Unit II

WAGES, BONUS AND GRATUITY

CHAPTER-1

Concept of Wages

I. Origin and Introduction of Wages

II. Concept and Theories of Wages
III. Theories of Wages
a. Wages Fund Theory
b. Subsistence Theory
c. The Surplus Value Theory of wages
d. Residual Claimant Theory
e. Marginal Productivity Theory
f. The Bargaining Theory of Wages
g. Behavioural Theories of Wages
IV Kinds of Wages
- Meaning and Definitions
- Classification Wages
a. Subsistence Wage
b. Minimum Wage
c. Fair Wage
d. Living Wage
V The Minimum Wages Act, 1948
Salient features of the Act
1)Definitions
2) Fixation and Revision of Minimum Rates of Wages under the Act
Payment of Minimum Wages.

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 Concept of Wages

I) Origin and Introduction of Wages

Wage is a reward for the services rendered or remuneration for the work done and it is as
old as the society itself. In the primitive days, wages were paid in kind, most common of them
was grains and the food. But with the advent of industrialisation wages form a complex problem
and in almost all industrialised countries it became a sensitive area of public policy. Very soon
the quantum of wages assumed a common cause of friction between the employers and the wage-
earners. Frequent disputes between employer and wage-earners resulted in strikes over the
demand for wage-increase. The determination of adequate wages that should be justifiably
payable to the workmen by the employer, was not merely an economic problem but a
multidimensional phenomena, necessarily involving relevant factors like place of industry, prices
of the product, living standards, basic needs of die wage-earner and the governmental policy in a
given society. The natural instinct of the employer to keep the wage-bill to a minimum and
workers struggle to secure a wage-increase to meet both ends, created a chaotic situation which
demanded an immediate State’s intervention to protect the weaker section of the society, namely,
workers, in view of its low bargaining capacity.

How much and on which basis wages should be paid to the workers for services rendered
by them has been a subject matter of great concern and debate among economic thinkers for a
long time. This has given birth to several wage theories, i.e. how wages are determined. Out of
them, some important theories of wages are discussed here.

II) Concept and Theories of Wages

- Concept of Wages

Theories of wages are nothing but a series of systematic attempts to explain what does
determine the level of wage. They portray picture on the diagram of the way in which wages as
the price of labour power are connected with other prices and other economic quantities. For
almost two countries how they have been developed and have had to be built out of a highly
simplified picture of the real world, sketching on the broad outlines of the more obvious features,
on the basic of general knowledge or else of interference as to the general shape which things

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have. Wage theory has gone through three stages of development since the middle ages, as
detailed below:

The "Just Wage" of the Middle ages-

The first was the medieval period of church domination, with the doctrine of the "Just
Price" which meant in reality a just wage, whether for the trader or the craftsman; it was that
price of his wares which would enable him to maintain himself and his family according to their
established position in the community. The just price was concocted by churchmen and given a
moral flavour to support the status it is a relic of a static society, from which both intellectual and
natural progress were absent, and it might seem to be merely historical interest, nevertheless,
there are vestigial remnants of the just wage in some of the more advanced societies of modern
time. The allowances and privileges enjoyed by certainroy and privileged class of families in the
society are instances explaining their existence even today.

III) Theories of Wages

1) Wages Fund Theory:
This theory was developed by Adam Smith (1723-1790). His theory was based on the
basic assumption that workers are paid wages out of a pre-determined fund of wealth. This fund,
he called, wages fund created as a result of savings. According to Adam Smith, the demand for
labour and rate of wages depend on the size of the wages fund. Accordingly, if the wages fund is
large, wages would be high and vice versa.
2) Subsistence Theory:
This theory is propounded by David Recardo (1772-1823). According to this theory, “The
labourers are paid to enable them to subsist and perpetuate the race without increase or
diminution”. This Payment is also called as “Subsistence wages”. The Basic assumption of this
theory is that if workers are paid wages more than subsistence level workers’ number will
increase and, as a result wages will come down to subsistence level. On the contrary, if workers
are paid less than subsistence wages, the number of workers will decrease as a result of
starvation death: malnutrition, disease etc. and many would not marry. Then, wage rates would
again go up to subsistence level. Since wage rate tends to be at, subsistence level at all cases, that

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is why this theory is also known as “Iron Law of Wages”. The subsistence wages refers to
minimum wages.
3) The Surplus Value Theory of Wages:
This theory was developed by Karl Marx (1849 – 1883). This theory is based on the basic
assumption that like other article, labour is also an article which could be purchased on payment
of its price i.e., wages. This payment, according to Karl Marx, is at subsistence level which is
less than in proportion to time labour takes to produce items. The surplus, according to him, goes
to the owner. Karl Marx is well known for his advocation in favour of labour.
4) Residual Claimant Theory:
This theory owes its development to Francis A. Walker (1840-1897). According to
Walker, there are four factors of production or business activity, viz., land, labour, capital and
entrepreneurship. He views that once all other three factors are rewarded what remains left is
paid as wages to workers. Thus, according to this theory, worker is the residual claimant. He can
claim only in case of residue which remains after deducting all the capital expenses under a
production.
5) Marginal Productivity Theory:
This theory was propounded by Phillips Henry Wick-steed (England) and John Bates
Clark of U.S.A. According to this theory, wages is determined based on the production
contributed theory, wages is determined based on the production contributed by the last worker,
i.e., marginal worker. His/her production is called ‘marginal production’.
6) The Bargaining Theory of Wages:
John Davidson was the profounder of this theory. According to this theory, the fixation of
wages depends on the bargaining power of workers/trade unions and of employers. If workers
are stronger in bargaining process, then wages tends to be high. In case, employer plays a
stronger role, then wages tends to be low.
7) Behavioural Theories of Wages:
Based on research studies and action programmes conducted, some behavioural scientists
have also developed theories of wages. Their theories are based on elements like employee’s
acceptance to a wage level, the prevalent internal wage structure, employee’s consideration on
money or wages and salaries as motivators.

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 IV)Kinds of Wages
Meaning and Definition
In the ordinary language the term wages implies ‘reward’ to the labourers for the services
rendered by them. It may be paid daily, weekly, fortnightly, monthly, per hour or per unit.
Services rendered by the labourer include both physical and mental services.
In the words of Benham, “Wages are a sum of money paid under contract by an employer
to a worker for services rendered”.
According to ILO “Wages refer to that payment which is made by the employers to the
labourer for his services hired on the conditions of payment per hour, per day, per week or per
fortnight.” We can sum up the wages by referring to that reward which is received from the
employer for the services rendered by the labourer per week, per month, per fortnight or per unit,
it includes allowances also.

