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1. Chapter 19 THE PAYMENT OF GRATUITY ACT, 1972

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 Chapter 19 THE PAYMENT OF GRATUITY ACT, 1972
HL Kumar: Compliances under Labour Laws, 5th ed > HL Kumar: Compliances under Labour Laws, 5th ed >
Chapter 19 THE PAYMENT OF GRATUITY ACT, 1972
Chapter 19 THE PAYMENT OF GRATUITY ACT, 1972
In context with Payment of Gratuity (Central) Rules, 1972
Object of the Act
The Payment of Gratuity Act,
1972 was enacted to introduce a
scheme for payment of gratuity
for certain employees employed
in industrial and commercial
establishments, as a measure of
social security. By the
Amendment of 1984 by Act 26
of 1984, sub-section (3A) was
inserted in section 1 to the
Payment of Gratuity Act, 1972 to
ensure that once the Act has
become applicable to such shop
or establishment, it shall
continue to be so
notwithstanding the fact that the
number of persons employed
therein at any time after it has
become so applicable falls below
ten. To ensure that an
unscrupulous employer may not
fabricate the records to avoid
application of the Act or to
reduce the number of employees
just to avoid payment of
gratuity; various provisions, as
to notice of opening, notice of
change or closure of the shop or
establishment, and appointment
of Inspectors have been made
under the Act for the better
enforcement and administration
of the Act besides provisions for
displaying of statutory notice
and of giving intimation about
its application to an
establishment and the violation
thereof have been made offences
punishable with imprisonment or
fine or with both.
HL Kumar: Compliances under Labour Laws, 5th ed
H L Kumar & Gaurav Kumar
Applicability of the Act
Section 1(3)(a) of the Payment of
Gratuity Act contemplates that it
applies to every factory, mine,
oil field, plantation, port and
railway company and under
section 1(3)(b) to every shop or
establishment within the
meaning of “any law for the time
being in force in relation to
shops and establishments” in a
State in which ten or more
persons are employed or were
employed on any day of the
preceding twelve months. Clause
(c) of section 1 of the Act also
empowers the Central
Government to apply the Act to
such other establishments or
class of establishments, in which
ten or more employees are or
were employed on any day of
the preceding twelve months by
notification in this behalf.
By a notification No. S.O. (F.
No. S-42013/1/95-SS. II), the
Central Government has
extended the Act upon
educational institutions in which
ten or more persons are or were
employed on any day of the
preceding twelve months.
The Payment of Gratuity Act,
1972 will also apply to the
employees working in a temple,
as held by the Orissa High
Court.
Option for Better Scheme
An employee can, no doubt opt
for a scheme other than under
the Payment of Gratuity Act if it
appears to be better but on
adoption of that, he has to abide
by the Scheme in toto. The
Supreme Court has held that
sub-section (5) of section 4 of
the Payment of Gratuity Act does
not contemplate that the
employee would be at liberty to
opt for better terms of the
contract, by keeping option open
in respect of a part of the Statute.
While reserving his right to opt
for beneficial provisions of the
statute, he has to opt for either of
them and not the best of the
terms of the statute as well as
those of the contract. He cannot
have both. Such a construction
would defeat the purpose for
which sub-section (5) of section
4 has been enacted. Impugned
judgment cannot sustain and is
set aside.
Appropriate Government
Sub-clause (a) of section 2 of the
Act, which defines the
“appropriate Government”, lays
down that unless the context
otherwise requires:
(i) “appropriate Government” in
relation to an establishment—
(a) belonging to or under the
control of the Central
Government,
(b) having branches in more than
one State,
(c) of a factory belonging to, or
under the control of the Central
Government, (d) of a major port,
mine, oilfield or railway
company, shall be the Central
Government and (ii) in any other
case, the State Government. In
respect of an establishment
having branches in more than
one State, the Central
Government is the “appropriate
Government”. Section 2(a)
defines appropriate Government
which is either Central
Government or State
Government. The use of the
words, ‘belonging to or under
the control of’ in sections 2(1)(a)
and 2(1)(c) of the Act is also not
without significance. The
Central Government cannot be
the appropriate Government in
relation to an establishment or a
factory which is under the
control of the State Government.
Section 2(a)(1) in relation to an
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Chapter 19 THE PAYMENT OF GRATUITY ACT, 1972

Object of the Act Applicability of the Act Option for Better Scheme Appropriate Government
establishment makes a
distinction between
establishments and factories. In
relation to an establishment
belonging to, or under the
control of, the Central
Government and of a factory
belonging to or under the control
of, the Central Government the
appropriate Government is the
Central Government.

