Gratuity is a lump sum paid by a company when an employee leaves the organization and is one of the many retirement benefits the company offers to the employee. Currently, The Payment of Gratuity Act 1972 (the Gratuity Act) applies to employees working in factories, mines, oil fields, plantations, ports, railway companies, shops, or other establishments with ten or more employees. Let us discuss the Payment of Gratuity Act, of 1972.
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What is Gratuity?
Gratuity is a statutory benefit given to employees as a token of appreciation on termination of employment after rendering continuous service for at least five years in recognition of continuous, meritorious service and sincere efforts of the employee towards the organization.
Payment of Gratuity Act, 1972 with Payment of Gratuity (Central) Rules, 1972 deals with payment of gratuity to employees on termination of their employment. This Act is extended to the whole of India except the State of Jammu and Kashmir in cases relating to plantations and ports.
The objective of the Act is to financially assist the worker by providing post-retirement gratuity in recognition of continuous, meritorious services and sincere efforts of the employee towards the organization.
Applicability of the Act
The act applies to:
- Every factory, oil field, railway company, port, mine, and plantation;
- Any shop or establishment within the meaning of any law for the time being in force relating to shops and establishments in the State in which 10 persons or above are employed on any day of the preceding 12 months;
- Such other establishments or classes of establishments in which 10 or more employees are employed or who were employed on any day of the preceding twelve months, as the Central Government may determine on this behalf.
- A shop or establishment to which this Act has become applicable shall continue to be governed by this Act, even if the number of persons employed therein falls below ten at any time after the commencement of this Act.
This Act has been amended from time to time as required, in 1984, 1987, 1994 and 1998, 2005, 2009, 2010.
Benefit for employees
Gratuities serve as a social security tool as well as a reward for a person who sacrifices his whole life for the improvement, development, and prosperity of the company and otherwise for the nation.
Gratuity is an amount (as a lump sum payment) paid by an employer to an employee for past service when employment is terminated in the following scenario
- In case of resignation.
- In case of retirement.
- In the case of supplementary pension insurance, i.e. concluding an employment contract according to the agreement with the employer.
- In the event of death, a family member can use the same financial instrument.
Main provisions
- The ability to pay tips to the employee is both his right and the employer’s obligation.
- It is a legal right given to employees.
- Gratuities cannot be garnished either by court order or other means
- Employees become due on the day their employment ends.
- By changing the ownership right, the employer-employee relationship continues, and the new employer cannot escape the obligation to pay remuneration to the employees;
- An employee who resigns is also entitled to a gratuity; (and non-acceptance of the notice is not an obstacle to the employee’s entitlement to gratuity).
- For this section, disability means a disability that does not prevent the employee from performing the work he was able to perform before the accident or illness that caused such disability.
- The amount of the gratuity will be 15 days’ wages according to the rate of wages last drawn by the employees concerned for each completed year of service or part thereof exceeding six months, but a maximum of 15 months’ wages.
Compliance as per Payment of Gratuity Rules 1972
- Form “A” – Notice of Opening: Within thirty days after the rules become applicable to the establishment, the employer shall submit a notice in Form “A” to the controlling authority of the area.
- Form “B” – Notice of Change: A notice in Form “B” shall be submitted by the employer to the governing body of the area within thirty days of any change in name, employer, address, or nature of business.
- Form “C” – Notice of Closure: If the employer intends to close the establishment, he shall give notice on Form “C” to the controlling authority of the area at least sixty days before the intended closure.
- Form “D” – Notice of Exclusion of Spouse from Family: Under sub-rule (1) of rule 5, female employees may submit a wish to exclude her husband from the family for the Payment of Gratuity Act, 1972.
- Form “E” – Notice of revocation of notice of exclusion of husband from family: Under sub-rule (2) of rule 5, a female employee may file a revocation of her earlier submission desiring to exclude her husband from the family for the Payment of Gratuity Act, 1972.
- Form “U” – Abstract of Act and Rules: According to section 16, the employer must prominently post at or near the main entrance of the business a notice in bold type in English and a language understood by the majority of the employees, stating the name of the officer designated by the employer authorized to receive notices on his behalf under the Payment of Gratuity Act or rules thereunder [rule (4)].
The employer shall post a summary of the Gratuity Act and the rules set out therein in English and a language understood by the majority of employees in a conspicuous place at or near the main entrance to the establishment (Rule 20).
Penalties
The penalties imposed for various offenses on employers by the Payment of Gratuity Act 1972 are listed below:
- Misrepresentation or to avoid payment as required by law. Imprisonment for up to 6 months or fine up to Rs. 10,000 or both. [Sec. 9(1)]
- Violation of or non-compliance with any provisions of the Act or the Rules or Regulations caused the execution. Imprisonment for a term which may extend to one year (minimum 3 months) or fine which may extend to Rs. 20,000 (minimum Rs. 10,000) or both. [Sec. 9(2)]
- Failure to pay gratuity as per law, imprisonment up to two years (minimum 6 months) or fine up to Rs. 20,000 (minimum Rs. 10,000), or both.
- Failure to make a payment in the form of a premium for compulsory insurance according to Section 4A (1) or as a contribution to an approved tip fund. Fine up to Rs 10,000 and Rs 1,000 for each day during which the offense continues.
Final words
In conclusion, gratuity plays a vital role for employees as it acts as a post-retirement plan. Employees who work in public and private sectors should be aware of these tipping rules to ensure they get the most out of it. It is a financial incentive provided to an employee for providing service and dedication to the company.