Classification of Wages
Subsistence Wage :- The wage that can meet only bare physical needs of a worker and his
family is called subsistence wage.
Minimum Wage: - Justice Higgin propounded the concept of minimum wages as the
irreducible level of wage paid to an unskilled worker, considering him a human being living in a
civilized society. In this single sentence, he indicated three important considerations, namely:
(1) That minimum wage is an irreducible level which cannot be further reduced;
(2) It is paid to an unskilled worker who has not undergone any expensive training to acquire
skill;
(3) The worker is to be considered a “human being living in a civilized society and therefore
he is entitled to same basic needs of food clothing and shelter which any other human
being requires. Thus according to Justice Higgins a minimum wages is that irreducible
wage, which should enable the worker to get three basic necessities of life, i.e., food,
clothing and shelter.
Fair Wage: - Fair Wages is an adjustable step that moves up according to the capacity of the
industry to pay and the prevailing rates of wages in the area of industry.

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Living Wage: - Having described the minimum wage to provide for food, clothing and shelter as
a basic and irreducible level of wage, Justice Higgins developed his concept of living wage as
one which should not only provide for food, clothing and shelter but for some frugal comfort of
life, good education to children, some amusement and provision for sickness and old-age
including some measure of social security. Again die frugal comfort should be such as measured
at the changing values at a given time.
It is pertinent to note that the above concept of living wage, as described by Justice
Higgins is also endorsed by Supreme Court in the Express Newspaper (P) Ltd. V. Union of India
– Therefore die living wage should enable the wage-earner to provide for himself and his family
not only for the three basic necessities of life, namely, food, clothing and shelter, but also for
frugal comforts, good education to children, protection against ill-health and a measure of
insurance against the more important misfortune including old-age. In any event the minimum
wage must be paid irrespective of the extent of profits, the financial condition of the
establishment or the availability of workmen at lower wages. The wages must be fair, i.e.,
sufficiently high to provide standard family with food, shelter, clothing, medical care and
education of children appropriate to the workmen. A fair wage lies between the minimum wage
and the living wage which is the goal. Wages must be paid on an industry wise and region basis
having due regard to the financial capacity of the unit.

V) The Minimum Wages Act, 1948

The Minimum Wages Act 1948 is an Act of Parliament concerning Indian labour law that
sets the minimum wages that must be paid to skilled and unskilled labours. The Indian
Constitution has defined a 'living wage' that is the level of income for a worker which will ensure
a basic standard of living including good health, dignity, comfort, education and provide for any
contingency. However, to keep in mind an industry's capacity to pay the constitution has defined
a 'fair wage'. Fair wage is that level of wage that not just maintains a level of employment, but
seeks to increase it keeping in perspective the industry's capacity to pay.

To achieve this in its first session during November 1948, the Central Advisory Council
appointed a Tripartite Committee of Fair Wage. This committee came up with the concept of
a minimum wage, which not only guarantees bare subsistence and preserves efficiency but also
provides for education, medical requirements and some level of comfort.

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 India introduced the Minimum Wages Act in 1948, giving both the Central government
and State government jurisdiction in fixing wages. The act is legally non-binding, but statutory.
Payment of wages below the minimum wage rate amounts to forced labour. Wage boards are set
up to review the industry's capacity to pay and fix minimum wages such that they at least cover a
family of four's requirements of calories, shelter, clothing, education, medical assistance, and
entertainment. Under the law, wage rates in scheduled employments differ across states, sectors,
skills, regions and occupations owing to difference in costs of living, regional industries' capacity
to pay, consumption patterns, etc. Hence, there is no single uniform minimum wage rate across
the country and the structure has become overly complex. The highest minimum wage rate as
updated in 2012 was Rs. 322/day in Andaman and Nicobar and the lowest was Rs. 38/day in
Tripura. In Mumbai, as of 2017, the minimum wage was Rs. 348/day for a safai
karmachari (sewage cleaner and sweeper), but this was rarely paid.

Salient features of the Act –

a) The Act provides for fixation of : i) minimum time rate of wages; ii) a minimum piece
rate; iii) a guaranteed time rate; and iv) an overtime rate, for different occupations,
localities or classes of work and for adults, adolescents, children and apprentices.
b) The minimum rate of wages must consist basic rate of wages and a cost of living
allowance and it should be an all-inclusive rate.
c) Wages shall be paid in cash but with the prior approval of Appropriate Government may
pay partial wage in kinds.
d) It lays down that the cost of living allowance and the cash value of concessions in respect
of supplies of essential commodities at concessional rates shall be computed by the
competent authority at certain interval.
e) The Act empowers the appropriate Government to fix the number of hours of work per
day, to provide for weekly holiday and the payment of overtime wages in regard to any
Scheduled employment in respect of which minimum rates of wages have been fixed
under the act.
f) The establishments covered by this Act are required to maintain registers and records in
the prescribed manner.

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 g) The Act also provides for appointment of Inspectors and authorities to hear and decide
claims arising out of payment of wages.
h) The provision is also made in the Act for dealing with complaints for violation of the
provisions and for imposing penalties for the same.

1) Definitions :
Sec.2(h) provides that “Appropriate Government” means –
(i) In relation to any Scheduled employment carried on by or under the authority of the
Central Government or a railway administration or in relation to a mine, oil-field or
major port, or any corporation established by a Central Act, the Central Government,
and
(ii) In relation to any other Scheduled employment, the State Government.
In Regional Labour Commissioner, Bangalore and others v. T.K. Varkey and Company
and another((1992 I LLJ 547 Karnataka) some workers were employed by the contractor in
construction of staff quarters for Railways. The workers were being paid minimum wages at the
rates prescribed by the state government, whereas the Labour Enforcement officer’s view was
that, they should have been paid the rates prescribed by the central government. A Claim
difference between the two rates was made which has been contested. It was held that the place
where the employment is carried on and for whose benefit the employment is carried on and
under whose control the work connected with the employment is carried on are the deciding
factors in finding out whether the Appropriate Government is the Central Government or State
Government. In the instant case, the employment has taken place in the place belonging to the
Railways and the employment for the work carried on was for the purpose of construction of
staff quarters for the benefit of the Railways. The work was being carried on by or under the
authority of the Railways only. The fact that contractor had employed the workman was not a
deciding factor because actually the work was carried on by or under the authority of Railways
only. Therefore, the Central Government is the Appropriate Government and the minimum
wages shall be payable in accordance with the notification issued by the Central Government.

