By Rupin Chopra and Aishwarya Rajput
Introduction
Have you ever wondered about the financial perks that come with long-term employment? One such benefit is gratuity, a lump sum payment offered by employers to their employees upon retirement, resignation, or termination.
What is Gratuity?
A gratuity is a financial reward that companies/employer offer to employees as a token of appreciation for their long-term service and valuable contributions. This monetary benefit is often calculated based on factors such as the employee’s tenure with the company and their final salary.
Applicability and Eligibility:
The Payment of Gratuity Act, 1972 (Gratuity Act) governs gratuity payments in establishments employing 10 or more individuals. To be eligible for gratuity, an employee must have completed a minimum of five years of continuous service. Gratuity is payable upon:
- Superannuation
- Retirement
- Termination of Employment (including resignation)
- Death or Disablement due to accident or disease (no minimum service period required)
It’s important to note that the right to receive and the obligation to pay gratuity are contingent upon the fulfilment of these conditions.
Computation of Gratuity:
The Gratuity Act mandates that employers pay gratuity at a rate of 15 days’ wages (comprising basic wages and dearness allowance) for each completed year of service (or a portion exceeding six months). The calculation is based on the employee’s last drawn wages.
Which are the Establishments that the Gratuity Act Apply?
As per Section 1(3) , the Gratuity Act applies to various establishments, including factories, mines, oilfields, plantations, ports, railway companies, and shops or establishments as defined by state-specific Shops and Establishments Acts or Central Government notifications.
Continuous Service for Eligibility under Gratuity
- The concept of “continuous service” under the Gratuity Act, is pivotal in determining an employee’s eligibility for gratuity. This term encompasses uninterrupted service, including authorized breaks such as leave, layoffs, strikes, lockouts, or work cessations beyond the employee’s control.
- Secondment, where an employee is temporarily assigned to another department, location, or entity, often at the employer’s behest, can be considered an authorized break in service. Given the nature of secondment, such periods may be included in the calculation of continuous service for gratuity eligibility.
- Consequently, if an employee is seconded from an Indian entity to a foreign group entity, the period of secondment can potentially be counted toward the five-year continuous service requirement. Upon completing three years of service, including the secondment period, the employee may become eligible for gratuity from the Indian entity, even though their physical employment is overseas.
Can an Employer Withhold Gratuity?
An employer may withhold or forfeit a portion of an employee’s gratuity under certain circumstances. These include:
- Damage or Loss to Employer’s Property:If an employee’s services are terminated due to willful misconduct, negligence, or actions that cause damage or loss to the employer’s property, the gratuity may be withheld or forfeited to the extent of the damage or loss.
- Serious Misconduct:In cases of severe misconduct, such as riotous or disorderly behavior, violence, or offenses involving moral turpitude committed during employment, the employer may fully or partially withhold the gratuity.
It is important to note that these are specific conditions under which gratuity can be withheld. In most cases, employees who meet the eligibility criteria for gratuity are entitled to receive it.
Penalty for Violation of the Provision of the Act and the Rules
As per Section 9 of the Gratuity Act[1], employers who fail to comply with the Gratuity Act and its rules can face penalties.
- These include imprisonment for a minimum of three months and a fine of at least ten thousand rupees.
- Additionally, individuals who knowingly provide false information to avoid gratuity payments can be imprisoned for up to six months and fined up to ten thousand rupees.
Nomination for Gratuity
The Gratuity Act under Section 6[2] allows employees to designate a nominee to receive their gratuity in the event of their death. Here are the key points regarding nomination:
- Nominee Selection:Employees can nominate one or more family members.
- Timing of Nomination:Nominations can be made at any time during employment and can be modified as needed.
- Nominee’s Age:If the nominee is a minor, the employee can appoint a guardian to receive the gratuity on their behalf.
Will the Gratuity Amount after the employee’s death belong solely to the Nominee?
The nominee acts as a custodian of the gratuity amount. They are responsible for receiving the funds and then distributing them to the deceased employee’s legal heirs according to the applicable laws of succession. While the nominee has the authority to collect the gratuity, they do not have the right to claim it as their own.
In the Case of Sarbati Devi versus Usha Devi[3], the Hon’ble Supreme Court laid down that a mere nomination does not have the effect of conferring to the nominee any beneficial interest in the amount payable under the life insurance policy, on death of the deceased. The nomination only indicates the hand which is authorized to receive the amount on payment of which the deceased gets a valid discharge of its liability under the law. The amount, however, can be claimed by the heirs of the assured in accordance with the law of succession.
Further, in the Case of Shipra Sengupta vs Mridul Sengupta & Others[4], the Hon’ble Supreme clarified that a nominee does not have ownership rights over the gratuity amount. The nominee is merely a custodian who is responsible for receiving the funds and then distributing them to the legal heirs of the deceased employee as per the applicable laws of inheritance. This means that the nominee’s role is limited to facilitating the transfer of funds to the rightful beneficiaries. In this specific case, the Hindu Succession Act, 1956, shall govern the distribution of the gratuity amount among the deceased’s heirs.
Conclusion
Gratuity is a valuable financial benefit that can provide significant support to employees and their families. By understanding the eligibility criteria, calculation methods, and legal nuances, employees can ensure they receive their rightful entitlements. However, it is important to remember that while the nominee plays a crucial role in receiving the gratuity amount, they do not have ownership rights over it. The funds must be distributed to the legal heirs of the deceased employee according to applicable laws of succession.
[1] https://clc.gov.in/clc/sites/default/files/PaymentofGratuityAct.pdf
[2] ibid.
[3] 1984(1) SCC 424; https://indiankanoon.org/doc/1308094/
[4] AIRONLINE 2009 SC 408; https://indiankanoon.org/doc/569805/