Payment of Gratuity in India– Key Points to note for Organisations

  (Arjun Paleri, Raisa Pinto and Harinie Seenivasan) 

In India, employees are provided several social security benefits for their services to the organisation. One such important benefit is the payment of gratuity under the Payment of Gratuity Act, 1972 (“Gratuity Act”). Gratuity payments are made by employers based on the years of service (employees who have completed five (5) years of continuous service are eligible) of the employee, thus incentivising employees for their long association with organisations. From an employer’s perspective, it is a gesture of appreciation that strengthens the employee-employer relationship. Importantly, gratuity is a statutory obligation under the Gratuity Act that cannot be withheld without valid reasons. 

Recent Judicial Precedent 

Judicial precedents, have for long, established that gratuity payments must be made by organisations on a timely basis and must not be withheld except in very specific circumstances.  

Affirming this principle, the Kerala High Court in Sadhoo Beedi Enterprises v. Controlling Authority[1] held that gratuity cannot be paid to employees in instalments.  

In this case, the employee filed a claim for unpaid gratuity under the Gratuity Act against their employer (“Petitioner”). The Controlling authority ordered the Petitioner to make payments of gratuity with interest without any delays. The Petitioner, however, requested the court to allow it to make the payment in twelve (12) instalments.  

Considering the objective of the Gratuity Act, the court observed that the law does not provide for gratuity payments to be made in instalments as the purpose of gratuity is to serve as a terminal benefit. The court also observed that the financial distress of an employer cannot be an excuse to deny gratuity payments to employees. Accordingly, the court ordered the employer to make payments within a prescribed time limit and disposed of the petition accordingly.  

Points for organisations to consider while making gratuity payments  

While gratuity payments are a statutory requirement,  organisations often miss out on crucial points, which may lead to non-compliance. Listed below are a few key points that need to be considered by organisations: 

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[2] have reiterated time and again that gratuity can be withheld only (a) for  termination of the employee’s employment due to any of the reasons listed in the Gratuity Act[3]; 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.  

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References

1. Sadhoo Beedi Enterprises v. Controlling Authority, WP(C) No. 36274 of 2024.

2. Jaswant Singh Gill vs M/s Bharat Cooking Coal Limited & Ors., AIR ONLINE 2006 SC 412.

3. Under Section 4(6) of the Gratuity Act, the following reasons are listed: (a) any act, (b) wilful omission, (c) negligence causing any damage, (d) destruction of property belonging to the employer, (e) riotous or disorderly conduct, (f) any other act of violence, or (g) for any act which constitutes an offence involving moral turpitude