Section 2 (c) “competent authority” means the authority appointed by the Appropriate
Government by notification in the Official Gazette from time to time the cost of living index

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number applicable to the Employees employed in the scheduled employments specified in such
notification.

Section 2 (d) “cost of living index number” in relation to employees in any scheduled
employment in respect of which minimum rates of wages have been fixed means the index
number ascertained and declared by the competent authority by notification in the Official
Gazette to be the cost of living index number applicable to employees in such employment.
Section 2 (e) “Employer” means any person who employs whether directly or through another
person or weather on behalf of himself or any other person one or more employees in any
scheduled employment in respect of which types of wages have been fixed under this Act.
Employer includes except in sub-section (3) of Section 26-
i) in a factory there is carried on any scheduled employment in respect of which minimum rates
of wages have been fixed under this Act any person named under clause (f) of sub-section (1) of
section 7 of the Factories Act, 1948, as a manager of the factory;
ii) any scheduled employment under the control of any government in India In respect of which
minimum rates of wages have been fixed under this Act, the person or authority appointed by
such government for supervision and control of employees or where no person or authority is
appointed, the Head of the Department;
iii) in any scheduled employment under any local authority in respect of which minimum rates of
wages have been fixed under this Act, the person is appointed by such authority for the
supervision and control of employees or where no person is so appointed, the Chief Executive
Officer of the local authority;
iv) in any other case where there is carried on any scheduled employment in respect of which
minimum rates of wages have been fixed under this Act, any person responsible to the owner for
the supervision and control of the employees for the payment of wages.
A managing agent is an employer. Private Engineering contractor engaged on Government
contract or work is an employer of the drivers of the lorries which are hired out to him with the
drivers at agreed rates.
In Robert Toppo v. State of Jharkhand and others, (2003, III LLJ 810, Jha) the petitioner is
the Principal of the school in which a hall was being constructed and the labourers working in
that construction work. On the report of the Labour Enforcement Officer the order was passed to

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pay minimum wages for labourers. It was contended by the petitioner that labourers were
guardians of students and they were helping the school by ‘shramadhan’ (donation of labour),
therefore the school was not there employer. It was also contended that the order under Section
20 (2) was bad as no witnesses were examined.
It was held by the High Court that the petitioner was an employer under section 2(e) of the
Minimum Wages Act, 1948 engaging workers in a scheduled appointment. The orders were also
not bad for non-examination of witnesses as there was no mandate for such examination under
the Act of the Rules. The penalty of 5 times was reduced to 3 times in circumstances of the case.

Section 2(g) “Scheduled employment” means an employment specified in the schedule, or any
process or branch of work forming part of such employment. The schedule is listed in 2 parts as
appended to enactment.
In Chattaram Darsanram v Union of India, a petition for quashing the notification dated
28th May, 1976 by the Central Govt. revising the minimum wages of the workmen employed in
the Mica mines was filed. The question was whether workmen working in mine were working in
scheduled employment.
It was held that item No.10 of Part I of the Schedule relates to employment in any ‘mica
works’ and not ‘mica mines’. The connotations of ‘mica mines’ and ‘mica works’ are different.
It would not be reasonable to read ‘mica mines’ in the expression ‘mica works’. Thus ‘mica
mines’ is not included in the Schedule and as the inclusion of an employment in the Schedule is a
condition precedent for issuing any notification fixing minimum wages is ultra vires.
In Ahmedabad Panjrapole Sanstha v. Miscellaneous Mazdoor Sabha and others, the
petitioner Sanstha is engaged in the activity of taking care for sick and lame cattle and to
maintain them. The Sanstha has other objects such as raising of cattle improving the breed,
caring for the cattle, to run a dairy form in order to supply good milk and ghee in the interest of
public and to grow grass to cut it or have it cut and to buy or sell the same. It has lands in
different villages and it earns rental and other income and also agricultural income besides
income earned by sale of wood, wool, manure etc. It has its branch at Vastrapur where cattle are
put for treatment. It was held that having regard to the activities of the Panjrapole Sanstha, it is a
‘commercial establishment’ attracting Minimum Wages Act. The Vastrapur branch of Sanstha is

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not a separate establishment and the fact that the other branches have not demanded minimum
wage will not affect the right of the workmen.

Sec.2(h) “Wages” – ‘Wages’ means all remuneration, capable of being expressed in terms of
money, which would if the terms of the contract of employment, express or implied, were
fulfilled, be payable to person employed in respect of his employment or of work done in such
employment and includes house rent allowance.

Wages do not include:

(i) The value of –
(a) Any house accommodation, supply of light, water, medical attendance; or
(b) Any other amenity or any service excluded by general or special order of the
appropriate Government.
(ii) Any contribution paid by the employer to any Pension Fund or Provident Fund or under
any scheme of social insurance;
(iii)Any travelling allowance or the value of any travelling concession.
Where a trip allowance was prescribed by a notification, the notification was held to
be invalid because trip allowance is meant to compensate the extra cost which an
employee is likely to incur when he moves out of his headquarter in connection with
his employment; it clearly partakes of the character of travelling allowance and
travelling allowance according to the definition of the expression “wages” cannot
form a component of the wages.
(iv)Any sum paid to the person employed to defray special expenses entailed on him by the
nature of his employment; or
(v) Any gratuity payable on discharge.
In Prern Sahyog v. Authority Under Minimum Wages Act and others, on receiving a
complaint of non-payment of wages, the Authorities under the Minimum Wages Act, 1948
ordered payment of eight times of wages as compensation. The Supreme Court held that the
award of compensation was too excessive and hence it was reduced to equivalent of wages
awarded to the workman.

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 In Management of Ram Krishna Pharmaceutical, Hyderabad v. State Authority under
Minimum Wages Act, 1948 and Joint Commissioner of Labour, A.P. Hyderabad and another, a
G.O. was issued fixing basic wages and the first respondent directed the petitioner to deposit
certain amount towards the difference in minimum wages payable under the G.O. and actual
wages being paid by the management. The petitioner company impugned the order of the
Authority directing it to deposit the difference in minimum wages payable under G.O. and the
actual wages paid. The High Court quashing the impugned order observed that a petitioner and
the second respondent (employees) had entered into a statutory settlement under Section 12(3) of
the Industrial Disputes Act, 1947 and as the total pay packet thereunder was higher than the
minimum wages fixed by the G.O., the impugned order could not be sustained. It was not open
to the second respondent employees to separate one component, namely, minimum basic wage
and contend that basic wages are less than the wages prescribed under the G.O.

