In the world of employment, one term that often stands out is “gratuity.” Derived from the Latin word “gratuitous,” it signifies a token of appreciation, a payment made by an employer to an employee when terminating their service, be it retirement or resignation. For students and newcomers seeking a concise understanding of gratuity laws, this article aims to provide an overview of the Act and its implications.
Understanding the Payment of Gratuity Act
The Payment of Gratuity Act aims to introduce a system for providing Gratuity to employees working in various sectors such as factories, mines, oilfields, ports, railway companies, shops, or any other establishments employing ten or more individuals. In a significant legal case, “Burhanpur Tapti Mills Limited vs. Burhanpur Tapti Mills Majdoor Sangh” (1964) – SUPREME COURT, it was firmly established that Gratuity constitutes an extra payment given to an employee upon their retirement, in addition to the retirement benefits they are entitled to receive.
Applicability of the Act
The Act applies to:
- Specified Establishments: Ports, mines, factories, plantations, railway departments, oil fields.
- Shops and Establishments: Within the meaning of state laws, ten or more persons are employed or were employed on any day in the last 12 months.
- Notified Establishments: The central government may notify any other establishments where ten or more persons are employed or were employed on any day in the last 12 months.
- Continued Applicability: If the Act becomes applicable to a shop or establishment once, it shall continue to apply even if the number of employees falls below 10.
Who is Eligible for Gratuity?
According to Section 2(E) of the Act, an employee is defined as any person other than an apprentice who is employed for wages, with express or implied terms and conditions of employment, in connection with ports, mines, oilfields, railway departments, shops, or establishments to which the Act applies. The definition excludes persons holding a post under the central or state government. However, the Payment of Gratuity (Amendment) Act, 2009 amended the definition of an employee to include teachers in educational institutions within the purview of the Act.
The Right to Receive Gratuity
An individual employed in an establishment to which the Act applies, an employee as defined in Section 2(E), and a person who has been in continuous service for five years have the right to receive Gratuity.
What Constitutes an “Establishment”?
The term “establishment” includes both commercial and non-commercial establishments. For example, the Act applies to employees working in temples, as seen in the case of “Sri Jagannath Temple, Puri vs Jagannath Padhi.”
Defining Wages
The Act defines wages as all payments earned by an employee, paid or payable in cash, including dearness allowance, but excludes bonus, commission, house rent allowance (HRA), and overtime wages.
Calculating Continuous Service
Suppose an employee has not been in continuous service for one year. In that case, they shall be deemed in continuous service for one year if, during the last 12 calendar months preceding the calculation date, they have worked under the employer for not less than 190 days. This provision also applies if the employee was employed below the ground in a mine or in an establishment that operates for less than six days a week.
Special Provisions for Seasonal Establishments
In the case of seasonal establishments, if an employee has not been in continuous service for one year, they shall be deemed to be in continuous service if they have worked at least 75% of the number of days the establishment was in operation during that period. When computing the days an employee has worked, certain days are included, such as days during which the employee was laid off, days during which they were on leave with full wages, days during which female employees were on maternity leave up to 26 weeks and days on which the employee was absent due to temporary disablement caused by an accident arising in the course of employment.
Understanding “Family” in Gratuity
As per Section 2(G) of the Act, “family” is defined as follows:
- Male Employee: Himself, his wife, children (married/unmarried), parents (dependent), parents of the wife (dependent), widow, and children of a predeceased son.
- Female Employee: Herself, her husband, children (married/unmarried), parents (dependent), parents of the husband (dependent), widow, and children of a predeceased son.
How is Gratuity Calculated?
The amount of Gratuity payable is determined as follows:
- Monthly-Rated Employee: Gratuity shall be payable at 15 days’ wages for every completed year of service. Wages refer to the last drawn wages, and a month means a period of 26 days. The formula for calculating Gratuity is Gratuity = Last drawn wages * 15/26 * completed years of service.
- Piece-Rated Employee: Gratuity = Last drawn wages * 15/26 * completed years of service. Here, the last drawn wages are calculated by taking the average of the total wages received in the three months immediately preceding the termination of employment.
- Seasonal Establishment: Gratuity is calculated at seven days’ wages for each season.
A Safety Net for Retirement
The Payment of Gratuity Act 1972 is an old-age retirement social security benefit. It provides relief to retired employees or their family members in the event of the employee’s death during service. It acts as a post-retirement plan, rewarding dedicated individuals who have served their organizations faithfully.
A Token of Appreciation
Gratuity is a token of loyalty, reflecting the employer’s appreciation for an employee’s commitment and service. By understanding the provisions of the Payment of Gratuity Act, both employers and employees can navigate the complexities of gratuity payments and ensure a secure and dignified retirement for employees.
