Gratuity Part B is a LOCK (10 appearances = tied highest in paper). Write the full answer from anchors: 240-day rule, death and disablement exception, formula, forfeiture grounds. Also prepare the death-below-5-years Part C pattern cold.
Why This Matters
A factory worker serves for 4 years and 240 days, then is retrenched. The employer refuses gratuity, saying "5 years not completed." The worker argues 240 days in the fifth year constitutes continuous service. This dispute turns on how "continuous service" is computed under the Act. Gratuity is the most frequently tested Part B topic from Unit IV and generates multiple Part C problems on the 5 year threshold, death during service, and forfeiture.
Chapter Overview
This chapter answers five questions:
- Who is covered? Application and definitions.
- When is gratuity payable? The five year continuous service rule and its exceptions.
- How is gratuity calculated? The computation formula.
- When can gratuity be forfeited? The two statutory grounds.
- What is the nomination process? Who receives gratuity on the employee's death.
Application and Definitions
The Act applies to every factory, mine, oilfield, plantation, port, railway company, and every shop or establishment employing 10 or more persons on any day in the preceding 12 months.
Once covered, always covered. If an establishment employed 10 persons on any single day in the preceding year, the Act applies even if the number subsequently falls below 10.
An employee shall be said to be in continuous service for a period if he has been in uninterrupted service for that period, including service interrupted by sickness, accident, leave, absence from duty without leave (not exceeding the authorised period), lay off, strike (not illegal), or lock out.
For the purposes of the Act, an employee who has actually worked for not less than 240 days in a year of 12 calendar months (190 days for establishments working below ground in mines or seasonal establishments) shall be deemed to have been in continuous service for that year.
An employee is deemed to have completed one year of continuous service if they actually worked 240 days in that year.
- 240 days for surface/regular establishments
- 190 days for underground mine workers and seasonal establishments
This deeming provision is critical for Part C problems on "less than 5 years" claims.
Eligibility for Gratuity
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 is due to death or disablement.
| Termination Reason | 5 Years Required? | Gratuity Payable? |
|---|---|---|
| Superannuation (retirement age) | Yes | Yes, if 5 years completed |
| Voluntary resignation | Yes | Yes, if 5 years completed |
| Retrenchment | Yes | Yes, if 5 years completed |
| Death | No | Yes, regardless of length of service |
| Disablement | No | Yes, regardless of length of service |
The death/disablement exception is the most tested point in Part C. A worker who dies after 2 years of service: gratuity is payable to the nominee. A worker who resigns after 4 years and 300 days: apply the 240 day deeming rule.
📋 Facts: Workmen who had worked more than 240 days in the preceding year were retrenched without complying with the statutory preconditions. The employer argued they had not completed a full year of continuous service. The case arose under Section 25B of the Industrial Disputes Act, whose 240-day deeming provision parallels Section 2A of the Gratuity Act.
⚖️ Issue: Whether 240 days of actual work in a year amounts to one year of continuous service.
🏛️ Held: It does. The deeming provision replaces the requirement of an uninterrupted calendar year: 240 days of actual work in the preceding twelve months completes the year. Beneficial provisions are construed in favour of the workman.
🎯 Principle: The 240 day deeming provision is a beneficial provision and must be construed in favour of the employee.
Computation of Gratuity
For every completed year of service (or part thereof in excess of six months), the employer shall pay gratuity at the rate of 15 days' wages based on the rate of wages last drawn.
For piece rated employees: 15 days' wages based on the average of total wages received during the last 3 months.
For seasonal establishment employees: 7 days' wages for each season.
The formula:
Gratuity = (Last drawn wages × 15 × Years of service) ÷ 26
"26" because a month is deemed to have 26 working days (not 30).
(Last Wages × 15 × Years of Service) ÷ 26
- Last wages = basic + DA at time of exit
- 15 = statutory rate (15 days per year)
- 26 = working days in a month (not 30)
- "Part thereof in excess of 6 months" counts as a full year
Maximum gratuity: Rs. 20 lakh (enhanced from Rs. 10 lakh by notification). The ceiling is subject to periodic revision.
Illustration: Worker with 20 years of service, last drawn wages Rs. 15,000/month. Gratuity = (15,000 × 15 × 20) ÷ 26 = Rs. 1,73,077 (approximately).