Sec.2(i) “Employer” means any person who is employed for hire or reward to do any work,
skilled or unskilled, manual or electrical in a scheduled employment in respect of which
minimum rates of wages have been fixed. It includes:
(1) An out-worker to whom any articles or materials are given out by another person to be
made up, cleaned, washed, altered, ornamented, finished, repaired, adopted or otherwise
processed for sale for the purposes of the trade or business of that other person where the
process is to be carried out either in the home of the out-worker or in some other
premises not being premises under the control and management of that other person.
(2) An employee declared to be an employee by the appropriate Government.
It does not include any member of the Armed Forces of the Union. The definition of
employee in this Act is wide enough to include a person working on job basis or piece work.

Wage structure – Broadly speaking the wage structure can be divided into three categories –
The basic ‘minimum wage’ which provides bare subsistence and is at poverty line-level, a little
above is the ‘fair wage’ and finally the ‘living wage’ which comes at a comfort level. It is not
possible to demarcate these levels of wage structure with any precision.
Certain principles on which wages are fixed have been stated by the S/c in Kamani Metals
and Alloys v. Their Workmen, - There is a minimum wage which , in any event must be paid,

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irrespective of the extent of profits, the financial condition of the establishment or the availability
of workmen on lower wages. This minimum wage is independent of the kind of industry and
applies to all alike big or small. It sets the lowest limit below which wages cannot be allowed to
sink in all humanity. The second principle is that wages must be fair, that is to say, sufficiently
high to provide a standard family with food, shelter, clothing, medical care and education of
children appropriate for the workmen but not at a rate exceeding his wage earning capacity in the
class of establishment to which he belongs. A fair wages is thus related to the earning capacity
and workload. It must, however, be realized that “fair wage” is not “living wage” by which is
meant a wage which is sufficient to provide not only the essential above mentioned but a fair
measure of frugal comfort with an ability to provide for old age and evil days. Fair wage lies
between minimum wage, which must be paid in any event, and the living wage, which is the
goal.”
Minimum Wages – The expression “minimum wages” is not defined in the Act presumably
because it would not be possible to lay down a uniform minimum wages for all industries
throughout the country on account of different and varying conditions prevailing from industry
to industry and from one part of the country to another. It was held in Hydro (Engineers) Private
Ltd. V. The Workmen, that :-
“The concept of minimum wages takes in the factor of the prevailing cost of essential
commodities whenever such minimum wage is to be fixed. The idea of fixing such wages in the
light of cost of living at a particular juncture of time and neutralising the rising prices of essential
commodities by linking up scales of minimum wages with the cost of living index cannot,
therefore, be said to be alien to the concept of minimum wage. Furthermore in the light of
spiraling of prices in recent years, if the wage scales are to be realistic it may become necessary
to fix them so as to neutralise at least partly the price rise in essential commodities.”

Fair Wages – There is difference between minimum wages and fair wages. In case of fair wage,
besides the principle of industry-cum-region, the company’s capacity to bear the financial burden
must receive due consideration. But mere hopeful observations made in the director’s annual
report cannot be basis for awarding increased wages because such observations are sometimes
made to inspire hope and confidence in shareholders and they cannot be a substitute for actual
audited figures.

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 In S.A.F.L.Works v. State Industrial Court, Nagpur, is a leading case on the point. In this
case the Supreme Court observed that in fixing the paying capacity the Tribunal will have to fix
the income as well as permitted deductions and allowances properly incurred. There can be no
dispute that expenses incurred for purchase of raw material, maintenance of the factory, expenses
incurred towards rent, public charges, maintenance of the establishment and expenses incurred in
marketing of the produce should be deducted. These items are not exhaustive. As to whether a
particular item of expenditure is liable to be deducted or not have to be determined on the facts
of the case. No deduction should be allowed for payment of income tax or for allowances made
for depreciation or for making provision for reserve. So far as expenses incurred towards
payment of wage bill inclusive of dearness allowances, bonus, gratuity, etc. are concerned they
will have to be deducted. After properly determining the paying capacity of the industry the
Tribunal will have to proceed to fix fair wages which would include the fitment, scale of wages
and dearness allowance. While after fixing the above the Tribunal will have to determine as to
from which date retrospective effect will have to be re-determined the wage including fitment,
scale of wages, dearness allowance, period during which retrospective effect is to be given will
have to be determined afresh.
Living Wage :- The Fair Wage Committee in its report published by Government of India,
Ministry of Labour in 1949 defined the ‘living wage’ as under:
“The living wage should enable the male earner to provide for himself and his family not merely
the bare essentials of food, clothing and shelter but a measure of frugal comfort including
education for children, protection against ill-health, requirements of essential social needs, and a
measure of insurance against the more important misfortunes including old age.”

2) Fixation and Revision of Minimum Rates of Wages under the Act

Fixation of Minimum Wages [Sec.3(1)(a)] –
Section 3 lays down that the Government shall fix the minimum rates of wages which is
payable to employees in the course of employment specified in Part I and Part II of the Schedule,
and in an employment added to either part by notification under Section 27. In case of the
employments specified in Part II of the Schedule, the minimum rates of wages may not be fixed
for the entire State. Parts of the State may be left out altogether. In the case of an employment
specified in Part I, the minimum rates of wages must be fixed for the entire State, no parts of the

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State being omitted. The rates to be fixed need not be uniform. Different rates can be fixed for
different zones or localities.
The constitutional validity of Sec.3 was challenged in Bejoy Cotton Mills v. State of
Ajmer, the S/c held that restrictions imposed upon the freedom of contract by the fixation of
minimum rate of wages, though they interfere to some extent with freedom of trade or business
guaranteed under Art.19(1)(g) of the Constitution, are not unreasonable and being imposed and
in the interest of general public and with a view to carrying out one of the Directive Principles of
the State Policy as embodied in Article 43 of the Constitution, are protected by the terms of
Clause (6) of Article 9.
Notwithstanding the provisions of Section 3(1)(a), the “Appropriate Government” may not
fix minimum rates of wages in respect of any scheduled employment in which less than 1000
employees in the whole state are engaged. But when it comes to its knowledge after a finding
that this number is increased to 1000 in such employment, it shall fix minimum wage rate.

