India: Payment Of Gratuity Act, 1972 - The Case Of Computation

Last Updated: 13 February 2019
Article by Malavika Menon and Shambhawi Sinha


The incumbent government in its interim budget presented on 1st February 2019 has raised the gratuity limit to Rs. 30 Lakhs. This increase in the gratuity ceiling is another step towards labour welfare in line with the socialist principles laid down in the Constitution of India ("Constitution").

Provisions on labour upliftment find ample place in the Constitution. Labour is a subject in the concurrent list i.e. both the Central and State Governments are competent to enact legislations on the same. In addition to the basic fundamental rights provided to all citizens under Chapter III of the Constitution, the Directive Principles of State Policy under Chapter IV of the Constitution also provide for various safeguards. To enumerate a few; (i) Article 39 provides that the State shall direct its laws/policies towards equal pay for equal work, health and strength of workers and ensuring that citizens are not abused or forced by economic necessity to enter avocations unsuited to their age or strength; (ii) Article 42 provides that the State shall make provisions for securing just and humane conditions of work and for maternity relief; (iii) Article 43 states that the State shall endeavour to secure, by suitable legislation or economic organisation or in any other way, to all workers (agricultural, industrial or otherwise), work, living wages and work conditions ensuring a decent standard of life.

India has sought to achieve its labour welfare objectives through enactment and implementation of various labour legislations which encompass issues like disputes, terms and conditions of employment, unions, wages, compensation, pension, safety, leave, gratuity, harassment, insurance, maternity benefits etc.


Amongst a plethora of labour related statutes, is the Payment of Gratuity Act 1972 ("the said Act"), a labour welfare legislation which deals with payment of gratuity to employees. The said Act does not define gratuity but in general terms gratuity may be understood as a lumpsum payment given to long term employees for their service and dedication at the end of their employment with the employer. Naturally, all long-term serving employees look forward to and consider gratuity as one of their major retirement benefits.

In this article, we discuss the applicability of the said Act and how sometimes in reality due to lack of transparency on the subject, employees might be under the wrong impression of being entitled to gratuity. We seek to provide some clarity on whether third party support staff, interns, and directors of a company are to be considered as 'employees' for the purposes of computation of number of employees to test the applicability of the said Act to an employer.

As per S.1(3), the said Act it is applicable to:

  1. every factory, mine, oilfield, plantation, port and railway company;
  2. every shop or establishment within the meaning of any law for the time being in force in relation to shops and establishments in a State, in which ten or more persons are employed, or were employed, on any day of the preceding twelve months;
  3. such other establishments or class of establishments, in which ten or more employees are employed, or were employed, or, any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf.

The hon'ble Supreme Court ("SC") in State of Punjab vs. Labour Court Jullunder and Ors. (AIR1979SC1981) observed that, there is no warrant for limiting the meaning of the expression '"law" in Section 1(3)(b). The expression is comprehensive in its scope, and can mean, a law in relation to shops as well as, separately, a law in relation to establishments, or a law in relation to shops and commercial establishments and non-commercial establishments. Therefore, because the expression 'establishments' has been left unqualified by the legislation, it is very wide in its scope and as a result, employers often are unable to evade the said Act on this particular ground.

However, the said Act is categoric in its applicability to only those employers who have a minimum number of 10 (ten) employees. Should this condition not be met with, the said Act would not be applicable to the concerned employer.


S.2(e) of the said Act defines 'employee' as follows:

"employee" means any person (other than an apprentice) who is employed for wages, whether the terms of such employment are express or implied, in any kind of work, manual or otherwise, in or in connection with the work of a factory, mine, oilfield, plantation, port, railway company, shop or other establishment to which this Act applies, but does not include any such person who holds a post under the Central Government or a State Government and is governed by any other Act or by any rules providing for payment of gratuity;

From a bare reading of the definition, it is clear that the 'employee' should be employed for wages i.e. the employee must exist on the payroll of the employer and there must ideally be direct payment of wages by the employer to him/her.

