WHETHER AN EMPLOYEE WHO HAS NOT COMPLETED 5 YEARS’ SERVICE, BUT HAS COMPLETED 240 DAYS (190 DAYS IN 5 DAYS WORKING SYSTEM), WOULD BE ELIGIBLE FOR GRATUITY PAYOUT?

Adv. SK Mittal, Practising Lawyer in Labour and Industrial Laws

The Payment of Gratuity Act, 1972 [“The Act”], u/s 2(b), defines “completed year of service” so as to mean continuous service for one year.  U/s 2(c), “continuous service” means continuous service as defined in section 2A.  Eligibility for payment of gratuity and the method of calculation is given in section 4.  Relevant portion of Section 4 is reproduced below –

“4.  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: 

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

(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.”

Therefore, for becoming eligible for gratuity, the employee must have rendered 5 years’ service and this 5 years’ service must be ‘continuous service’. Continuous service is defined in Section 2A as follows –

2A. Continuous Service. – For the purposes of this Act, –

(1)  an employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service, including service which may be interrupted on account of sickness, accident, leave, absence from duty without leave (not being absence in respect of which an order treating the absence as break in service has been passed in accordance with the standing orders, rules or regulations governing the employees of the establishment), lay-off, strike or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act;

(2)  where an employee (not being an employee employed in a seasonal establishment) is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer—

(a)  for the said period of one year, if the employee during the period of twelve calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than—

(i)  one hundred and ninety days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and 

(ii)  two hundred and forty days, in any other case;

(b)  for the said period of six months, if the employee during the period of six calendar months preceding the date with reference to which the calculation is to be made, has actually worked under the employer for not less than—

(i)  ninety-five days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and 

(ii)  one hundred and twenty days, in any other case.

Explanation. – For the purposes of clause (2), the number of days on which an employee has actually worked under an employer shall include the days on which—

(i)  he has been laid-off under an agreement or as permitted by standing orders made under the Industrial Employment (Standing Orders) Act, 1946 (20 of 1946), or under the Industrial Disputes Act, 1947 (14 of 1947), or under any other law applicable to the establishment;

(ii)  he has been on leave with full wages, earned in the previous year;

(iii)  he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment; and

(iv)  in the case of a female, she has been on maternity leave; so, however, that the total period of such maternity leave does not exceed such period as may be notified by the Central Government from time to time;

(3)  where an employee, employed in a seasonal establishment, is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer for such period 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 such period.”

It is explicit from the language of sub-section (1) of section 4 that gratuity is payable after an employee has rendered continuous service of five years. For the service to qualify to be continuous service, it should not have been interrupted.  If interrupted, then such interruption should not be due to any fault of the employee. Section 5(b) makes provision for forfeiture of gratuity if the services of the employee are terminated for any act, willful omission or negligence causing any damage or loss of/damage to the property of the employer. If the services are terminated for riotous or disorderly conduct or any act of violence on the part of the employee or for any act constituting an offence involving moral turpitude, then also the gratuity can be forfeited. Gratuity is, therefore, a reward for long, continuous and meritorious service, and hence twin conditions should be met i.e. 5 years of service and the service should be continuous.

If a permanent employee resigns from its service in the fifth year of employment or the services are terminated by the employer, then it is not interruption of the kind referred to in sub-section (1) of section 2A of the Act i.e. the services rendered by the employee are not interrupted and remain uninterrupted. 

The provisions of sub-section (2) of section 2A would not apply in this case, because the services rendered by it are uninterrupted, hence they are said to be “continuous service” within the meaning of clause (1) of section 2A.  Therefore, the provisions of sub-section (2) of section 2A are not, at all, applicable in cases where there is no interruption i.e., for permanent employees.  The provisions of sub-section (2) of Section 2A apply in cases where the employee is not in continuous service i.e., the services have been interrupted. Basically, it is applied for casual, daily wagers, temporary workers or when the work is of an intermittent nature etc.  

If the interruption is covered within the exemption, then 240 actual working days would be deemed to be ‘continuous service’. Now, let’s examine the concept of 240 / 190 days.  If sub-section (2) of section 2A is read as a whole, it would be clear that when there is interruption in service, the legislature takes 75% of the working days as sufficient for the services to be deemed to be continuous service. If the total working days in a year, including Sundays are taken as 360, then its 75% comes at 240.  

As is given in the explanation below, sub-clause (ii) of clause (b) of sub-section (2) of section 2A, for purposes of calculating actual working days, the following would be included –

(i) days of laying-off,

(ii) days of leave with wages, earned in the previous year,

(iii) days of absence due to temporary disablement caused by accident arising out of and in the course of employment, and

(iv)  period of maternity leave.

Sub-section (3) of section 2A also provides for actual working for 75% of the number of days on which a seasonal establishment was in operation during such period.

Now, let’s discuss the concept of 190 days in the case of an employee employed below the ground in a mine.  According to the Mines Act 1952, in the case of a person employed below ground in a mine, 190 days attendance at the mine is deemed to be a calendar years’ service. That appears to be the rationale for taking 190 days’ actual working for these employees.

As far as the question of taking 190 days for establishments having 5 days working per week is concerned, to my mind, one of the reasons may be that the daily working hours of the employees are more than those applicable for establishments having 6 days working. In other words, in 6 days working system, employees work for 8 hours a day for six days in a week, whereas in 5 days working system, the daily working hours are increased to about 9.5 per day for five days in a week.  In 5 days working system, the employee enjoys Saturday as extra weekly holiday. Total extra holidays (Saturday) would therefore be 52.  If these Saturdays are deducted from 240 days, it would come to 192 days.  The legislature might have rounded it off to 190 days.  Therefore, for calculating 190 days working, the intervening Saturdays would have to be deducted.  

The above contention is supported by the fact that as per the Act, 1972, gratuity is calculated at 15 day’s wages.  One day’s wage is to be arrived by applying 1/26 formula, meaning thereby that Sundays are excluded while calculating one day’s wages.  So, while arriving at one day’s wages, only actual working days are taken into consideration. The intention of the legislature for calculating 240 / 190 days, therefore, could not have been to include Sundays or, in the case of 5 days working, Saturdays as well.  

The above view is fortified with one more reason.  The retrenchment compensation under the Industrial Disputes Act, 1947 is calculated at the rate of the average wage. The average wage is calculated by dividing one month’s wage by 30 i.e. 1/30. In other words, Sundays are included in this calculation. Therefore, while calculating 240 days for continuous service under the Industrial Disputes Act, the actual working days includes Sundays as well. 

In view of the above discussion, since the period for which the employee rendered interrupted service remained less than five years, there is no question of the employee becoming eligible for gratuity at all.  Even if its case is covered by sub-section (2) of section 2A, and the working of 190 days is to be considered for treating the same to be continuous service for the fifth year, then Saturdays should be excluded while calculating 190 days actual working.


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