Revision of Minimum Wages

According to Section 3(1)(b), the Government may review at such intervals as it may think fit,
such intervals not exceeding five years, and revise the minimum rate of wages, if necessary. This
means that minimum wages can be revised earlier than five years also.
According to Section 3(2), the Government may fix minimum rate of wages for:
1. Time work, known as Minimum Time Rate;
2. Piece work, known as Minimum Piece Rate;
3. A “Guaranteed Time Rate” for those employed in piece work for the purpose of securing
to such employees a minimum rate of wages on a time work basis; (This is intended to
meet a situation where operation of minimum piece rates fixed by the appropriate
Government may result in a worker earning less than the minimum wage), and
4. A “Over Time Rate” i.e. minimum rate whether a time rate or a piece rate to apply in
substitution for the minimum rate which would otherwise be applicable in respect of
overtime work done by the employee.
Section 3(3) provides that different minimum rates of wages may be fixed for –
1. Different scheduled employments;
2. Different classes of work in the same scheduled employments;

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 3. Adults, adolescents, children and apprentices;
4. Different localities.
Further, minimum rates of wages may be fixed by any one or more of the following wage
periods namely:
1. By the hour,
2. By the day,
3. By the month,
4. By such other large wage periods as may be prescribed; and where such rates are fixed by
the day or by the month, the manner of calculating wages for a month or for a day as the
case may be, may be indicated. However, where wage period has been fixed in
accordance with the Payment Wages Act, 1986 vide Section 4 thereof, minimum wages
shall be fixed in accordance therewith [Section 3(3)].
Procedure for Fixing and Revising Minimum Wages (Section 5)
In fixing minimum rates of wages in respect of any scheduled employment for the first
time or in revising minimum rates of wages, the appropriate Government can follow either of the
two methods described below:

Firstly, [Section 5(1)(a)] This method as the ‘Committee Method’.

The Appropriate Government may appoint as many committees and subcommittees as it
considers necessary to hold inquiries and advise it in respect of such fixation or revision as the
case may be. After considering the advice of the committee or committee, the Appropriate
Government shall, by notification in the Official Gazette fix or revise the minimum rates of
wages. The wage rates shall come into force from such date as may be specified in the
notification. If no date is specified, wage rates shall come into force on the expiry of three
months from the date of the issue of the notification.
As regards composition of the Committee, Section 9 of the Act lays down that it shall
consist of persons to be nominated by the Appropriate Government representing employers and
employee in the scheduled employment, who shall be equal in number and independent persons
not exceeding 1/3 of its total number of members. One of such independent persons shall be
appointed as the Chairman of the Committee by the Appropriate Government.

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Secondly,[Section 5(1)(b)] this method is known as the ‘Notification Method’
When fixing minimum wages under Section 5(1)(b), Appropriate Government shall by
notification in the Official Gazette publish its proposals for the information of persons likely to
be affected thereby and specify a date not less than 2 months from the date of notification, on
which the proposals will be taken into consideration. The representations received will be
considered by the Appropriate Government. It will also consult the Advisory Board constituted
under Section 7 and thereafter fix or revise the minimum rates of wages by notification in the
Official Gazette. The new wage rates shall come into force from such date as may be specified in
the notification.
However, if no date is specified, the notification shall come into force on expiry of
3months from the date of its issue. Minimum wage rates can be revised with retrospective effect.
Payment of minimum wages:
Section 12 – It lays down that where in respect of any scheduled employment a notification U/S
5 is in force, the employer shall pay to every employee engaged in a scheduled employment
under him, wages at a rate not less than the minimum rate of wages fixed by such notification for
that class of employees in that employment without any deductions except as may be authorized
within such time and subject to such conditions as may be prescribed. Provisions of Section 12
of this Act should not affect the provisions of the Payment of Wages Act, 1936.
In Ansu Pokkuvararthu Madurai Thozhilalar v. T.N.S.T.C. Ltd., the petitioner was
registered trade union which was formed to espouse cause of workers working in the
Respondent/Corporation. Petitioner filed writ petition seeking direction to the respondent to pay
wages, at rates prescribed in Government Order (G.O.), issued by Labour and Employment
Department. The question before the Court was whether members of the petition are entitled to
basic rates of wages and dearness allowance as given under G.O. The Court held that the
expression ‘employee’ would include temporary employee also. Section 12 of the Act mandates
that an employer shall pay to every employee engaged in a Scheduled employment under him,
wages, at a rate not less than the minimum rate of wages fixed in the notification issued under
section 5 of the Act. Therefore, it is clear that members of petition are entitled to basic rate of
wages and dearness allowance as mentioned in G.O.

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Section 13: Fixing hours of normal working day, etc. – Section 13(1) provides that, in regard
to any scheduled employment minimum rates of wages in respect of which have been fixed
under this Act, the appropriate Government may –
(a) Fix the number of hours of work which shall constitute a normal working day, inclusive
of one or more specified intervals;
(b) Provide for day of rest in every period of seven days which shall be allowed to all
employees or to any specified class of employees and for the payment of remuneration in
respect of such day of rest;
(c) Provide for payment for work on a day of at a rest not less than the overtime rate.
According to Section 13(2) the provisions of sub-section (1) shall, in relation to the
following classes of employees apply only to such extent and subject to such conditions as may
be prescribed :-
(a) Employees engaged on urgent work, or in any emergency which could not have been
foreseen or prevented;
(b) Employees engaged in work in the nature of preparatory or complementary work which
must necessarily be carried on outside the limits laid down for the general working in the
employment concerned.
(c) Employees whose employment is essentially intermittent;
(d) Employees engaged in any work which for technical reasons has to be completed before
the duty is over;
(e) Employees engaged in a work which could not be carried on except at times dependent
on the irregular action of natural forces.
Employment of an employee is essentially intermittent when it is declared to be so by the
appropriate Government on the ground that the daily hours of duty of the employee, or if there be
no daily hours of duty of the employee, or if there be no daily hours of duty as such for the
employee, the hours of duty, normally include periods of inaction during which the employee
may be on duty but is not called upon to display either physical activity or sustained attention.

Section 14: Overtime: Where an employee works on any day in excess of the number of hours
constituting a normal working day, the employer shall pay him overtime. An employee entitled
to overtime must be such whose minimum rate of wage is fixed under this Act by the hour, by

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the day or by such longer wage period as may be prescribed. The overtime shall be payable for
every hour or for part of an hour so worked in excess at the rate fixed under this Act or under any
law of the Appropriate Government for the time being in force, whichever is higher.

