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Gratuity Law in Pakistan

last modified Oct 16, 2012 Gratuity is one of three prevalent retirement benefits in the private sector employment. The other two are ensions and rovident !und". #t is a lump$sum" amount of money payable to a wor%er on leavin& service.

What is gratuity and what laws are governing gratuity in Pakistan?

Gratuity is one of three prevalent retirement benefits in the private sector employment. The other two are ' ensions and rovident !und'. #t is a 'lump$sum' amount of money payable to a wor%er on leavin& service (throu&h retirement, death or termination of service) based on salary (hi&hest or the final salary) and period of service (over and above si* months). Gratuity is actually a benefit for services rendered in the past. #t is a reward of &ood, efficient and faithful service for a substantial period of time. +efore 1,-2, &ratuity was paid by an employer either on voluntary basis or in conse.uence of an award by a labor court. /owever, the 0abour 0aws 1mendments Ordinance, 1,-2 made payment of &ratuity a le&al obli&ation. 1mendments were subse.uently made in the 2tandin& Order 12 of 3est a%istan #ndustrial and 4ommercial 5stablishments (2tandin& Orders) Ordinance 1,66. Gratuity is now a statutory ri&ht for wor%ers who have wor%ed at least twelve months in an or&ani7ation. The relevant laws &overnin& &ratuity in private sector are8

West Pakistan Industrial and Commercial Establishments (Standing rdinance" #$%& Payment o' Wages (ct" #$)% *actories (ct" #$)+ Sho,s and Establishments rdinance" #$%$



rgani-ations are liable to ,ay gratuity to their workers?

#n accordance with section 1(9) of the 2tandin& Orders Ordinance, 1,66, every commercial establishment (employin& 20 or more wor%ers) and industrial establishment (employin& :0 or more wor%ers) are re.uired to pay &ratuity to a wor%er once he;she has met the minimum criteria. The table below shows all the or&ani7ations liable to pay &ratuity to their wor%ers. 4ommercial 5stablishments 1dvertisin&;commission;forwardin& 1&ency, clerical department of a factory, >oint stoc% company, <inimum #ndustrial =umber of 5stablishments 3or%ers 1t least 20 !actory wor%ers must be employed by 1 <inimum =umber of 3or%ers 1t least :0 wor%ers must be employed by

#nsurance company, ban%in& company, ban%, bro%er office, stoc% e*chan&e, 4lub, hotel, restaurant, 4inema, theater, Other or&ani7ations as declared and notified by the &overnment

?ailways 5stablishment of a contractor the or&ani7ation the or&ani7ation 5stablishment in for continuous for continuous connection with 12 months 12 months construction industry

What are the .uali'ying conditions 'or a worker to earn gratuity?

1 wor%er is entitled to &ratuity if the followin& three conditions are satisfied. 1. 3est a%istan #ndustrial and 4ommercial 5stablishments (2tandin& Orders) Ordinance 1,66 is applicable to that establishment (whether commercial or industrial) i.e. it must have the minimum number of wor%ers as mentioned above 2. 1 person has to be a wor%man as defined in 2tandin& Orders Ordinance 1,66. 1 wor%man is any person employed in any industrial or commercial establishment to do any s%illed or uns%illed, manual or clerical wor% for hire or reward. @. The minimum .ualifyin& employment period is twelve months or above. /owever, if a wor%er has wor%ed over si* months in a specific year, he will be entitled to &ratuity of one year.

What are the .uali'ying events 'or ,ayment o' gratuity to a worker?
1n employee is entitled to &ratuity when8 1. /e resi&ns from his service (voluntary retirement or voluntary redundancy in e*chan&e for financial benefits li%e &olden handsha%e schemes) 2. /is or&ani7ations terminates his services due to reasons other than misconduct @. /e dies while in service of his employer (it is not necessary that employee should be on duty at the time of death) 9. /e reaches the superannuation a&e and retires /owever, if an employeeAs services were terminated on account of misconduct (li%e harassment, theft etc.), &ratuity would no lon&er be admissible to him. #n case of death of a wor%man, &ratuity is payable to the le&al dependents of a wor%man. 1s mentioned above, death may not necessarily occur on duty but the wor%er should be

in continuous service at that time. The amount of &ratuity, in this case, is transferred to '3or%men 4ompensation 4ommissioner' who will then allocate this amount to the dependents of a wor%er. The dependents of a deceased wor%er include 'his widowed mother, his own widow, minor son and unmarried dau&hter'.