Section Rule Nature of Requirement in Form Time Limit

Compliance Brief
4 Payment of Gratuity Gratuity to be paid
after completion of 5
years. Gratuity to be
paid for 15 days for
each completed year
as if month
comprises 26 days
subject to a
maximum amount of
Rs 3.50 lakhs

4 Display of Notice Name and

Designation of the
Officer to receive
notice under the Act
or the Rules to be
mentioned at or near
the main entrance
gate

6 6 Nominations Nominations to be F, G & H

obtained from new
Employees in Form
F (and in Form G for
families acquired
later) and any
change of
nomination to be
submitted, in
duplicate, in Form H

7 Payment of Gratuity Payment of Gratuity J&K

within 30 days from
the date of receipt of
application by the
employer in Form J
from the employee
and in Form K from
the nominee of the
employee.

20 Display of abstract Display of abstracts

of the Act and the of the Act at the
Rules main entrance in
English Language
 Page 3 of 7
Chapter 19 THE PAYMENT OF GRATUITY ACT, 1972

Section Rule Nature of Requirement in Form Time Limit

Compliance Brief
and the language
understood by
majority of
employees.

FORM “A“ NOTICE OPENING

FORM “B“ NOTICE CHANGE

FORM “C“ NOTICE CLOSURE

FORM “F“ NOMINATION

FORM “G“ FRESH NOMINATION

FORM “H“ MODIFICATION OF NOMINATION

FORM “U“ ABSTRACT OF THE ACT AND RULES

Explanation II.—An employee of a seasonal establishment shall be deemed to be in continuous service

[PV(4]if he has actually worked for not less than seventy-five per cent of the number of days on which the
establishment was in operation during the year. [Section 2(d)].

(d) “Controlling authority” means an authority appointed by an appropriate Government under section 3.
[Section 2(d)].

(e) “family”, in relation to an employee, shall be deemed to consist of—

(i) in the case of a male employee, himself, his wife, his children, whether married or unmarried, his
dependant parents and the widow and children, of his predeceased son, if any,
(ii) in the case of a female employee, herself, her husband, her children, whether married or
unmarried, her dependant parents and the dependant parents of her husband and the widow and
children of her predeceased son, if any:

Provided that if a female employee, by a notice in writing to the Controlling Authority, expresses her
desire to exclude her husband from her family, the husband and his dependant parents shall no longer be
deemed for the purposes of this Act, to be included in the family of such female employee unless the said
notice is subsequently withdrawn by such female employee.

Explanation.—Where the personal law of an employee permits the adoption by him of a child, any child
lawfully adopted by him shall be deemed to be included in his family, and where a child of an employee
has been adopted by another person and such adoption is, under the personal law of the person making
such adoption, lawful, such child shall be deemed to be excluded from the family of the employee.
[Section 2(h)].

4. Nomination.—(1) Each employee, who has completed one year of service, after the commencement of
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Chapter 19 THE PAYMENT OF GRATUITY ACT, 1972

the Payment of Gratuity (Central) Rules, 1972, shall make within thirty days of completion of one year of
service, a nomination [Section 6(1) read with rule 8, 6(1)].

(2) If an employee has a family at the time of making a nomination, the nomination shall be made in
favour of one or more members of his family and any nomination made by such employee in favour of a
person who is not member of his family shall be void. [Section 6(3)].

(3) If at the time of making a nomination, the employee has no family, the nomination can be made in
favour of any person or persons, but if the employee subsequently acquires a family, such nomination
shall forthwith become invalid and the employee shall make within 90 days a fresh nomination in favour
of one or more members of his family. [Section 6(4) read with rule 6(3)].

(4) A nomination or a fresh nomination or a notice of modification of nomination shall be signed by the
employee or, if illiterate, shall bear his thumb impression in the presence of two witnesses, who shall also
sign declaration to that effect in that nomination, fresh nomination or notice of modification of nomination
as the case may be. [Rule 6(5)].

(5) A nomination may, subject to the provisions of sub-sections (3) and (4) of section 6 be modified by an
employee any time after giving to his employer a written notice of his intention to do so. [Section 6(5)].