Recent case: giving less payment getting more work from the labour is always violates the
labour laws rules, recently in March 2020 In United States of America, Indian based Sharmiste
family gets the more work from labours and payed less. The federal court held that the Sharmiste
family is held liable for this incident and sent them to Jail for 15 years.

CHAPTER-
2 BONUS
(Concept of Bonus and Right to Share in the Profits)

Introduction
The Payment of Bonus Act, 1965
a. Definitions
b. Computation of available surplus
c. Sums deductible from gross profits
d. Eligibility for bonus
e. Disqualification for bonus
f. Payment of Maximum bonus
g. Calculation of Bonus with respect to certain employees
h. Deduction of certain amounts from bonus payable under the act
i. Time-limit for payment of bonus
j. Recovery of bonus due from an employer
k. Inspectors
l. Penalty
m. Power of exemption

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 I) Introduction
The practice of paying bonus in India appears to have originated during First World War
when certain textile mills granted 10% of wages as war bonus to their workers in 1917. In certain
cases of industrial disputes demand for payment of bonus was also included. In 1950, the Full
Bench of the Labour Appellate evolved a formula for determination of bonus. A plea was made
to raise that formula in 1959. At the second and third meetings of the Eighteenth Session of
Standing Labour Committee (G.O.I.) held in New Delhi in March/April 1960, it was agreed that
a Commission be appointed to go into the question of bonus and evolve suitable norms. A
Tripartite Commission was set up by the Government of India to consider in a comprehensive
manner, the question of payment of bonus based on profits to employees employed in
establishments and to make recommendations to the Government. The Government of India
accepted the recommendations of the Commission subject to certain modifications. To
implement these recommendations the Payment of Bonus Ordinance, 1965 was promulgated on
29th May, 1965. To replace the said Ordinance the Payment of Bonus Bill was introduced in the
Parliament.
In Mill Owners Association v. Rastriya Mill Mazdoor Sangh, a Full Bench of the Labour
Appellate Tribunal observed that bonus could no longer be considered as an ex-gratia payment
and laid down a formula known as “Full Bench Formula”. Since both labour and capical
contributed to the earnings of industrial concerns, it was only fair that labour should get some
benefit if there was a surplus left after meeting prior and necessary charges. Broadly speaking the
formula provided that the following prior charges should be deducted from the gross profits of an
enterprise:
(i) Return on paid up capital generally at the rate of six per cent;
(ii) Return on working capital varying from two to four per cent;
(iii)Depreciation worked out on a notional basis;
(iv)Rehabilitation and’
(v) Income tax.
If after deduction of these prior charges, surplus was left over the workmen would be
entitled to a share in the said surplus on an equitable basis. In the absence of any surplus,
however, there would be no question of payment of bonus on general notions of social justice.

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 The Supreme Court, while approving this principle in Muir Mill Ltd. V. Suti Mill Mazdoor
Union, laid down two conditions which had to be satisfied before a demand for bonus could be
justified:
(1) The wages fell short of the living standard; and
(2) The industry makes huge profits part of which are due to the contribution made my
workmen in increasing production.
The demand for bonus would become an industrial claim when either or both of these
conditions were satisfied. The Government of India had been under a constant pressure to
revise the bonus formula.
The object of the Act as contained in the preamble is to provide for payment of bonus to persons
employed in certain establishments and for matters connected therewith.
Broadly speaking the scheme of the Act is four dimensional :
(1) To impose statutory liability upon an employer of every establishment covered by the Act
to pay bonus to employees in establishment:
(2) To define the principle of payment of bonus according to the prescribed formula’
(3) To provide for payment of minimum and maximum bonus and linking the payment of
bonus with the scheme of “set-off and set-on”; and
(4) To provide machinery for enforcement of the liability for payment of bonus.

II) The Payment of Bonus Act, 1965.

1) Definitions
Section 2 (4) “allocable surplus” means-
(a) in relation to an employer, being a company 3[(other than a banking company)] which has
not made the arrangements prescribed under the Income-tax Act for the declaration and payment
within India of the dividends payable out of its profits in accordance with the provisions of
section 194 of that Act, sixty-seven per cent of the available surplus in an accounting; year;
(b) in any other case, sixty percent of such available surplus;
In Maharashtra Veej Mandal Kamgar Sangh v. Maharashtra State Electricity Board and others,
it was held that Income Tax Officer is the competent authority to determine the correct amount o

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depreciation allowable under the Income Tax Act subject to any appeal or revision from his
order.
Section 2(5) “appropriate Government” means-
(i) in relation to an establishment in respect of which the appropriate Government under the
Industrial Disputes Act, 1947 (14 of 1947), is the Central Government, the Central Government;
(ii) in relation to any other establishment, the Government of the State in which that other
establishment is situate;
Section 2(12) “direct tax” means-
(a) any tax chargeable under-
(i) the Income-tax Act;
(ii) the Super Profits Tax Act, 1963 (14 of 1963);
(iii)the Companies (Profits) Surtax Act, 1964 (7 of 1964);
(iv) the agricultural income-tax law; and
(b) any other tax which, having regard to its nature or incidence, may by declared by the Central
Government, by notification in the Official Gazette, to be a direct tax for the purposes of this
Act;
Section 2(13) “employee” means any person (other than an apprentice) employed on a salary or
wage not exceeding 1[three thousand and five hundred rupees] per mensem in any industry to do
any skilled or unskilled manual, supervisory, managerial, administrative, technical or clerical
work for hire or reward, whether the terms of employment be express or implied;
A person who is regularly employed for doing a regular work of sweeping is an employee
and not a casual worker even though he is a part-time worker.
In UCO Bank Employees Association, Madras v. Union of India and others,due to change in
ceiling limit of salary/or wage for purpose of bonus certain employees who were earlier getting
bonus became ineligible for bonus and hence they sought a declaration in this petition that
Section 2(13) of Payment of Bonus Act, 1965 should be declared unconstitutional. At the time of
enactment of Payment of Bonus Act,1965 the ceiling of salary or wage was fixed at Rs.1600. It
was subsequently enhanced to Rs.2,500 and in the year 1995 during the pendency of the writ
petition it was again raised to Rs.3,500. Some employees who were earlier eligible for bonus had
become ineligible after enhancement of ceiling limit of wages. Dismissing the petition the High

