Understanding Gratuity: A Key Social Security Benefit for Indian Employees

(Arjun Paleri, Raisa Pinto and Harinie Seenivasan)

In India, employees are entitled to a range of social security benefits as recognition for their service to an organisation. Among these, one of the most significant is the payment of gratuity, governed by the Payment of Gratuity Act, 1972 (the “Gratuity Act”). Gratuity is a statutory benefit provided by employers to employees who have completed a minimum of five (5) years of continuous service. It serves as both a financial reward and a means of encouraging long-term commitment to an organisation. By linking the payment to the duration of service, the Act incentivises employees to remain with their employers, thereby promoting stability within the workforce. From the employer’s standpoint, gratuity represents a meaningful gesture of appreciation and plays a vital role in strengthening the bond between the employer and the employee. More importantly, the payment of gratuity is not discretionary; it is a legal obligation that employers must fulfil. The Gratuity Act clearly stipulates that gratuity cannot be denied or withheld except under specific, legally valid circumstances.

Legal Precedent

Judicial precedents in India have consistently upheld that gratuity payments must be made promptly and cannot be withheld, except under narrowly defined legal exceptions.

Reinforcing this principle, the Kerala High Court in Sadhoo Beedi Enterprises v. Controlling Authority held that gratuity cannot be disbursed in instalments.

In the case, an employee filed a claim under the Gratuity Act, seeking unpaid gratuity from their employer (the “Petitioner”). The Controlling Authority directed the Petitioner to pay the gratuity amount along with interest, without delay. However, the Petitioner approached the court seeking permission to settle the amount in twelve monthly instalments.

The Court, considering the intent and objective of the Gratuity Act, noted that gratuity is intended to function as a terminal benefit, providing immediate financial support to employees upon the end of their service. It further clarified that the Act does not permit payment in instalments, and financial hardship on the part of the employer cannot justify a delay in fulfilling this statutory obligation.

As a result, the High Court directed the employer to make the full payment within a stipulated time frame and dismissed the petition.

Points for organisations to consider while making gratuity payments 

Although gratuity payments are a statutory obligation under the Gratuity Act many organisations inadvertently overlook important compliance aspects, which may lead to legal and financial repercussions. Below are some critical points employers must consider:

1. Timeline for making gratuity payments

As per the Gratuity Act, organisations are required to make gratuity payments (in full) within 30 days from termination of employment. While some organisations follow a standard practice of processing full and final settlement within 45 to 60 days, gratuity payments must be mandatorily processed within 30 days. Any non-compliance attracts an interest payment on the arrears.

2. Insurance requirements

Some states such as Karnataka and Andhra Pradesh require establishments to obtain insurance to manage gratuity payments effectively. There may also be related compliances such as obtaining a registration and submitting required forms. Organisations must identify and comply with such requirements.

3. Cap on gratuity payment

The Gratuity Act allows organisations to cap their gratuity payments to INR 20,00,000. However, organisations may also choose not to cap their gratuity payments and pay above INR 20,00,000. In either case, the organisation must sufficiently clarify the position it wishes to take in its employment agreement with the employee or employment handbook to avoid any future litigation.

4. Withholding gratuity

It is common practice for organisations to withhold gratuity payments from their full and final settlement dues. However, the courts have reiterated time and again that gratuity can be withheld only (a) during the termination of the employee’s employment due to any of the reasons listed in the Gratuity Act; and (b) when there is pecuniary loss as a result of the reasons. Hence, it is recommended that organisations obtain adequate legal advice and follow the required procedure before withholding gratuity payments.

Conclusion

From the foregoing, it is clear that gratuity forms an integral part of a full and final settlement that needs to be handled in a prescribed manner. Employers must ensure a timely and full payment of gratuity to avoid any consequences. Any decision made by an employer regarding gratuity must be carefully examined in the light of statutory provisions.