Third Party Support Staff

In most cases the support staff of an employer are outsourced through a staffing agency or a contractor under a contract or agreement. The staffing agency or the contractor (as the case maybe) raises regular invoices for the services performed by its workers for the employer and the same is paid by the employer to the staffing agency or contractor. There is no direct payment to the support staff by the employer. In essence, this is simply a contract labour structure of employment.

An employer has no direct financial obligation towards the support staff and does not exercise any real control over them. A certain degree of control over the support staff by the employer for supervision of day-to-day work would not make a support staff an employee of the employer.

In International Airport Authority of India v. International Air Cargo Workers' Union (2009)13SCC374, it was observed by SC that:

"if the contract is for supply of labour, necessarily, the labour supplied by the contractor will work under the directions, supervision and control of the principal employer but that would not make the worker a direct employee of the principal employer, if the salary is paid by a contractor, if the right to regulate the employment is with the contractor, and the ultimate supervision and control lies with the contractor"

Therefore, the support staff are actually employees of the staffing agency or contractor (who shall be a 'contractor' in terms of Contract Labour Regulation and Abolition Act, 1970) and the employer is merely the principal employer. In other terms, the support staff do not share an 'employer-employee' relationship with the employer.

In Workmen of Nilgiri Co-operative Marketing Society Ltd. v. State of T.N. (2004)3SCC514, with respect to employer-employee relationship, SC observed that:

"The control test and the organization test, therefore, are not the only factors which can be said to be decisive. With a view to elicit the answer, the Court is required to consider several factors which would have a bearing on the result: (a) who is the appointing authority; (b) who is the paymaster; (c) who can dismiss; (d) how long alternative service lasts; (e) the extent of control and supervision; (f) the nature of the job e.g. whether it is professional or skilled work; (g) nature of establishment; (h) the right to reject."

Therefore, unless an employer-employee relationship is established, in general cases, support staff will not be construed as 'employees' and cannot be considered while computing the number of employees to determine the applicability of the said Act. Further, in terms of S.21(4) of the Contract Labour Regulation and Abolition Act, 1970 only in the event where the 'contractor' fails to make the payment of wages, the principal employer shall be liable to make payment of wages in full or the unpaid balance dues, as the case may be, to the contract labour employed by the contractor and would have the right to recover the amount so paid from the contractor. Therefore, even in a case where the said Act is applicable to an employer, even then the employer's liability would only be secondary to contractor's primary duty of making payments to the contract labour.


Interns are usually graduate or post graduate students scouting for work experience and are not bound by any contract of employment and do not receive any wages. Occasionally, interns receive a stipend which is a discretionary payment. As a concept, internships per se are not governed by any statute. Further, the definition of 'employee' expressly excludes apprentice. An 'apprentice' means a person who is undergoing apprenticeship training in pursuance of a contract of apprenticeship. Although strictly speaking, an intern is not an apprentice and therefore not covered under the Apprentices Act, 1961; internship and apprenticeship are more or less of the same nature as both aim to provide training and skill development opportunities. As is the case with apprenticeship, the purpose of these internships is to give on-job practical training to students for a certain period of time and such internships are often part of the curriculum of educational institutions. Therefore, by implication it can be concluded that even interns by virtue of their status being similar to apprentices will not fall within the definition of 'employee' and thus shall lie outside the ambit of the said Act.


The Companies Act, 2013 defines 'director' as a director appointed to the Board of a company and "Board" has been defined to mean the collective body of the directors of the company. At the outset it must be highlighted that directors are entitled to gratuity in terms of Part IV of Schedule V of the Companies Act, 2013. However, the question is whether they are to be considered as 'employees' of a company.