(6) A nomination or fresh nomination or notice of modification of nomination shall take effect from the
date of receipt of the same by the employer. [Rule

6(6)].

5. Application for gratuity.—(1) An employee who is eligible for payment of gratuity under the Act, or
any person authorised, in writing, to act on his behalf, shall apply ordinarily within thirty days from the
date of gratuity became payable:

Provided that where the date of superannuation or retirement of an employee is known, the employee may
apply to the employer before thirty days of the date of superannuation or retirement. [Rule 7(1)].

(2) A nominee of an employee who is eligible for payment of gratuity shall apply, ordinarily within thirty
days from the date the gratuity became payable to him, to the employer. [Rule 7(2)].

(3) A legal heir of an employee who is eligible for payment of gratuity shall apply, ordinarily within one
year from the date the gratuity became payable to him, to the employer. [Rule 7(3)].

(4) An application for payment of gratuity filed after the expiry of the periods specified above shall also
be entertained by the employer if the applicant adduces a sufficient cause for the delay. [Rule 7(5)].

6. Payment of gratuity.—(1) Gratuity shall be payable to an employee on the termination of his

employment after he has rendered continuous service for not less than five years—

(a) on his superannuation, or

(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:
 Page 5 of 7
Chapter 19 THE PAYMENT OF GRATUITY ACT, 1972

Provided that the completion of continuous service of five years shall not be necessary where the
termination of the employment of any employee is due to death or disablement:

Provided further that in case of death of the employee, gratuity payable to him shall be paid to his
nominee or, if no nomination has been made, to his heirs, and where any such nominee or heir is a minor,
the shares of such minor, shall be deposited with the Controlling Authority who shall invest the same for
the benefit of such minor in such bank or other financial institution, as may be prescribed, until such
minor attains majority.

Disablement means such disablement which incapacitates an employee for the work which he was capable
of performing before the accident or disease resulting in such disablement. [Section 4(1)].

(2) For every completed year of service or part thereof in excess of six months, the employer shall pay
gratuity to an employee at the rate of fifteen days’ wages based on the rate of wages last drawn by the
employee concerned:

Provided that in the case of a piece-rated employee, daily wages shall be computed on the average of the
total wages received by him for a period of three months immediately preceding the termination of his
employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account:

Provided further that in the case of an employee employed in seasonal establishment, the employer shall
pay the gratuity at the rate of seven days’ wages for each season. [Section 4(2)].

Explanation.—In case of a monthly rated employee, the fifteen days’ wages shall be calculated by
dividing the monthly rate of wages last drawn by him by twenty-six and multiplying quotient by fifteen.

(3) The amount of gratuity payable to an employee shall not exceed twenty months’ wages. [Section 4(3)].

7. Forfeiture of gratuity.—(1) The gratuity of an employee, whose services have been terminated for any
act, wilful omission or negligence causing any damage or loss to, or destruction of, property belonging to
the employer, shall be forfeited to the extent of the damage or loss so caused;

(2) The gratuity payable to an employee shall be wholly forfeited—

(a) If the services of such employee have been terminated for his riotous or disorderly conduct or any
other act of violence on his part, or
(b) If the services of such employee have been terminated for any act which constitutes an offence
involving moral turpitude, provided that such offence is committed by him in the course of his
employment.

[Section 4(6)].

8. Notice of opening, change or closure of the establishment.—(1) A notice shall be submitted by the
employer to the Controlling Authority of the area within thirty days of any change in the name, address,
employer or nature of business. [Rule 3(2)].

(2) Where an employer intends to close down the business, he shall submit a notice to the Controlling
Authority of the area at least sixty days before the intended closure. [Rule 3(3)].
 Page 6 of 7
Chapter 19 THE PAYMENT OF GRATUITY ACT, 1972

9. Application to Controlling Authority for direction.—If an employer—

(i) refuses to accept a nomination or to entertain an application for payment of gratuity, or

(ii) issues a notice either specifying an amount of gratuity which is considered by the applicant less
than what is payable or rejecting eligibility to payment of gratuity, or
(iii) having received an application for payment of gratuity, fails to issue notice within fifteen days; the
claimant-employee, nominee, or legal heir, as the case may be, may within ninety days of the
occurrence of the cause for the application, apply to the Controlling Authority for issuing a
direction under sub-section (4) of section 7 with as many extra copies as are the opposite parties;

Provided that Controlling Authority may accept any application on sufficient cause being shown by the
applicant after the expiry of the period of ninety days. [Rule 10].