1
Court observed that the State was the better judge of what the policy should be in economic
matters. Section 2(13) of the Payment of Bonus Act was held to be constitutional.
Section 2(14) “employer includes-
(i) in relation to an establishment which is a factory, the owner or occupier of the factory,
including the agent of such owner or occupier, the legal representative of a deceased owner or
occupier and where a person has been named as a manager of the factory under clause (f) of
subsection (1) of section 7 of the Factories Act, 1948 (63 of 1948), the person so named; and
(ii) in relation to any other establishment, the person who, or the authority which, has the
ultimate control over the affairs of the establishment and where the said affairs are entrusted to a
manager, managing director or managing agent, such manager, managing director or managing
agent;
A person in order to be an employer need not be a manager. Chairman or director of a
company having control over the affairs of establishment is an employer.
Section 2(18) Gross Profits – “Gross Profits” means the gross profits calculated under Section 4.
In the case of companies other than a banking company gross profits under Section 4 are to
be computed in the manner laid down in the Second Schedule. The Schedule requires adding
back to the net profits shown in the P. & L account the amount of depreciation deducted in that
account while computing gross profits. Obviously, the depreciation so to be added back is the
one worked out by the company under Section of 205(2) of the Companies Act for the purpose
of distribution of dividend under Section 205(1) of that Act. Section 6 provides that having
arrived at the gross profits under Section 4 read with the Second Schedule the company is
entitled to deduct therefrom depreciation admissible under Section 32(1) of the Income Tax Act,
that is such percentage on the written down value as may, in the cse of each of the classes of
assets, be prescribed. Interest paid by one office to its another office on advances received from
that office has to be disallowed in calculating gross profit of the office even if such expenditure
is accepted as a proper expenditure by auditors. Presumption under Section 23 of the Act is not
available to justify such deduction.
An adjudication and an award for bonus which is based exclusively on the provisions of
the Act has to be done in accordance with the provisions laid down therein. After ascertaining
the gross profits it is duty of the Tribunal to work out the available allocable surplus in

1
accordance with the provisions of the Act. The calculation of the amount of gross profits should
not be a gross work but must be based on relevant materials.
In All India Voltas and Volkart Employees Federation v. Voltas Ltd. And another, the
company paid to its employees certain amounts during 1964-65 and 1965-66 under a
“Superannuation Special Retired Gratuity Scheme”. The workmen claimed that the amounts paid
under the aforesaid scheme should be added back as bonus paid to its employees in respect of
previous accounting years for the purpose of computing gross profits under the Act. It was held
that the scheme framed by the company was scheme for payment of bonus though named
differently. The employees who have joined this scheme have expressly stated in writing not o
participate in the annual bonus since the Special Retiring Gratuity Scheme was in lieu of annual
bonus. The scheme was devised in 1959 to reduce the liability of income tax. Amount paid by
the company under the scheme have, therefore, remitted back to the Tribunal for appropriate
orders in the light of the judgment.

Section5. Computation of available surplus.—The available surplus in respect of any

accounting year shall be the gross profits for that year after deducting therefrom the sums
referred to in section 6;
Provided that the available surplus in respect of the accounting year commencing on any
day 1968 and in respect of every subsequent accounting year shall be the aggregate of –
(a) the gross profits for that accounting year after deducting therefrom the sums
referred to in section 6; and
(b) an amount equal to the difference between --
(i) the direct tax, calculated in accordance with the provisions of section 7, in respect of an
amount equal to the gross profits of the employer for the immediately preceding accounting year;
and
(ii) the direct tax, calculated in accordance with the provisions of section 7, in respect of an
amount equal to the gross profits of the employer for such preceding accounting year after
deducting therefrom the amount of bonus which the employer has paid or is liable to pay to his
employees in accordance with the provisions of this Act for that year.
In Indian Oxygen Ltd. V. Their Workmen, it was held that in calculating the allocable
surplus the tax concession by way of rebate that an employer will get under Income-tax Act on

1
the bonus for fund to be payable, need, not be taken into consideration. Account shown as
doubtful debts (and not as bad debts) is to be added back to gross profits. Similarly, capital
expenditures in the nature of expenses incurred on Plant Transfer Charges, Patent fees and Rent
paid for godown for storing goods, for erecting a factory are to be added back to the gross profit
for the purpose of determining allocable surplus.
In B.E.Supply Co.v.The Workmen, it was held by the Supreme Court that a claim for
depreciation on account of double shift can be allowed even if it was not claimed under the
Income-tax Act. But the working for double shift has to be proved by adducing evidence. The
amount to be allowed as prior charge towards depreciation will have to be computed after
allowing for the notional depreciation. The amount of income tax payable for the bonus year to
be calculated after deducting the statutory depreciation and not notional normal depreciation.

Section 6. Sums deductible from gross profits.—The following sums shall be deducted from
the gross profits as prior charges, namely:-
(a) any amount by way of depreciation admissible in accordance with the provisions of sub-
section (1) of section 32 of the Income-tax Act, or in accordance with the provisions of the
agricultural income-tax law, as the case may be:
Provided that where an employer has been paying bonus to his employees under a
settlement or an award or agreement made before the 29th May, 1965, and subsisting on that date
after deducting from the gross profits notional normal depreciation, then, the amount of
depreciation to be deducted under this clause shall, at the option of such employer (such option
to be exercised once and within one year from the date) continue to be such notional normal
depreciation;
(b) any amount by way of 1[development rebate or investment allowance or development
allowance] which the employer is entitled to deduct from his income under the income-tax Act;
(c) subject to the provisions of section 7, any direct tax which the employer is liable to pay for
the accounting year in respect of his income, profits and gains during that year;
(d) such further sums as are specified in respect of the employer in the Third Schedule.
Under Section 6, clause (a) the permissible deduction from the gross profits is not
depreciation calculated according to any recognized method of accountancy followed by a

1
banking company, but only such depreciation as is admissible in accordance with the provisions
of Section 32(1) of the Income tax Act.
In Workmen N.G. Bank v. N.G.Bank, the Bank claimed the deduction of depreciation at a
figure higher than that appearing in the profit and loss account. It was held that the burden of
proving that the depreciation claimed by it was the correct amount of depreciation, admissible
under Section 32(1) of the Income-tax Act was on the Bank and that burden has to be discharged
by the Bank by producing proper and satisfactory evidence.
It was further held that the calculation of the depreciation, in accordance with method
specified in Section 32(1) of the Income-tax Act, has to be done by the Tribunal in the exercise
of its quasi judicial duty. The Tribunal should not blindly acceptthe figure of depreciation arrived
at by another authority charged with the function of determining depreciation under a different
statute. The determination of depreciation under Section 32(1) of the Income-tax Act can be
taken into account as evidence only if there is some provision of law which provides to that
effect.

