Gratuity Entitlement during Suspension: What the Law and Courts Say
Introduction
The Payment of Gratuity Act 1972, provides the legal framework for how gratuities are calculated and paid to employees after they leave their jobs. The Act also establishes a right for employees and sets out the process to determine if an employee qualifies to receive a gratuity, how much will be paid out, and when it should be paid out. This article explores the question of gratuity entitlement during suspension. There are two primary questions related to the issue of suspending an employee, first, if an employee is suspended, should that time be counted as time worked when calculating a gratuity? Second, whenever an employee receives a subsistence allowance during the period of suspension, should that money be counted as wages under the Act and figure into gratuity calculations?
Table of Contents
Concept and Legal Nature of Gratuity
The term “gratuity” is derived from the Latin word gratis, meaning a gift. It represents a lump-sum amount paid by an employer to an employee as a token of appreciation for long and continuous service rendered to the organisation. The Hon’ble Supreme Court, in Maniben Magan bhai Bhariya v. District Development Officer, Dahod and Ors.1, characterised gratuity as a gesture of appreciation and recognised it as an important component of the social security framework available to employees at the end of their service tenure.
Statutory obligation is the primary definition of gratuity for an employer under the Payment of Gratuity Act,1972. For example, in a decision by the Odisha High Court in ‘Senior Branch Manager, NSIC Ltd. v. The Deputy Chief Labour Commissioner (Central), Bhubaneswar2, the court held that retirement benefits are “property” for purposes of Article 300A of the Constitution. As such, an employee cannot lose the right to receive retirement benefits unless it is in accordance with law and with statutory authority. If an employee is deprived of receiving gratuities without statutory authority, that would be unlawful.
Statutory Framework For Governing Gratuity
The Gratuity Act describes how to determine gratuity under the Act. It defines “continuous service” and describes when an interruption in service would still be considered continuous under Section 2A. The Gratuity Act also creates a controlling authority (section 3) and provides an employee’s right to receive gratuity (section 4) as well.
According to section 4(1), an employee is entitled to payment of gratuity when he/she has completed five (5) years of continuous service and is no longer working for the organisation. Termination occurs because of superannuation, retirement, resignation, death or physical incapacity resulting from an accident or illness. If an employee dies or is disabled, he/she does not need to have completed five (5) years of continuous service. According to section 4(2), employers are required to pay gratuity at the rate of 15 days’ wages for each completed year of service, up to the last salary drawn by the employee. Section 4(5) states that if the employment contract provides for a greater gratuity, employees have the right to receive a greater gratuity than that specified in the Gratuity Act.
Employers must pay gratuity within the statutory period imposed by Sections 7, 8 and 9 of the Gratuity Regulation Act (the Act). An employer who does not pay gratuity on time is subject to recovery of the unpaid sum with compounded interest. In addition, an employer who fails to pay gratuity on time shall be penalised under the Act for this violation.
Continuous service is the basis for letting an employee qualify for gratuity. Continuous service is defined in subsection 2A(2) as having worked for a minimum of 190 days at certain types of establishments or at least 240 days at all other types of establishments in the twelve-month period leading to the date on which gratuity is claimed.3
Where an employee fails to satisfy this threshold, Section 2A(1) becomes applicable. This provision treats interruptions due to sickness, accident, leave, lay-off, strike, lock-out, or cessation of work not attributable to the employee as periods spent “on duty.” The Payment of Gratuity Act, being a social welfare legislation, is designed to afford maximum protection against loss of income arising from old age, inability, or unemployment.
Where an employee is absent from duty and the absence is specifically indicated as a break in service by an order pursuant to the terms of the applicable service regulations, this exception does exist. Unless there is an order stating otherwise, the interruption will be “on duty”. In the case of Jeewanlal Ltd. v. Appellate Authority4 under the Payment of Gratuity Act, the Supreme Court has ruled that an employee’s entire duration of service (from their first appointment to their last termination date), shall be used to determine what they will receive with regard to gratuity.
Suspension and Its Legal Consequences
A key factor when deciding if a suspended worker is entitled to gratuities is if the time spent on suspension is classified as “on duty”. A case with the Rajasthan High Court, in the matter of Brij Lal Bundel v. State of Rajasthan5, found that generally a suspended individual is on duty when calculating their pension. The Court did not specifically state this was also the case for their gratuities.
Two scenarios exist at the conclusion of an employee’s suspension. Either the employee is found guilty of their misconduct and the employee’s suspension will not be counted as time worked, or they are found to not have done anything wrong, and the suspension period will be treated as time worked. In the case of Gopal v. United India, the Bombay High Court ruled that if the employer determines after reviewing the facts that an employee’s suspension period will be treated as time not worked, the employee is only entitled to the subsistence allowance already received. In these types of cases, the period of suspension is defined as “dies non”. As long as the order to treat the period of suspension as “dies non” is made based on evidence and there is no indication of unlawful behaviour by the employer, the Courts will not intervene.
The underlying rationale is the principle of “no work, no pay.” Since a suspended employee does not render service, full wages and allowances are not payable unless the suspension is held to be unjustified and the period is expressly treated as duty by the competent authority.
Wages, Subsistence Allowance, and Gratuity Calculation
Section 2(s) of the Act defines “wages” as all emoluments earned by an employee while on duty or on leave, paid or payable in cash, and includes dearness allowance while excluding bonus, commission, house rent allowance, overtime wages, and other allowances.
In Maniben Maganbhai Bhariya, the Supreme Court clarified that wages under the Act essentially comprise basic wages and dearness allowance. This position was reiterated earlier in Straw Board Manufacturing Co. Ltd. v. Its Workmen. The Madras High Court, in Selvaraj v. The Management of Shardlow India Limited,6 emphasised that emoluments must arise strictly in accordance with the terms of employment and be earned while on duty or on leave.
In P. Selvaraj, the issue of the nature of subsistence allowance was considered in Section 17B of the Industrial Disputes Act, but the definition of subsistence allowance is not expressly stated. The Court explained that subsistence allowance is meant to maintain an employee during the period of suspension and is not to be treated as part of wages. If subsistence allowances were to be included in the definitions of wages, the scope of that definition would then be unnecessarily broad, leading to an unjust situation.
Conclusion
The Supreme Court has consistently held that social security legislations must be interpreted liberally to advance their beneficial purpose. Where two interpretations are possible, the one that confers maximum benefit on the employee should prevail. In addition, the principle of liberal construction applies only to ambiguous statutory provisions and if the terms of any statute are specific enough to allow the courts to determine what the statute means based on the express intent of the legislature (i.e., the plain language of the statute) and to implement that intent regardless of any unintended consequences. For example, sections 4 and 2A of the Payment of Gratuity Act set forth that the completion of continuous service is an absolute prerequisite for the payment of gratuity to employees, and hence, once an employee has completed 240 days of actual work in relation to their entitlement to gratuity, gratuity will be paid in accordance with that provision.
Where this threshold is not met, the applicability of Section 2A(1) depends on whether the absence or suspension is treated as a break in service by a specific order under applicable service rules.
If the competent authority expressly treats the suspension period as “not on duty,” such period becomes dies non and cannot be reckoned for gratuity. Conversely, where the employee is fully exonerated or no such order exists, the suspension period must be counted for gratuity purposes. Since wages must be earned “while on duty,” subsistence allowance paid during a suspension treated as “not on duty” cannot form part of wages for gratuity calculation.
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