Gratuity is the financial assistance given to an employee by an employer at the end of employment. Let us understand in this blog what to do if an employer refuses to pay a gratuity.
What to Do When the Employer Refuses the Payment of Gratuity
Employers are bound to offer gratuities and if they refuse to do so, they can be punished under the law.
- Resigning from employment
- Retirement from employment
- Death during the employment period or
- Termination from employment.
It is a distinct advantage scheme, and the employee makes no involvement. Gratuity is a constitutional right of the eligible employees in an organization to be paid according to the Payment of Gratuity Act of 1972.
Validity of the Gratuity Payment Act of 1972
This act is suitable for any organization, company, or establishment with 10 or more employees working at least for a day in a year. This act is valid in all parts of the country, excluding Jammu & Kashmir. Once such an organization comes under the compass of The Payment of Gratuity Act, the organization remains roofed and sheltered, disregarding the number of employees’ overtime.
It has been stated that every employer should give awards to loyal employees. This principle has been followed by employers, and gratitude is shown to their employees by providing gratuity for their service. It is a benefit gained after retirement. However, an organization is not bound to pay gratuity to each individual. There are a few criteria for it like an employee must be an active member of the organization for five or more years to enjoy the benefit. The reason for resignation is not a matter of consideration as it could differ from natural to unnatural causes.
Gratuity Availability for the Private and the Public Sector
In our country, it is compulsory for every employer in an organization to pay their employees a gratuity fund when terms and conditions apply, like the completion of 5 years. This applies to both sectors (Private and Public).
Report of Non-payment of Gratuity
The following things to keep in mind while reporting for not receiving gratuity:
- According to Section 3 of The Payment of Gratuity Act of 1972, a dominating authority is liable to look after the matter. This section states that it is entitled to arbitrate disputes arising from gratuity non-payment;
- Forms are provided by the dominating authority and have to be filled up for both the employer and the employee to appear for the hearing on the mentioned date and venue.
- If the employer does not appear, the authority will proceed with the employee’s hearing;
- If the employee doesn’t appear, then the employee’s claim will be declined.
Generally, an assistant labor Commissioner is appointed to look after the matter. If an employee has failed to receive gratuity from an employer, the higher authority will take action within 15 days.
Different types of forms are available online for assistance.
Punishment for an Employer/Organisation if They Refuse to Pay Gratuity
The three points to consider are:
- Section 9 states that the dominating authority can apply all the penalties of the organization. An employer is bound to offer a gratuity, and if not, there is a punishment from 6 months to 2 years;
- If the deemed authority decides to lessen the imprisonment, the employer is not liable to go through 6 months. Settlements can be made accordingly;
- Six months of custody can be made on the employer based on the false statements made or avoid paying the gratuity.
Gratuity Cover
Every organization is responsible for paying gratuity to an employee and must get a cover for gratuity according to Section 4(A) of The Payment of Gratuity Act of 1972. This assurance will guarantee that adequate funds are visible with the setup of the organization to pay its employees the rightful gratuity.
Understanding the Rules and Regulations
Gratuity, a significant employee benefit, is governed by specific rules to ensure fair treatment and transparency. Let’s delve into the intricacies of gratuity rules in India to understand their applicability, calculation, and taxation.
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Applicability of Gratuity
Minimum Employee Count: Gratuity becomes mandatory for organizations with a workforce of 10 or more employees on a single day in the preceding 12 months. Even if the employee count falls below 10 later, gratuity obligations persist.
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Eligibility Criteria
Continuous Service Requirement: To be eligible for gratuity, an employee must render continuous service for 5 years. However, exceptions exist in cases of an employee’s demise or disablement.
Calculation of 5 Years: A year is considered 240 working days for those not working underground and 190 days for underground workers. Even interruptions due to various factors like strikes, leaves, or termination not initiated by the employee are counted in the 5 years.
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Payment Conditions
Upon Retirement: Contrary to common belief, gratuity is not limited to retirement. Employees become eligible upon retirement, resignation, or termination, provided they meet the 5-year service criterion.
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Gratuity Calculation
For Covered Organizations: The gratuity calculation formula for organizations covered under the Payment of Gratuity Act, 1972, is (15 x Last Drawn Salary x Number of Completed Years of Service) / 26.
For Uncovered Organizations: The formula is (15 x Average Salary for the Last 10 Months x Number of Years Employed) x 30.
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Forfeiture of Gratuity
Employers can forfeit gratuity if an employee is terminated for reasons such as disorderly conduct, theft, or property damage.
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Gratuity and Bankruptcy:
Organizations must pay gratuity even during bankruptcy. No court order can prevent an employer from fulfilling this obligation.
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Income Tax Applicability:
For Covered Employees: Gratuity up to the least of the following is not taxable:
- Rs.20 Lakh
- Actual Gratuity Received
- 15/26 x Last Drawn Salary x Completed Years of Service
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Tax Exemption Limit for Cumulative Gratuity
The Rs.20 Lakh tax exemption applies to the cumulative gratuity received from multiple employers.
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Special Cases:
- Widow or Legal Heir: Gratuity paid to the widow or legal heir of an employee is exempt from tax.
- Ex-Gratia Payments: Any ex-gratia payment made to an employee or legal heir due to injury is also tax-free.
Payment of Gratuity After Death
If an employee dies before completing five years of continuous service, the eligibility period is waived in the event of death or disability. The gratuity amount is determined based on the employee’s tenure of service and last drawn salary, and it is payable up to the date of death.
According to the Gratuity Act, there is no mandatory five-year service requirement in cases of death or disability. The employee or their nominee is entitled to receive the gratuity amount.
Therefore, in the unfortunate event of an employee’s death before completing five years of service, the nominee or legal heir can still receive a gratuity amount, and the eligibility period does not apply in such cases.
What Is the Punishment Imposed on My Employer if He Refuses to Pay Gratuity?
An employer who violates or fails to comply with any provisions of the Gratuity Act or any rule or order established under it shall face penalties. The punishment may include imprisonment for a period not less than three months but up to one year, or a fine ranging from ten thousand rupees to twenty thousand rupees, or both.
In cases related to the non-payment of gratuity under this Act, the employer could face imprisonment for a term not less than six months but up to two years, unless the court, with documented reasons, believes that a lesser term of imprisonment or a fine would serve the interests of justice.
Conclusion
However, there is a point to be noted that it is only compulsory when the central government releases some notifications concerning the cover term for the gratuity. So far, each state is making its terms and conditions for its company to get gratuity insurance. When employees are a matter of concern, this act and law are highly beneficial for them in a recession period. The objective of this mandatory gratuity insurance is to ensure the safeguard of the employees in an organization in every situation even when an establishment has to be put down.
FAQs
Can employees receive gratuity before the completion of five years under any special conditions apart from death or disability?
No, under normal circumstances, employees must complete five years of continuous service to be eligible for gratuity.
How does the merger or acquisition of a company affect the gratuity of existing employees?
During a merger or acquisition, employees' existing service typically counts towards their gratuity eligibility under the new company.
Are there any recent amendments to the Payment of Gratuity Act that employees should be aware of?
There have been talks of raising the gratuity ceiling and reducing the eligibility period, but no confirmed amendments as of June 24, 2024.
What role do trade unions play in ensuring gratuity payments?
Trade unions can represent employees in disputes over gratuity payments and ensure their rights are protected under the Act.
What are the consequences for employers who falsely report lower wages to reduce gratuity payments?
Employers who under report wages to reduce gratuity payments can face penalties, including fines and back payments to employees.
