Wages III: The Payment of Gratuity Act 1972 and the Employees' Provident Funds and Miscellaneous Provisions Act 1952, and their Place in the Code on Social Security 2020

Gratuity began as a reward for long and faithful service and became, through awards and the Payment of Gratuity Act 1972, a statutory retirement benefit. The Act applies to every factory, mine, oilfield, plantation, port and railway company, to every shop or establishment in which ten or more persons are employed, or were employed on any day of the preceding twelve months, and to other establishments the Central Government notifies; once it applies, it continues to apply even if the number falls below ten. An "employee" is any person employed on wages to do any skilled, semi-skilled, unskilled, manual, supervisory, technical or clerical work, other than a person holding a post under the Central or a State Government governed by other rules; teachers were brought in by an amendment of 2009, after the Supreme Court had held in 2004 that they were outside the definition. Gratuity is payable on the termination of employment after continuous service of not less than five years, on superannuation, on retirement or resignation, or on death or disablement due to accident or disease — and in the last case the five-year condition does not apply (section 4(1)).

"Continuous service" (section 2A) is uninterrupted service, and it is not interrupted by sickness, accident, leave, absence without leave (unless treated as a break), lay-off, a strike that is not illegal, a lockout, or a cessation of work not due to the employee's fault. An employee who has not been in uninterrupted service for a year is deemed to have been in continuous service if he actually worked at least 240 days in the preceding twelve months (190 days if employed below ground in a mine or in an establishment working fewer than six days a week). Maternity leave counts as service, up to the period the Central Government notifies under the 2018 amendment.

For every completed year of service, or part of a year in excess of six months, the employer pays gratuity at the rate of fifteen days' wages based on the rate of wages last drawn (section 4(2)). "Wages" means all emoluments earned while on duty or on leave, which in practice is basic wages plus dearness allowance, excluding bonus, commission, house rent allowance, overtime and other allowances. For a monthly-rated employee, fifteen days' wages are calculated by dividing the monthly rate of wages last drawn by twenty-six and multiplying by fifteen — the twenty-six-day convention reflects a month of twenty-six working days. For a piece-rated employee the daily wage is the average of the total wages for the three months before termination; in a seasonal establishment, gratuity is seven days' wages for each season. So gratuity = last drawn monthly wages × 15 ÷ 26 × completed years of service. An employee whose last monthly wages (basic plus DA) were ₹26,000 and who served twenty years receives 26,000 × 15 ÷ 26 × 20 = ₹3,00,000.

Gratuity is subject to a ceiling (section 4(3)) that has been raised over time: ₹10 lakh from 2010, and, after the Payment of Gratuity (Amendment) Act 2018 allowed the Central Government to fix the ceiling by notification, ₹20 lakh from 2018. Because the ceiling is now a matter of notification, the current figure should be checked. An employer may pay better terms under an award, agreement or contract (section 4(5)). Gratuity may be forfeited to the extent of the damage caused, where service is terminated for an act, wilful omission or negligence causing damage to the employer's property; and wholly or partially where service is terminated for riotous or disorderly conduct or violence, or for an offence involving moral turpitude committed in the course of employment (section 4(6)). Every employee must make a nomination (section 6). Gratuity must be paid within thirty days of its becoming payable, with simple interest for delay (section 7), and is determined, in dispute, by a controlling authority, with an appeal. It is protected from attachment in execution of a court decree (section 13), and employers must insure their liability for it, unless exempted (section 4A, inserted in 1987).

The EPF and MP Act 1952 provides compulsory contributory provident fund, pension and deposit-linked insurance for employees in factories and establishments. It applies to every factory engaged in an industry specified in Schedule I in which twenty or more persons are employed, and to any other establishment employing twenty or more persons that the Central Government notifies; an establishment with fewer may be covered voluntarily if the employer and the majority of employees agree, and coverage, once it applies, continues even if the number falls. It is administered by the Employees' Provident Fund Organisation under a tripartite Central Board of Trustees chaired by the Union Minister of Labour, with the Central Provident Fund Commissioner as chief executive. Three schemes operate under it: the Employees' Provident Fund Scheme 1952; the Employees' Deposit Linked Insurance Scheme 1976, which pays a lump sum to the nominee of a member who dies in service; and the Employees' Pension Scheme 1995, which replaced the Family Pension Scheme of 1971.

The provident fund accumulates with interest at a rate declared each year and may be withdrawn on retirement or leaving employment, with partial withdrawals and advances allowed for housing, illness, education and marriage; since 2014 each member has a portable Universal Account Number. A pension is payable under the 1995 scheme to a member with at least ten years of pensionable service, from fifty-eight (earlier at a reduced rate), with a minimum monthly pension fixed by the government, and family pensions to survivors. The Supreme Court held in 2019 that special allowances paid universally to all employees are part of "basic wages" for contributions, so that an employer cannot shrink contributions by splitting pay into allowances; and in 2022 it largely upheld the 2014 amendment to the pension scheme while allowing eligible members an option to seek pension on higher actual wages.

The Code on Social Security consolidates nine Acts, the Gratuity Act and the EPF Act among them, and keeps both schemes in their own chapters. The gratuity chapter keeps the ten-employee coverage, the five-year condition (waived on death or disablement), the fifteen-days'-wages formula and the ceiling by notification; it reads five years as three for working journalists, carrying forward the rule of the Working Journalists Act; and it makes a fixed-term employee entitled to gratuity on a pro rata basis for the period of his contract, without the five-year condition, so that a worker engaged on successive fixed terms is not denied it. The provident fund chapter keeps the twenty-employee threshold and the EPFO and Central Board, and empowers the Central Government to frame the schemes and to apply them to other establishments. Both benefits are computed on "wages" as the Code defines them, with the rule that excluded allowances beyond half of total remuneration are added back — which, for employers who kept basic pay low, raises the base on which provident fund and gratuity are paid.