Gratuity is one of the most significant retirement benefits that provide financial security to employees when they retire from an organization. This, under the 1972 Payment of Gratuity Act, is one of the rights a worker avails himself of wherein upon following continuous service in an organization for a certain period, an employee has a right to receive a single-time payment as agreed by the employer. This benefit not only appreciates the long-term service and contribution of an employee but also enables the employees during the post-employment phase. Understanding eligibility criteria about gratuity is important both for an employer to be in good legal books and for an employee to redeem his or her rights in the performance process.
Legal Framework Governing Eligibility Criteria for Gratuity
Payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972, is an essential legislation in India that sets out to provide gratuity pay to the employees in certain establishments. The underlying purpose of this provision is to provide financial security to the employees at the time of retirement or termination of service so as to ensure post-employment well-being. It extends to establishments employing ten or more workers engaged in any industry, such as factories, mines, oilfields, plantations, ports, railway companies, shops, etc., other than those mentioned by the government.
Payment of Gratuity: Section 4
Under Section 4, the following are specified as the qualifying events which give rise to a claim to gratuity:
Eligibility: Gratuity is payable when an employee has provided continuous service for at least five years. The provision is not applicable in cases of gratuity on account of death or disablement.
Qualifying Events: Qualifying events trigger a gratuity claim, namely,
retirement /superannuation/ resignation on account of reaching retiring age
Resignation
death /disablement.
Calculation Formula: Gratuity is calculated on actual drawn wages, at the rate of 15 days' wages for every completed year of service. The ceiling gratuity payable is capped at ₹20 lakh.
Know in detail What does gratuity mean
Who is an Employee?: Section 2(e)
Section 2 (e) of the Act defines an 'employee' as any person other than an apprentice employed for wages in any kind of work, whether manual or otherwise, in or about the work of an establishment to which this Act applies. In other words, it encompasses persons working in factories, mines, oilfields, plantations, ports, railway companies, shops, and other establishments. Notably excluded are the persons holding posts under the Central or State Government and those governed by other Acts or rules providing for the payment of gratuity.
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Eligibility Criteria for Gratuity
Minimum Service Period
Gratuity under the Payment of Gratuity Act, 1972 is claimable by an employee after accumulation of at least five years of continuous service with the same employer. Continuous service would include periods of authorized leave, layoff, strike, or lockout. However, it would exclude unauthorized absence.
Conditions for Entitlement
Gratuity is payable when employment is terminated for any of the following reasons:
Superannuation: When the employee attains the age stipulated under the terms and conditions of service of the employer or statutory provisions.
Retirement: This is the voluntary retirement of the employee from service.
Resignation: The employee voluntarily terminates his/her employment with the employer.
Death: This is termination brought about by the death of the employee.
Disablement: The termination arises from permanent disablement caused by accident or disease.
Learn What are Salient Features of Minimum Wages Act, 1948
Exceptions to the Service Period Requirement
Death Gratuity: The gratuity shall be payable to the nominee or nominees or to the legal heirs of the deceased employees, irrespective of their length of service.
Disablement Gratuity: The gratuity shall be payable to the employee on becoming permanently disabled, being permanently incapacitated for work as a result of bodily injury suffered by accident or disease, irrespective of the length of service.
In Short,
Payment of Gratuity Act, 1972 mandates gratuity payments for employees who have rendered continuous service of five years or more, with certain exceptions such as death or disablement. Recent amendments have increased the maximum gratuity limit from ₹10 lakh to ₹20 lakh, providing enhanced financial benefits for employees. Understanding gratuity eligibility ensures fair treatment of employees, helping them receive the financial benefits they are entitled to upon termination of service. Employers who are aware of these regulations can avoid legal disputes and ensure compliance with labor laws, fostering a positive work environment.
FAQs on Gratuity Eligibility
Q1. What is the minimum period of service to be eligible for gratuity?
Under the Payment of Gratuity Act, 1972, a worker must have rendered five years of continuous service to the same employer for being qualified for gratuity. It is exempted in cases of death or disablement due to employment.
Q2. Whether an employee who has served a company for a lesser period is eligible for gratuity?
Yes ,the five years of continuous service requirement is waived under the following conditions
Death: Gratuity shall be payable to the nominee or legal heir of a deceased employee, irrespective of the length of service. Disablement: Gratuity shall be payable to an employee upon permanent disablement from an accident or disease, irrespective of the length of service.
Q3. Is gratuity payable upon resignation?
Yes, gratuity shall be payable at the time of resignation, however if an employee has completed his or her five years of continuous service with the employer. However, if there is any resignation by an employee before completing five years, gratuity is not payable except it is on account of death or disablement.
Q4. How is gratuity calculated for part-time employees?
Gratuity is calculated on a daily worked basis by part-time employees.
The formula used: Gratuity = (Days worked / 240) × (Last drawn salary × 15)
Here, 240 denotes the working days in a year.
Q5. What happens when an employee dies, before completing the service period?
Gratuity is payable to the nominee or legal heirs in case of a deceased employee, irrespective of the number of years of service rendered. It is calculated on the basis of years completed.