In general cases, directors draw a flexible remuneration depending on profits and do not draw wages which are paid to employees irrespective of any profit or loss of a company but this alone does not pull out directors from the definition of 'employee' especially if there is a contract of employment executed between the company and director. However, whether a director is a servant i.e. employee or an agent of a company needs to be decided on a case to case basis and not by applying any blind yardstick. The answer as to whether a director can be considered an employee or not will depend on a multitude of factors as can be understood from the following judgments:

In Employees' State Insurance Company Vs. Apex Engineering Private Limited (1998)1SCC86 it was held by SC that:

"a Director of a company is not a servant but an agent inasmuch as the company cannot act in its person but has only to act through Directors who qua the company have the relationship of an agent to its principal, though a Managing Director could have a dual capacity, both as a Director and as an employee, depending upon the nature of work and the terms of his employment.."

In Comed Chemicals Ltd. Vs C.N. Ramchand AIR2009SC 494, it was observed by SC that:

"Now, it is well settled that a Director is not a mere employee or servant of the Company. In Lee v. Lee's Air Framing Ltd. 1961 AC 12, it was held that a Director is a controller of the company's affairs and is not a mere servant of the Company. Such Director may have to work also as an employee in a different capacity. Gower and Davies' Principles of Modern Company Law, (17th Edn. pp. 370-76) also deals with duties of Director viz-a-viz as an employee of the Company and makes it clear that a Director per se cannot be said to be an employee or servant of the Company."

The judicial treatment which will be meted out to a managing director in terms of his position as an employee is more clear as can be seen from the case of Employees' State Insurance Company vs. Apex Engineering Private Limited cited above. Further, in line with the Companies Act 2013, the hon'ble SC in case of Ram Pershad vs The Commissioner of Income Tax, New Delhi AIR1973SC637 observed that:

"The nature of his employment may be determined by the articles of association of a company and/or the agreement if any, under which a contractual relationship between the Director and the company has been brought about, where under the Director is constituted an employee of the company, if such be the case, his remuneration will be assessable as salary under Section 7. In other words, whether or not a Managing Director is a servant of the company apart from his being a Director can only be determined by the articles of association and the terms of his employment.

Generally it may be possible to say that the greater the amount of direct control over the person employed, the stronger the conclusion in favour of his being a servant. Similarly the greater the degree of independence the greater the possibility of the services rendered being in the nature of principal and agent. It is not possible to lay down any precise rule of law to distinguish one kind of employment from the other.."

Therefore, the overall test for determining whether a director is employed by a company or not is dependent on the degree of supervision and control exercised upon him. The same would have to be deduced from the articles of association of the concerned company and employment agreements (if any) to ascertain various factors like: whether the person draws his powers/authority from the articles of association and/or employment agreement; the designation given to him; limitations (if any) imposed upon the exercise of his powers; nature of his service; extent of his independence in his employment etc.


In view of the aforementioned, the employees should be careful with respect to their position as an 'employee' at their workplaces and whether their relationship with the employer is actually of an 'employer-employee' or not. An establishment having 10 (ten) or more people may prima facie appear to be covered under the said Act and although the judiciary is usually liberal in its interpretation and application of social welfare legislations, that does not mean that an employer can be forced to pay gratuity if he legitimately falls outside the ambit of the said Act.

The employees should make themselves more aware of the applicability of the said Act to avoid any future disputes. One of the easiest ways of ensuring the same is to check whether an employer has complied not only with the said Act but also with the provisions of the Payment of Gratuity Central Rules 1972. For example, whether the employer has filed Form A 'Notice of Opening' (applicable to all establishments who are covered under the said Act) with the concerned controlling authority under rule 3(1); or if the employer displays a notice of the designated officer as required under rule 4(1); or if the employer displays a synopsis of the said Act and rules as given in FORM U 'Abstract of the Act and Rules' in its premises under rule 20.

This raise in the gratuity ceiling is certainly good news for the working people. However, the applicability and benefit of what seems to be a pretty straightforward social statute, will vary on a case to case and specifically even more on an employee to employee basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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