions that one who had worked for 240 days (above the ground) and 190 days (below the ground) will be considered as having continuous service. Similarly, if during any year one could not work for 240 days, they shall be paid gratuity for that year provided they had worked for at least 190 days and where their absence was not due to any reason for which disciplinary action was initiated.

Regards,
Madhu.T.K

I would like to add one thing over here that recently I came to know from one of my friends that there is a Supreme Court ruling which states as follows: As per the latest judgment of the honorable Supreme Court - An employee is eligible for gratuity if they have completed 4 years of continuous service and 240 days of continuous working in the 5th year. I am trying to get a copy but still have not been able to obtain it. If anybody gets it, please share it.

I joined a company on a contract (payrolls of the company itself) for 6 months. During this time, my CTC included a gratuity deduction. Could you please tell me if I'm eligible for reimbursement or carry forward of gratuity if I'm converted into a full-time employee?

Thanks

Clarification on Gratuity Act Applicability for Part-Time Employees

I have received a viewpoint from MADHU T.K. regarding the applicability of the Gratuity Act to part-time employees. MADHU T.K. mentioned that part-time employees do not fall under the purview of the I.D. Act and are not entitled to gratuity. However, under sections 2(9) and 2(f) of the E.S.I. and PF Acts respectively, the department considers part-time employees as "employees" and covers them under the respective Acts. In such cases, the department either levies EE/ER contributions or requests proof of salary exceeding the applicable limit under the respective Act.

I would like to inquire whether any department has issued a clarification or circular about the definition of "employee." If such a clarification exists, it may also impact the Gratuity Act.

Regards,
I. M. ANAND

In continuation of my remarks as above, I may further add as follows for kind consideration:

1. The issue on similar lines was earlier also discussed in CiteHR sometime back. The links are mentioned as follows:
- https://www.citehr.com/392839-part-t...man-under.html
- Minimum wages for part-time labourers - labour acts.. CiteLegal

2. Further, in a recent judgment, the Honorable Supreme Court has held that part-time employees are not entitled to regularization in their services. The copy of the judgment is linked herewith as an email attachment.

Regards

Understanding Gratuity in CTC

If an employee is not eligible for gratuity, then why is this a part of CTC as the company is deducting from the employee's CTC? If gratuity is not paid back to an employee who has not completed 4 or 5 years in an organization, then how does it become a cost to the company?

I will legally accept if an employee completes their 4 or 5 years in a company, then the company can say that it is costing them, and it includes in my CTC.

If no amount is being deposited by the company before 4-5 years, then what's the point a company can keep the employee's gratuity amount which was deducted in the name of COST TO COMPANY, or where is it written that the employee has no right to this amount?

As per my understanding, in a case where the company is committed to paying the amount of gratuity on behalf of the employee if they complete their 5 years in continuous service, and in case the employee is not able to complete their 5 years, then no employee can claim the gratuity amount for not completing the desirable years.

I think showing Gratuity in CTC and deducting this amount can be claimed from the company if not completing 5 years, and resignation is in a normal scene.

Regards

Here I have also one query. Please tell:

1. If an employee's date of joining is 10/05/2010 and management asks for resignation on 12/12/2014 after completing 4 years and 07 months.

2. The employee did not resign but stated that if the employer pays him one month's notice payment and gratuity for the last 5 years, then he is ready for the same.

3. The termination of service is at the management's discretion.

Eligibility for Gratuity in Case of Service Termination

4. Please provide a reply as per the law: Is he eligible for gratuity in the case of service termination by management? This is because it is a regular practice of the company to remove the employee after about 5 years of employment by asking for resignation.

Thank you.

Eligibility for Gratuity: Termination or Resignation

Whether termination or resignation, in order to be eligible for gratuity, the employee should work for at least 5 years. In the case of termination, the employee has the defense that there should be sufficient reasons for termination, and it should be done only after following the provisions of the ID Act, whether it is retrenchment or after a proper inquiry. If during the termination both parties agree that, considering the length of service, gratuity will be paid, then it can be paid. There is no illegality in reaching an agreement that benefits the employee(s).

Regards,
Madhu.T.K

If a 5-day week organization employee completes 4 years and 11 months and submits their resignation, is the employee eligible to avail the benefits of gratuity and superannuation? Please let me know the criteria for gratuity and superannuation. When can an employee become eligible to claim gratuity and superannuation?

Thank you.