INDIAN LABOUR JURISPRUDENCE AND THE GORDIAN KNOT OF GRATUITY

~ Hriti Prekh, third year student from HNLU Raipur

At one time gratuity was treated as payment gratuitously made by the employer to his employees at his pleasure, but as a result of a long series of decisions of industrial tribunals gratuity has now come to be regarded as a legitimate claim which workmen can make and which, in proper cases, can give rise to an industrial dispute.”

Gajendragadkar J.

  1. Background

In India, especially since 1947, the concept of gratuity has taken on a new meaning. Due to the lack of a clear statutory provision that applies to all industrial employees, industrial tribunals and courts have had to deal with the issue of gratuity payment. In this regard, the Indian courts have made a substantial contribution by developing numerous regulations. An examination of the awards and judgments of industrial tribunals and courts indicates a range of opinions on gratuity.

The tribunals refused to give gratuity in addition to provident fund in several of the early judgements. However, the Supreme Court held that the legislative framework of provident fund and retrenchment compensation did not preclude the claim for gratuity. Furthermore, the decisions and judgments of the tribunals and courts demonstrate that a variety of considerations were considered while drafting the gratuity scheme. However, there is no consistency in gratuity rates or the qualifying time for gratuity eligibility. The amount of gratuity that can be paid varies from case to case. Furthermore, there is no unity of view among (judicial and quasi-judicial) decision-makers on the manner of gratuity computation. Some people believe that gratuity should be based on total wages, while others believe that it should be calculated solely on basic wages.

  1. What is Gratuity?

Gratuity is a voluntary payment provided by the employer to the employee in appreciation of the employee’s continual, meritorious services and genuine efforts towards the organisation. Thus, the major objective and notion of gratuity is to assist the worker after retirement, whether due to superannuation regulations or physical disablement or damage of a crucial body component. As a result, it is a form of financial aid to help people get through their post-retirement problems and inconveniences.

  • Factors to be considered for determining the payment of Gratuity

The major point appears to have been the employer’s ability to pay. The courts and tribunals have given this issue a lot of thought, attempting to assess the employer’s ability to pay based on(i) the employer’s financial condition, (ii) the profit-earning capacity, (iii) the profit earned in the past, (iv) the size of his reserves, (v) the likelihood of replenishing them, and (vi) the claim for capital invested.”

In order to determine the employer’s financial capacity to bear the strain and financial burden of implementing a gratuity scheme from year to year, two factors must be determined: first, the average number of retirements per year; second, the current state of the management’s finances, the past history, and the future prospects of the concern.

It is also widely acknowledged that gratuity is a long-term programme, and that, as a result, a long-term perspective is required when assessing the financial health of the company. “The question of whether a scheme should be constructed or not must be settled on this basis alone, and if the scheme must be framed, the size of the profit should be defined.” As a result, the gratuity system should not take into account the concern’s momentary prosperity or suffering.

The Supreme Court has declared that drafting of the scheme is unreasonable when the management’s financial condition is unsound and there is a risk of the firm being taken over by the government. This viewpoint is consistent with social justice ideas and is equally valid in the case of a company that is about to close or has already closed, as determined by the Court in Akola Electric Supply Co..

According to a review of the awards and rulings[Chitransh1] [HP2] , there has been no unity of opinion among the tribunals or the courts about the qualifying duration of service for which gratuity is awarded. However, tribunals and courts tend to agree that in the event of an employee’s death or physical or mental impairment, they are entitled to a defined amount of gratuity for “each completed year of service.”

  1. Problems of Gratuity – Important issues

The tribunals’ gratuity schemes have often prompted a number of questions. The key questions are:

  • Whether personnel terminated for wrongdoing resulting in a financial loss to the firm are entitled to gratuity
  • If workers who have been fired for serious or little wrongdoing are entitled to a gratuity?
  • Is it true that just participating in an unlawful strike disqualifies workers from receiving a gratuity? 
  • Are gratuities provided to temporary and daily-paid employees?
  • Can a gratuity be given for previous services when a management position is transferred? 
  • Fifth, can gratuity be paid to employees who voluntarily retire or resign?

Addressing the first and second problems, the judiciary has taken two distinct ways to deciding whether or not to pay a gratuity in the situation of a worker’s dismissal for wrongdoing resulting in financial loss to the company. The first view[Chitransh3]  discusses that, a worker who is fired for wrongdoing that results in a financial loss to the company should not be given a gratuity. According to the second view, in the event of a financial loss to the company, the amount of the loss may be subtracted from the gratuity.

For instance, in Oil Company, Madras, the Labour Appellate Tribunal directed that “gratuity shall not be payable to an employee who is dismissed for misconduct” and “gratuity shall not be paid to an employee who is dismissed for misconduct involving financial loss to the company”.[i]

The aforementioned ruling contrasts sharply with several of the Supreme Court’s earlier and later decisions. The reasons for the Supreme Court’s earlier and subsequent rulings are self-evident. When a workman earns gratuity, it cannot be totally withheld to him, regardless of the nature of the misconduct for which he is found guilty at the conclusion of the service. The amount of the loss suffered by management as a result of wrongdoing is deductible.