Forfeiture of Gratuity
Gratuity shall be wholly or partially forfeited if:
(a) the services of the employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or
(b) the services have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed in the course of employment.
| Ground | Nature | Scope |
|---|---|---|
| Riotous/violent conduct | Physical violence, disorder on premises | Need not be a criminal offence; employer must prove the conduct |
| Moral turpitude offence | Criminal offence involving moral turpitude | Must be committed in the course of employment; conviction may not be necessary if employer proves the act |
Wrong. Only two specific grounds: violent/disorderly conduct, or moral turpitude offence in the course of employment. Ordinary misconduct (habitual absence, insubordination, poor performance) does NOT forfeit gratuity. The employee retains the right to gratuity even if dismissed for non qualifying misconduct.
Nomination
Each employee shall make a nomination conferring the right to receive gratuity in the event of the employee's death. If the employee has a family, the nomination must be in favour of one or more family members. A nomination in favour of a non family member is void if the employee has a family.
The nomination determines who receives gratuity on death. If no nomination is made, gratuity is payable to the legal heirs. The employee may modify the nomination at any time by giving written notice.
Controlling Authorities
The appropriate Government shall appoint a Controlling Authority for the purposes of the Act. Any person aggrieved by the employer's refusal to pay gratuity may apply to the Controlling Authority. The Authority shall determine the amount of gratuity and direct payment. Appeal lies to the appellate authority within 60 days.
Common Confusions
Depends on the 240 day deeming provision. If the employee worked 240 days in the fifth year, the fifth year is deemed complete. Count actual working days, not calendar months. Surendra Kumar Verma (1980): construe the provision liberally in favour of the employee.
Wrong. Section 4(1) proviso: the 5 year requirement does not apply when termination is due to death or disablement. Gratuity is payable to the nominee regardless of length of service.
Key Takeaways
Eligibility:
- 5 years continuous service (240 day deeming rule)
- Exception: death and disablement (no 5 year requirement)
- Part in excess of 6 months = full year
Computation:
- (Last wages × 15 × years) ÷ 26
- Maximum: Rs. 20 lakh
- Seasonal workers: 7 days per season
Forfeiture (only two grounds):
- Riotous/violent/disorderly conduct
- Moral turpitude offence in course of employment
- Ordinary misconduct does NOT forfeit
Nomination:
- Must be in favour of family if family exists
- Non family nomination void if family exists
- Modifiable at any time
Eligibility for Gratuity
Under Section 4(1) of the Payment of Gratuity Act, 1972, gratuity is payable on termination of employment after 5 years of continuous service, on superannuation, retirement, resignation, death, or disablement. The 5 year requirement does not apply where termination is due to death or disablement.
Continuous service is computed using the 240 day deeming provision: if the employee actually worked 240 days in a year, that year counts as continuous service (190 days for mine/seasonal workers). In Surendra Kumar Verma (1980), the Supreme Court held this provision must be liberally construed.
Gratuity is computed at 15 days' wages for each completed year of service (or part exceeding 6 months), calculated as: (last drawn wages × 15 × years of service) ÷ 26. Maximum payable: Rs. 20 lakh.
Part A (6 marks)
Forfeiture of Gratuity
Under Section 4(6), gratuity may be wholly or partially forfeited on two grounds only. First, riotous or disorderly conduct or any act of violence by the employee. Second, any act constituting an offence involving moral turpitude, provided it is committed in the course of employment.
Ordinary misconduct such as habitual absence, insubordination, or poor performance does not forfeit gratuity. The forfeiture grounds are exhaustive, not illustrative. The employer cannot add additional grounds by contract or policy.
Part B (15 marks)
Discuss the salient features / salient provisions of the Payment of Gratuity Act, 1972
- Application: factories, mines, plantations, shops, 10+ employees on any day in preceding 12 months
- Continuous service: 240 day deeming rule (190 for mines/seasonal)
- Eligibility: 5 years continuous service; exception for death and disablement
- Computation: (Last wages * 15 * years) / 26; max Rs. 20 lakh
- Forfeiture: 2 grounds only (riotous conduct, moral turpitude in employment)
- Nomination: mandatory; family member if family exists
- Controlling Authority: dispute forum, appeal within 60 days