Disclaimer: This article offers a general overview of the Payment of Gratuity Act 1972. For precise and up-to-date information, it is advisable to consult legal professionals or refer to the official Act.
Frequently Asked Questions (FAQs)
- Is Gratuity applicable to all employees?
As mentioned in the Payment of Gratuity Act, Gratuity applies to employees working in specific establishments.
- How is the amount of Gratuity calculated for a monthly-rated employee?
For a monthly-rated employee, the calculation of Gratuity involves considering 15 days’ wages for each completed year of service.
- What is the significance of the “family” in gratuity calculations?
The definition of “family” is essential when determining the beneficiaries of Gratuity in case of the employee’s demise.
- Can teachers in educational institutions receive Gratuity?
Yes, teachers in educational institutions are eligible for gratuity benefits, thanks to an amendment in 2009.
- Is there a minimum service period required to be eligible for Gratuity?
Yes, an individual must have completed a continuous service of at least five years to be eligible for Gratuity.
6. What is Gratuity, and when is it paid?
Gratuity is a token of appreciation in the form of a payment made by an employer to an employee at the time of their retirement or resignation.
7. What is the primary objective of the Payment of Gratuity Act 1972?
The primary objective of the Payment of Gratuity Act is to set up a system for providing Gratuity to employees working in different types of establishments, including factories, mines, ports, railway companies, and shops, that employ ten or more individuals.
8. Who is eligible to receive Gratuity?
An individual employed in an establishment covered by the Act, meeting the definition of an employee and having completed a minimum of five years of continuous service, has the right to receive Gratuity.
9. Which establishments are covered under the Act?
The Act applies to specified establishments such as ports, mines, factories, plantations, railway departments, oilfields, shops, and establishments where ten or more persons are employed. The central government can also notify other establishments with ten or more employees.
10. How is the amount of Gratuity determined?
For employees paid every month, Gratuity is calculated based on 15 days’ worth of wages for each completed year of service. When we mention wages, it pertains to the last salary received; a month is defined as a period spanning 26 days. However, it’s important to note that piece-rated employees and seasonal establishments follow different calculation methods.
11. Under the Act, who is considered part of the employee’s “family”?
The Act defines the family of a male employee as his wife, children (married or unmarried), dependent parents, dependent parents of the wife, widow, and children of a predeceased son. For a female employee, the family includes her husband, children (married or unmarried), dependent parents, dependent parents of the husband, widow, and children of a predeceased son.
12. What role does the Act play in providing social security benefits?
The Payment of Gratuity Act 1972 serves as a retirement social security benefit, providing relief to retired employees or their family members in the event of the employee’s death during service.
13. Is it necessary to consult legal professionals for precise information?
While this article provides a general overview, consulting legal professionals or referring to the official Act for precise and up-to-date information regarding Gratuity is advisable.
- Comprehending the necessity for alterations within companies:
- Organizations must adapt to external factors such as technological advancements, market competition, and customer preferences.
- Internal factors like inefficiencies, outdated processes, or organizational growth may also necessitate change.
- Example: Kodak, a renowned photography company, failed to adapt to the digital revolution, resulting in a decline in its market position and bankruptcy.
- Types of organizational changes:
- Structural change: Restructuring departments, teams, or hierarchies to improve efficiency or respond to market demands.
- Technological change: Implementing new technologies, systems, or automation to streamline processes and enhance productivity.
- Cultural change: Transforming the values, norms, and behaviours within an organization to foster innovation, collaboration, or customer-centricity.
- Example: Microsoft’s transformation under CEO Satya Nadella, shifting from a primarily software-focused company to a cloud-first and mobile-first strategy, emphasizing collaboration and openness.
- Change management process and its role in strategic management:
- Identify the need for change and establish clear goals and objectives.
- Plan the change, including communication strategies, resource allocation, and timelines.
- Execute the change, involving training, support, and addressing resistance to ensure smooth implementation.
- Example: Procter & Gamble’s successful change management initiative involved reorganizing its brand portfolios and streamlining product offerings, resulting in improved profitability and market focus.
- Ways to efficiently handle alterations within organizations:
- Communicate the vision and reasons for change to gain employee buy-in and support.
- Involve employees in the change process to foster ownership and engagement.
- Offer assistance and education to aid staff members in adjusting to novel procedures or technological advancements.
- Example: Netflix’s shift from DVD rentals to streaming required a change in business model and culture, involving open communication and a focus on continuous innovation.
Please note that these FAQs serve as a general guide, and it is recommended to refer to the official Act and seek professional advice for specific circumstances and legal interpretations.
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