21.1.12 Query on Gratuity

Enquiry:

An industrial undertaking pays gratuity to the employee who completes one year of service equal to last month drawn salary and is not following strictly the provisions of law that employee is entitled to gratuity equal to last drawn salary x no. of years of service at the time he leaves the service.

Further information

1. Accounting policy describes that gratuity is paid every year to the eligible person.
2. Gratuity paid every year is disclosed in the final accounts.
3. Employment agreement mentions that gratuity will be paid every year.
4. Employee has acknowledged the receipt of amount of gratuity.

Please advise:

1. Under the circumstances, are the accounts misstated?
2. Is company liable to pay some amount to employee on account of gratuity who leaves the service say after 5 years while he has been receiving his gratuity every year in accordance with terms of employment?
3. How auditor should give his audit report in respect of gratuity? Or there is no need of mentioning anything?

Kindly give definite/specific answers, please do not reproduce the Standard.

Opinion:

The Industrial & Commercial Employment (Standing Orders) Ordinance 1968 is applicable to all industrial and commercial establishments employing more than twenty workmen at any time during the preceding twelve months. For certain Standing Orders (S.O.) including the S.O. No. 12 (6) relating to termination of employment and payment of terminal benefits etc. the minimum number of persons employed is required to be 49 for Industrial undertakings and 20 for other undertakings. The relevant provisions of the S.O. No. 12 are reproduced below for reference:

12. Termination of employment.–

(1) For terminating employment of a permanent workman, for any reason other than misconduct, one month’s notice shall be given either by the employer or the workman. One month’s wages calculated on the basis of average earned by the workman during the last three months shall be paid in lieu of notice.

(6) Where a workman resigns from service or his services are terminated by the employer, for any reason other than misconduct, he shall, in addition to any other benefit to which he may be entitled under this Ordinance or in accordance with the terms of his employment or any custom, usage or any settlement or an award of a Labour Court under the [Punjab Industrial Relations Act 2010 (XIX of 2010)], be paid gratuity equivalent to [thirty 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 (XLIX of 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.

From the plain reading of the above two paragraphs it appears that gratuity under S.O. No.12 (6) (normally called Statutory Gratuity) is in addition to all other terminal benefits {except as mentioned in two provisos to S.O. No.12(6)} and can only be paid after termination of employment for any reason or resignation from service. The payment along with current pay does not, prima facie, seem to be aligned to the requirements of S.O. No.12 which deals with matters arising on and after the termination of the employment. You may interpret the inquired questions based on the above guidance provided by the Committee.

Further, considering that your query involves interpretation of the law, you are advised to seek legal opinion for more clarity and understanding.

(April 25, 2016)