Educational Law

Gratuity Law in Pakistan

Gratuity is a one of the retirement benefits for long service. Before May 1972, the payment of gratuity by employer was on voluntary basis, after that it was incorporated in Standing Orders and becomes a statutory obligation of employers. Since then payment of gratuity is a legal benefit of eligible worker.

There are three different retirement benefits defined in Standing Order 12(6) i.e. “Gratuity” or “Provident Fund” or “Approved Pension Fund”. The establishment employing or employed certain number of workers is legal liable to offer at least any one of the retirement benefit.

S.O 12(6) of W.P. Industrial & Commercial (Standing Orders) Ordinance, 1968 defines, “where a workman resigns from service or services are terminated by the employer, for any reason other than misconduct, shall be entitled for gratuity equivalent to thirty (30) days wages, calculated on the basis of the (wages admissible to him in the last month of service if he is a fixed-rated workman or the highest pay drawn by him during the last twelve months if he is a piece-rated workman), for every completed year of service or any part thereof in excess of six months: provided that, where the employer has established a provident fund to which the workman is a contributor and the contribution of the employer to which is not less than the contribution made by the workman, no such gratuity shall be payable for the period during which such provident fund has been in existence. Provided further that if through collective bargaining the employer offers and contributes to an “Approved Pension Fund” as defined in the Income Tax Ordinance, 2001, and where the contribution of the employer is not less than fifty per cent of the limit prescribed in the aforesaid Ordinance, and to which the workman is also a contributor for the remaining fifty per cent or less, no gratuity shall be payable for the period during which such contributions has been made.]”

Which Establishment is Liable to Pay Gratuity?

As per Section 1 of the Ordinance, the provision of gratuity becomes applicable to: every commercial establishment employing or employed twenty or more workmen and every industrial establishment employing or employed fifty or more workmen, on any day during the preceding twelve month.

When Gratuity becomes payable?

Gratuity becomes payable at time of separation from services which could be: (i) by resignation by the workman, (ii) termination of services by employer due any reason other than misconduct (in case of proved misconduct employer is not bound to pay gratuity), (iii) in case of death and (iv) retirement or superannuation of a worker.

Who is entitled for Gratuity?

  • There are following conditions to check the entitlement of gratuity:provision of statutory gratuity is applicable on the establishment i.e. industrial or commercial, in respect to number of workmen employed, as explained above.
  • employee is a “workman” as defined in Section 2(i) of this Ordinance as someone who is employed to do any skilled or unskilled, manual or clerical work. According to various Courts judgments, it is the nature of duties he is performing rather than his designation or wages which determine whether he is a “workman” or not.
  • length of service should be excess to six months or more.

Rate of Gratuity

Earlier the rate of gratuity was 15-days of wages for each completed year of service and later on it was revised as 20-days wages. Right now the present rate of gratuity is 30-days wages for every completed year of service or for any period in excess of six month in the same establishment.

How to calculate the amount of Gratuity payable?

Following is procedure to calculate the payable gratuity of an eligible worker:

  1. Calculate per day wage rate based on 26-days in a month, by dividing monthly wages by 26-days;
  2. Rate per day is multiplied by rate of gratuity which is 30 days wages (i.e. per day wage x 30); and
  3. Finally calculate payable amount of gratuity for the entire service period, the formula is per day wage x 30 (rate of gratuity) x No. of service years

Six-month rule is followed to decide whether to pay gratuity for the last year of service depending upon whether the service is more or less than six months. For service of more than six months, gratuity is payable otherwise not.

The 26-days month is defined in the Explanation of Section 3 of the Minimum Wages for Unskilled Workers Ordinance, 1969 i.e. “month” means a normal working period of twenty-six days calculated at the rate of forty-eight hours of work per week. Similarly the minimum wages for skilled and semi-skilled workers is also based on 26 days in a month. The yearly provincial gazettes specify the same for these categories of workers.

Meaning of Wages for Calculation of Gratuity

All payments or allowances which are regular, permanent and non-contingent in nature, no matter by what name they are called, are included in wages for the purpose of gratuity. Any payments which are irregular (unpredictable and/or depend on the goodwill of employer) orcontingent in nature (payable upon existence or disappearance of certain conditions (e.g., profit) which could not be predicted in advance) then those payments are not part of wages for the purpose of calculating gratuity.

In the case of fixed-rated worker, gratuity is to be calculated on the basis of wages admissible to worker in the last month of service.

In the case of piece-rated worker, gratuity is to be calculated on the basis of highest pay drawn during the last twelve months, for every completed year of service or any part thereof in excess of six months.

Payment of Gratuity in case of Death of Worker

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”. The Commissioner shall proceed with the allocation of the deposit amount to the dependents of the deceased in accordance with the provisions of Section 8 of the Workmen’s Compensation Act, 1923. If the employer fails to deposit the gratuity amount then the dependents of the deceased may submit an application to Commissioner for the recovery.

Important points to be remembered regarding payment of gratuity:

  • Gratuity has no connection with loss or profit or the financial position of an employer; it has to be paid to eligible worker.
  • Completed year of service means a period of 12-months service counted from the date of first appointment in the same establishment. It does mean calendar year, financial year or any other period.
  • The period of service which is 6-months or less, will not be considered for payment of gratuity.
  • Retirement on attaining the age of superannuation is treated as termination of service by employer and voluntary retirement is considered resignation by worker.
  • Legally employer is bound to offer only one retirement benefit out of three. However, employer at its sole discretion may also offer provident fund or worker unions have to right to negotiate and get more benefits simultaneously.
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