Gratuity

Gratuity is one of three prevalent retirement benefits in the private sector employment. The other two are "Pensions
(approved Pensions Fund) and Provident Fund". It is a "lump-sum" amount of money payable to a worker on leaving
service (through retirement, death or termination of service) based on salary (highest or the final salary) and period of
service (over and above six months).

Gratuity is actually a benefit for services rendered in the past. It is a reward of good, efficient and faithful service for a
substantial period of time. Before 1972, gratuity was paid by an employer either on voluntary basis or in consequence
of an award by a labor court. However, the Labour Laws Amendments Ordinance, 1972 made payment of gratuity a
legal obligation. Amendments were subsequently made in the Standing Order 12 of Industrial and Commercial
Establishments (Standing Orders) Ordinance 1968. Gratuity is now a statutory right for workers who have worked at
least twelve months in an organization.

What are the qualifying conditions for a worker to earn gratuity?

A worker is entitled to gratuity if the following four conditions are satisfied.

1. Industrial and Commercial Establishments (Standing Orders) Ordinance 1968 (or any of its variants)
is applicable to that establishment (whether commercial or industrial) i.e. it must have the minimum
number of workers as mentioned above

2. A person has to be a workman as defined in Standing Orders Ordinance 1968. A workman is "any
person employed in any industrial or commercial establishment to do any skilled or unskilled, manual or
clerical work for hire or reward".

3. He/she must be a permanent workman. If a worker is temporary, badli, probationer or a contract

4. The minimum qualifying employment period is twelve months or above. However, if a worker has
worked over six months in a specific year, he will be entitled to gratuity of one year. Thus, in essence,
gratuity is payable for more than six months of employment.

What are the qualifying events for payment of gratuity to a worker?

An employee is entitled to gratuity when:

He resigns from his service (voluntary retirement or voluntary redundancy in exchange for financial benefits like golden
handshake schemes)

His organizations terminates his services due to reasons other than misconduct

He dies while in service of his employer (it is not necessary that employee should be on duty at the time of death)

He reaches the superannuation age and retires

However, if an employee's services were terminated on account of misconduct (like harassment, theft etc.), gratuity
would no longer be admissible to him.

In case of death of a workman, gratuity is payable to the legal dependents of a workman. As mentioned above, death
may not necessarily occur on duty but the worker should be in continuous service at that time. The amount of gratuity,
in this case, is transferred to "Workmen Compensation Commissioner" who will then allocate this amount to the
dependents of a worker. The dependents of a deceased worker include "his widowed mother, his own widow, minor
son and unmarried daughter".
What is the rate of gratuity and how is it calculated?

In accordance with the provisions of law, rate of gratuity is "thirty (30) days wages for every completed year of service
or any period in excess of six months". Any employment period exceeding six months will be considered as one year.
Originally, gratuity was set at 15 days' wages for every completed year of service. In 1973, the rate was revised to 20
days' wages. In 1994, it was further revised to 30 days' wages for every completed year of service or any period in
excess of six months.

The basis for calculation of wages is "wages admissible to a fixed-rate worker in the last month of his service" or "the
highest drawn pay by a piece-rate worker during the preceding twelve months". Wages for gratuity calculation are the
"gross wages" including all permanent and regular allowances (like house rent allowance, cost of living allowance and
conveyance allowance), however, these don't include any such contingent or unpredictable payments like temporary
relief to workers (e.g. flood relief) or bonus provided by the employer. Other than wage rate, the second determining
factor in gratuity calculation is the time period a worker has served with an establishment/organization. Any length of
service higher than six months over the number of years of service is considered as one year for the purpose of gratuity
calculation. Whereas any length of service less than six months is not included in the course of calculating gratuity.

Consider the following illustration:

Date of joining/first appointment in an establishment 01st September, 1989

Date of voluntary retirement/resignation 30th April, 2015

Gross salary paid in 2015 Rs. 30,000

Temporary relief (flood relief) 5,000

Bonus (at the end of year indicating profitable situation for firm) 10,000

Total length of service 25 years and 8 months

Admissible period for calculation of gratuity 26 years

To calculate gratuity, Last drawn monthly gross pay Rs. 30,000

Pay per day 30,000/26(working days)=1153.85

One year gratuity (pay per day*30) 1153.85*30=34615.4

Gratuity for the whole period served i.e. 26 years 26*34,615.4=Rs. 900,000.4

Note: If the employment period in above example was 25 years and 4 months, gratuity would be payable only for 25
years. Wages for workers are determined on a 26-day month basis as defined in the Minimum Wages for Unskilled
Workers Ordinance, 1969. Minimum wage notifications, issued by the provincial governments, also determine wages
for unskilled, semi-skilled and skilled workers on a 26-day basis.