In Hindustan Times, the Supreme Court observed: “It has been pointed out by this court in more than one case that having regard to the nature of gratuity it will not be proper to deprive an employee of the gratuity earned by him because of his dismissal for misconduct and the proper provision to make in this connection is that where an employee is dismissed for misconduct which has resulted in financial loss to the employer the amount lost should be deducted from the amount of the gratuity due.”

Coming to the third problem, when a worker engages in an unlawful strike, the challenge of claiming gratuity becomes more complex. Some early adjudicators believed that labourers who participated in an unlawful strike were unable to receive gratuity benefits. For example, in Patna Electric Supply Company Ltd vs. Bali Rai., the presiding officer of the Industrial Tribunal stated that personnel who participated in an unlawful strike were not entitled to the benefits of gratuity that would otherwise be available to them. As a result, they concluded that the illegal strike disrupted the workmen’s continuity of employment for the purposes of gratuity, among other things.

The opposing viewpoint is that an unlawful strike cannot, in and of itself, produce an interruption in service continuity for the purposes of gratuity. For example, the Supreme Court had the chance in Jeevanlal Ltd vs The Appellate Authority.to interpret the term “continuous service” under a gratuity programme under an award.

Justice Gajendragadkar observed: “continuous service in the context of the scheme of gratuity framed by the tribunal in the earlier reference postulates the continuance of the relationship of master and servant between the employer and his employee. It is difficult to hold that merely because an employee is absent without obtaining leave that itself would bring to an end the continuity of his service. Similarly, participation in an illegal strike which may incur the punishment of dismissal may not by itself bring to an end the relationship of master and servant. It may be a good cause for termination of service provided of course the relevant provisions in the standing orders in that behalf are complied with; but mere participation in an illegal strike cannot be said to cause breach in continuity for the purposes of gratuity.”

Further for the fourth problem, One of the determining elements for the payment of gratuity has been the status of the worker, especially whether he is permanent, temporary, or on probation. Temporary workers are not entitled to gratuity, and their claims have been rejected down by tribunals and courts on several occasions. The Labour Appellate Tribunal concluded in Oriental Metal Pressing Works vs Bhaskar Kashinath Thakoor that temporary workers were not entitled to gratuity unless it was clearly included in the gratuity system.

There has been a split in opinion on the issue of gratuity payment to daily-paid labourers. Some adjudicators declined to give daily-paid labourers the benefit of gratuity such as in the Rallis (India) Ltd[ii].. While, the Industrial Tribunal in Shivarajpur Syndicate Ltd.[iii], decided that daily-rated employees were entitled to gratuity. If the management’s financial situation allows, the advantage of a gratuity should be offered to those daily-rated workers who have completed a long term continuous service.

There appear to be two distinct methods used by tribunals and courts when it comes to the payment of gratuity on management transfers. According to the first, no gratuity should be provided when a management transfer like in India Ice Aerated Water & Cold Storage Co. Ltd[iv]. According to the second, gratuity may be awarded for past services on transfer of management like in Bombay Garage Ltd vs The Industrial Tribunal.

When it comes to voluntary retirement, The prevailing tendency in judicial judgement is to give gratuities to workers who have completed a particular amount of time on the service. But, the Supreme Court in Express Newspapers Ltd vs. State of Madras observed that “gratuity being a reward for good, efficient and faithful service rendered for a considerable period, there would be no justification for awarding the same when an employee voluntarily resigns and brings about termination of his service except in exceptional circumstances”. However, there are two exceptions to this rule. First, was the “conscience clause,” and then there were those employees who had worked for at least fifteen years.

  1. Gratuity under the Social Security Code, 2020 – Concluding note

In terms of eligibility for gratuity, the Social Security Code, 2020 (hereinafter referred as “SS Code[Chitransh4] ”) has set various criteria for permanent and fixed-term workers. Every store or establishment in which ten (10) or more employees are engaged, or were employed, on any day over the past twelve (12) months may pay gratuity to qualified employees. Gratuity is payable to an employee upon termination of his job after five (5) years of continuous service, on his superannuation, retirement or resignation, death or disablement owing to accident or sickness, and on the expiration of his contract period under fixed term employment. When an employee’s employment is terminated due to death, disability, or the end of a fixed term contract, a continuous service of five (5) years is not required.

The employer shall provide a gratuity to an employee at the amount of fifteen (15) days’ salary for each completed year of service or portion thereof in excess of six (6) months. The amount of gratuity payable to an employee may not exceed the amount that the Central Government may notify. Employees recruited directly or via a contractor are eligible for gratuity under the SS Code. If a person fails to pay any amount of gratuity to which an employee is due, he may be sentenced to one (1) year in jail or fined up to Rupees Fifty Thousand (Rs. 50,000/-), or both.”

However, it’d be interesting to see how the tribunals and courts decide to address the issues listed previously, and form a balance between the precedents and the current code based on the increasing complexity of labour disputes in the contemporary times.


[i] (1953) 2 L.L.J. 236 (L.A.T.).

[ii] (1952) 1 L.L.J. 451 (I.T. Madras).

[iii] (1950) L.L.J. 9, 17 (I.T. Bombay).

[iv] (1951) 2 L.L.J. 652 (I.T. West Bengal).


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