What is the rate o' gratuity and how is it calculated?

#n accordance with the provisions of law, rate of &ratuity is 'thirty (@0) days wa&es for every completed year of service or any period in e*cess of si* months'. 1ny employment period e*ceedin& si* months will be considered as one year. 2imilarly, a completed year of service is 12 months of service from the date of appointment of a wor%er in an establishment. The basis for calculation of wa&es is 'wa&es admissible to a fi*ed$rate wor%er in the last month of his service' or 'the hi&hest drawn pay by a piece$rate wor%er durin& the precedin& twelve months'. 3a&es for &ratuity calculation are the '&ross wa&es' includin& all permanent and re&ular allowances (li%e house rent allowance, cost of livin& allowance and conveyance allowance), however, these donAt include any such contin&ent or unpredictable payments li%e temporary relief to wor%ers (e.&. flood relief) or bonus provided by the employer. Other than wa&e rate, the second determinin& factor in &ratuity calculation is the time period a wor%er has served with an establishment;or&ani7ation. 1ny len&th of service hi&her than si* months over the number of years of service is considered as one year for the purpose of &ratuity calculation. 3hereas any len&th of service less than si* months is not included in the course of calculatin& &ratuity. 4onsider the followin& illustration8 Bate of >oinin&;first appointment in an establishment Bate of voluntary retirement;resi&nation Gross salary paid in 2011 Temporary relief (flood relief) 01st 2eptember, 1,6: @0th 1pril, 2011 ?s. @0,000 :,000

+onus (at the end of year indicatin& profitable situation 10,000 for firm) Total len&th of service 1dmissible period for calculation of &ratuity To calculate &ratuity, 0ast drawn monthly &ross pay 2: years and 6 months 26 years ?s. @0,000

ay per day One year &ratuity (pay per dayD@0) Gratuity for the whole period served i.e. 26 years

@0,000;26(wor%in& days)C11:@.6: 11:@.6:D@0C@961:.9 26D@9,61:.9C?s. ,00,000.9

What is the di''erence between gratuity and ,rovident 'und?

1s mentioned before, &ratuity and provident fund are two different retirement benefits under the 2tandin& Orders Ordinance 1,66. 3or%ers donAt have le&al ri&ht to both of these benefits. #t is rests with an employerAs discretion to decide as to whether he wants to set up provident fund or provide &ratuity at the end of employment or &rant both of these benefits voluntarily. The law canAt force an employer to provide either of these benefits or both the benefits simultaneously. Gratuity is usually awarded in addition to other benefits payable to an employee. /owever &ratuity is not payable durin& the period an employer has set up a provident fund in his establishment with at least :0E of the contribution by the employer and the remainin& by employee. The sum of both of these contributions would be payable to a wor%man even if he resi&ns or is dismissed from service for any reason includin& misconduct (remember &ratuity is not admissible in case of misconduct). /owever, the law does not stop an employer to provide both &ratuity and provident fund to its employees. 3hat is provided in the law is the minimum le&al protection i.e. floor and not the ceilin&. I' an em,loyer re'uses to ,ay gratuity or is ,aying less than the due amount" what should a worker (or his de,endents! do? The first step to &et &ratuity is to apply to the employer for payment of the due amount. #f there are delays on the employer side or employer is payin& less than the due amount, the a&&rieved party (wor%er or his dependents, in case of his death) can file a claim to the 4ommissioner appointed under section 1: of the ayment of 3a&es 1ct 1,@6. The complaint to the 3or%men 4ompensation 4ommissionerAs office can be filed within three years of the incidence of the act. 1 3or%men 4ompensation 4ommissioner is the officer of directorate of labor welfare and every district has a desi&nated 4ommissioner for labor related matters.