Gratuity is calculated on the basis of gross wages including all those allowances and fringe benefits which are of
permanent, regular and non-contingent in nature. The irregular and non-contingent payments (bonus, profit, payment
for annual leave etc.) are not part of wages for the purpose of calculating gratuity. In the case of fixed-rated workers,
gratuity is calculated on the basis of wages payable to a workers in the last month of service. In the case of piece-rated
workers, gratuity is calculated on the highest pay drawn during the last 12 months.

What is the difference between gratuity, provident fund, and pension fund?

As mentioned before, gratuity and provident fund are two different retirement benefits under the Standing Orders
Ordinance 1968. Workers don't have legal right to both of these benefits. It is rests with an employer's discretion to
decide as to whether he wants to set up provident fund or provide gratuity at the end of employment or grant both of
these benefits voluntarily. The law can't force an employer to provide either of these benefits or both the benefits
simultaneously.

Gratuity is usually awarded in addition to other benefits payable to an employee. However gratuity is not payable during
the period an employer has set up a provident fund in his establishment with at least 50% of the contribution by the
employer and the remaining by employee. The sum of both of these contributions would be payable to a workman even
if he resigns or is dismissed from service for any reason including misconduct (remember gratuity is not admissible in
case of misconduct). However, the law does not stop an employer to provide both gratuity and provident fund to its
employees. What is provided in the law is the minimum legal protection i.e. floor and not the ceiling. Both the Khyber
Pakhtunkhwa and Sindh Standing Orders Acts further provide that the amount paid to the worker under provident fund
must not be less than the amount of gratuity admissible to such worker.

It must be emphasized here though that after a 2007 amendment, there is also a provisions for an Approved Pension
Fund. If, agreed through collective bargaining, an employer offers and contributes to an “Approved Pension Fund” as
defined in the Income Tax Ordinance, 2001 (XLIX of 2001), and where the contribution of the employer is at least 50%
of the limit prescribed in the aforesaid Ordinance, and to which the workman is also a contributor for the remaining 50%
or less, no gratuity is payable for the period during which such contributions has been made. The Pension Fund option
is not provided under the Khyber Pakhtunkhwa and Sindh Standing Orders Acts.

It is interesting to note however that in the case of misconduct, an employer is not required to pay gratuity however if a
Provident Fund is maintained, the workman is entitled to receive the amount standing to his credit in the provident fund,
including the contributions of the employer to such fund, even if he resigns or is dismissed from service.

If an employer refuses to pay gratuity or is paying less than the due amount, what should a worker (or his
dependents) do?

The first step to get gratuity is to apply to the employer for payment of the due amount. If there are delays on the
employer side or employer is paying less than the due amount, the aggrieved party (worker or his dependents, in case
of his death) can file a claim to the Commissioner appointed under section 15 of the Payment of Wages Act 1936. The
complaint to the Workmen Compensation Commissioner's office can be filed within three years of the incidence of the
act. A Workmen Compensation Commissioner is the officer of directorate of labor welfare and every district has a
designated Commissioner for labor related matters.

How is gratuity paid to the worker's dependents in the case of worker's death?

In the event of a worker's death, gratuity is payable to the legal dependents of a worker. The amount of gratuity, as
calculated above, is transferred to the Workmen Compensation Commissioner, appointed under the Workmen
Compensation Act 1923. The Commissioner then allocates the amount to the worker's dependents who are defined as
the widow, minor son (under 18 years), and unmarried daughter, or a widowed mother. The amount of gratuity is
allocated among the dependents in accordance with the provisions of section 8 of the Workmen’s Compensation Act,
1923 (or its provincial variants).

Some points to remember

1. Gratuity is payable on completion of 12 months of service after first day of employment. It is not related to calendar
year (January to December) or fiscal or financial year (July to June) or any other arbitrary period.

2. Gratuity is payable for more more than six months of employment. If the period of employment is less than 6
months, no gratuity is payable.

3. As stated above, employer is required to provide only one benefit: Gratuity or Provident Fund or Pension Fund.
However, under a collective agreement/memorandum of understanding, the employer may provide multiple benefits or
the rate of gratuity may be raised from 30 days' wages to 40-45 days' wages.

4. Unlike Bonus or workers' participation in profits, gratuity has no connection with the financial position of the
employer. It must be paid to an eligible worker at the end of service, whether by superannuation or resignation or death
or termination (for any reason other than misconduct).