Understanding Gratuity Eligibility: Is It 5 Years or Can 4.6 Years Qualify?

Dear All,

Eligibility Criteria for Gratuity Payment

Kindly help me understand the eligibility criteria for gratuity payment. My doubt is:

A) Is it 5 years of continuous service (plain reading of the Act) or
B) 4.6 years of continuous service, computed as 5 years for the purpose of calculation (this is a doubt in my mind) or
C) 4 years and 240 days (as per HC judgment).

I have gone through earlier discussions conducted by learned members of this forum, but I still have doubts regarding its finality. Kindly help me, and I apologize for repeating the same discussion.

Thanks in advance to all.

Understanding Gratuity Eligibility

As per the Payment of Gratuity Act, an employee who has completed 5 years of continuous service is eligible to receive gratuity. When calculating continuous service, an employee who has worked for 240 days in 12 months is considered to have continuous service. The Madras High Court and Kerala High Court verdicts in Mettur Beardsell's case and Sreeja's case, respectively, have considered the 240 days in the fifth year as one year. However, my understanding of the provision in the Act is that it is meant to determine continuous service, where 240 days shall be considered, and not for the eligibility criteria.

At the same time, since there is a court verdict and the dictum of the verdict shall be applied to any similar instances, establishments have started paying gratuity to those who have left service after completing 4 years and 240 days in the fifth year. As 240 days mean 240 paid days, which will include all paid-off days, holidays, and leave days, it will likely require 8 months to accumulate 240 days. Therefore, 6 months in the fifth year are undoubtedly out of the scope of gratuity.

The formula of 4 years + 240 days as eligibility is a judicial interpretation given by the Madras High Court, whereas the textual provision in the PGA 1972 is five years. The 240 days of service that would count as Continuous Service for the year is based on Section 2(2)(a)(ii) of the Act and is a deeming provision. That means where there is no continuous service for the full year, then if such discontinuous service exceeds 240 days in a year, the employee is deemed eligible for gratuity for that year.

Eligibility Criteria for Gratuity Payment

Section 4(1) is clear and categorical that eligibility is only after 5 years of continuous service. Section 4(2) mandates that gratuity has to be paid for every completed year of service, and for such periods of service in excess of 6 months, there is eligibility to receive gratuity. Section 4(2) is not an exception or does not modify the mandate of Section 4(1). So, read together, the 240 days criteria would apply where there is interrupted service (that is off and on service), and the six months + service is only for counting the number of years, not applicable for eligibility.

Dear Adv M Munwar,

Regarding your query, both Mr. Madhu and Mr. KK have already provided their perspectives, which should be taken into consideration based on the current situation.

Gratuity Payment Eligibility

Gratuity is payable after completing 5 years of continuous service, as required by the Industrial Disputes Act. While High Court judgments are specific to each case, they do not hold the status of law unless officially notified. It is essential to assess the circumstances and decide whether payment or receipt is appropriate based on individual suitability.

Thank you.

Dear Prabhat Ranjan Mohanty Sir,

Thank you for sharing your views. To conclude my understanding as you have suggested, the court verdicts only apply to similar types of establishments and instances, and it is up to the employers to decide whether gratuity is to be paid before 5 years or not. The default mandatory eligibility period always remains at 5 years.

I hope I have interpreted this correctly.

Yes. But the dictum of a High Court verdict shall be applied to any similar incidents. For example, the Kerala High Court verdict in Sreeja Vs Regional Joint Labour Commissioner [2015 LLR 826] came in 2015. Till then, the Labour Officers, the controlling authority under the Payment of Gratuity Act in Kerala, used to take 5 years of service as the base for entitlement of gratuity. But since the above decision, they started considering 4 years and 240 days of service as the base. Even now, employers contact me for advice on this matter. I tell them that the Payment of Gratuity Act states that a minimum service of 5 years and 240 days is relevant only to decide whether the service has been continuous or not. I also inform them that there is a court verdict (above referred) which directs the payment of gratuity to an employee who has worked for 4 years and 240 days in the fifth year. The final decision should come from the management. If the employee decides to go legal, he can win.