10. Appeal.—Any person aggrieved by an order of the Controlling Authority may, within sixty days from
the date of the receipt of the order, prefer an appeal to the Regional Labour Commissioner (Central) of the
area who has been appointed as the Appellate Authority by the Central Government:

Provided that the Appellate Authority may, if it is satisfied that the appellant was prevented by sufficient
cause from preferring the appeal within the said period of sixty days, extend the said period by a further
period of sixty days.

[Section 7(7)].

11. Machinery for enforcement of the Act or Rules in Central spheres.—All Assistant Labour
Commissioners (Central) have been appointed as Controlling Authorities and all the Regional Labour
Commissioners (Central) Appellate Authorities.

12. Powers of the Controlling Authority.—The Controlling Authority for the purpose of conducting an
inquiry as to the amount of gratuity payable to an employee or as to the admissibility of any claim of, or in
relation to, an employee for payment of gratuity, or as to the person entitled to receive the gratuity, shall
have the same powers as are vested in court, under the Code of Civil Procedure, 1908 in respect of the
following matters, namely:—

(a) enforcing the attendance of any person or examining him on oath;

(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits; and
(d) issuing commissions for the examination of witnesses. [Section 7(5)].

13. Recovery of gratuity.—If the amount of gratuity payable is not paid by the employer, within the
prescribed time, to the person entitled thereto, the Controlling Authority shall, on an application made to it
in this behalf by the aggrieved person, issue a certificate for that amount to the Collector, who shall
recover the same together with compound interest thereon at the rate of nine per cent. per annum, from the
date of expiry of the prescribed time, as arrears of land revenue and pay the same to the person entitled
thereto. [Section 8].

14. Protection of gratuity.—No gratuity payable under the Payment of Gratuity Act and Rules made
 Page 7 of 7
Chapter 19 THE PAYMENT OF GRATUITY ACT, 1972

thereunder shall be liable to attachment in execution of any decree or order of any civil, revenue or
criminal court. [Section 13].

15. Penalties for offences.—(1) Whoever, for the purpose of avoiding any payment to be made by
himself or of enabling any other person to avoid such payment, knowingly makes or causes to be made
any false statement or false representation shall be punishable with imprisonment for a term which may
extend to six months, or with fine which may extend to one thousand rupees, or with both. [Section 9(1)].

(2) An employer who contravenes, or makes default in complying with, any of the provisions of the Act or
any Rule or order made thereunder shall be punishable with imprisonment for term which may extend to
one year, or with fine which may extend to one thousand rupees, or with both:

Provided that if the offence relates to non-payment of any gratuity payable under the Payment of Gratuity
Act, the employer shall be punishable with imprisonment for a term which shall not be less than three
months unless the court trying the offence, for reasons to be recorded by it in writing, is of opinion that a
lesser term of imprisonment or the imposition of a fine would meet the ends of justice. [Section 9(2)].

16. Display of notice.—The employer shall display conspicuously a notice at or near the main entrance of
the establishment in bold letters in English and in the language understood by the majority of the
employees specifying the name of the officer with designation authorised by the employer to receive on
his behalf notices under the Payment of Gratuity Act or the Rules made thereunder. [Rule 4].

17. Display of abstract of the Act and Rules.—The employer shall display an abstract of the Payment of
Gratuity Act and the Rules made thereunder in English and in the language understood by the majority of
the employees at a conspicuous place at or near the main entrance of the establishment. [Rule 20].

It would be seen that the word ‘Central Government’ is appearing at several places but in order to
understand, it is pertinent to refer clause (a) of section 2 of the Payment of Gratuity Act defining
appropriate government. In relation to an establishment, belonging to, or under the control of Central
Government, the appropriate Authorities under the Act will be under Central Government. When an
establishment other than belonging to, or under the control of, Central Government, the Authorities under
the Payment of Gratuity Act will be under State Government. However, if such an establishment will be
having its branches or office in more than one State, then the appropriate Authorities will be under the
Central or State Governments.

It will be seen that both the Authorities under the State and Central Governments function in their fields
and are constituted separately. Hence for compliances, it is advisable to ascertain as to which is the
appropriate Authority - Central or State.

End of Document