Section 8. Eligibility for bonus.—Every employee shall be entitled to be paid by his employer
in an accounting year, bonus, in accordance with the provisions of this Act, provided he has
worked in the establishment for not less than thirty working days in that year.
It was held in Project Manager, Ahmedabad Project, O.N.G.C. Sabarmati v. Sham Kumar
Sahegal (Died) by his Legal Representatives, that when an employee is suspended, it cannot be
said that such an employee did not work for the establishment. The work “worked” in Section 8
of the Act should mean “ready and willing to work”. Therefore when an employee is prevented
from working by an overt act on the part of the employer is reinstated in service then the
reasonable inference is that the employees statutory eligibility for bonus within the meaning of
Section 8 of the Act cannot be said to have been lost. Nor can the employer refuse to accede to
the demand for such bonus if it is otherwise payable under the provisions of the Act.

Section 9. Disqualification for bonus.—Notwithstanding anything contained in this Act, an

employee shall be disqualified from receiving bonus under this Act, if he is dismissed from
service for --
(a) fraud; or

1
(b) riotous or violent behaviour while on the premises of the establishment; or
(c) theft, misappropriation or sabotage of any property of the establishment.
In M/s.Sriram Bearings Ltd. V. The Presiding Officer, Labour Court, Ranchi & others, it
was held that the provisions of Section 9 of the Payment of Bonus Act cannot be given a
restricted meaning and the words “an employee shall be disqualified from receiving bonus under
the Act” cannot be read so as to mean that the employee shall be disqualified from receiving the
bonus of the accounting year only in which he is dismissed because such disqualification is
dependent only upon the order of dismissal from service. No such restriction in Section 9 has
been put by the Legislature. Therefore, if an employee is dismissed from services, he stands
disqualified from receiving any bonus under Act and not the bonus only of the accounting year.

Section 11. Payment of maximum bonus.—(1) Where in respect of any accounting year
referred to in section 10, the allocable surplus exceeds the amount of minimum bonus payable to
the employees under that section, the employer shall, in lieu of such minimum bonus, be bound
to pay to every employee in respect of that accounting; year bonus which shall be an amount in
proportion to the salary or wage earned by the employee during the accounting year subject to a
maximum of twenty per cent, of such salary or wage.
(2) In computing the allocable surplus under this section, the amount set on or the amount set off
under the provisions of section 15 shall be taken into account in accordance with the provisions
of that section.

Section 12. Calculation of Bonus with respect to certain employees – Where the salary or
wage of an employee exceeds seven thousand rupees or the minimum wage of an employee
exceeds seven thousand rupees or the minimum wage for the scheduled employment, as fixed by
the appropriate Government, whichever is higher per mensem, the bonus payable to such
employee under Section 10 or, as the case may be, under section 11 shall be calculated as if his
salary or wages were seven thousand rupees or the minimum wage for the scheduled
employment, as fixed by the appropriate Government, whichever is higher per mensem.
Explanation – For the purpose of this section, the expression ‘scheduled employment’
shall have the same meaning as assigned to it in clause (g) of section 2 of the Minimum Wages
Act, 1948.

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 It was held in Indian Cable Co. v. Workmen, that although officers drawing salary between
Rs.750 and Rs.1600 per month are employees under Section 2 (13) and eligible for bonus, still
for the purposes of calculating bonus payable 2(13) and eligible for bonus, still for the purpose of
calculating bonus payable under Sections 10 and 11, such officer’s salary will be taken at the
maximum of Rs.750 per month and will be eligible for bonus calculated on that basis. When he
is paid over and above his bonus an ex-gratia amount to make up for the loss occasioned
expenditure debited directly to Reserve. Such amount can, therefore, be added back to the gross
profits of the employer for purposes of working out the valuable surplus.

Section 18. Deduction of certain amounts from bonus payable under the Act. –
Where in any accounting year, an employee is found guilty of misconduct causing financial loss
to the employer, then, it shall be lawful for the employer to deduct the amount of loss from the
amount of bonus payable by him to the employee under this Act in respect of that accounting
year only and the employee shall be entitled to receive the balance, if any.

Section 19. Time-limit for payment of bonus. – All amounts payable to an employee by way of
bonus under this Act shall be paid in cash by his employer --
(a) where there is a dispute regarding payment of bonus pending before any authority under
section 22, within a month from the date on which the award becomes enforceable or the
settlement comes into operation, in respect of such dispute;
(b) in any other case, within a period of eight months from the close of the
accounting year:
Provided that the appropriate Government or such authority as the appropriate
Government may specify in this behalf may, upon an application made to it by the employer and
for sufficient reasons, by order, extended the said period of eight months to such further period
or periods as it thinks fit; so, however, that the total period so extended shall not in any case
exceed two years.
The claim for bonus can be made only after the close of the accounting year and in
accordance with the provisions of the Act. The gross profits can be calculated only at the end of
the accounting year and the available and allocable surplus can also be worked out only at the
end of the accounting year. There is no question of an employer computing the gross profits

1
available and allocable surplus in the middle of an accounting year or at any time before the
close of the relevant accounting year.

Section 21. Recovery of bonus due from an employer.- Where any money is due to an
employee by way of bonus from his employer under a settlement or an award or agreement, the
employee himself or any other person authorised by him in writing in this behalf, or in the case
of the death of the employee, his assignee or heirs may, without prejudice to any other mode of
recovery, make an application to the appropriate Government or such authority as the appropriate
Government may specify in this behalf is satisfied that any money is so due, it shall issue a
certificate for that amount to the Collector who shall proceed to recover the same in the same
manner as an arrears of land revenue.
Provided that every such application shall be made within one year from the date on which
the money became due to the employee from the employer.
Provided further that any such application may be entertained after the expiry of the said
period of one year, if the appropriate Government is satisfied that the applicant had sufficient
cause for not making the application within the said period.
Explanation- In this section and in 5[sections 22,23, 24 and 25], “employee” includes a
person who is entitled to the payment of bonus under this Act but who is no longer in
employment.
The mode of recovery prescribed under this section shall be available only if the bonus
sought to be recovered is “under a settlement or an award or an agreement”. It will not apply to
recovery of bonus which is payable under the Act.

Section 27. Inspectors. – (1) The appropriate Government may, by notification on the Official
Gazette, appoint such person as it think fit to be Inspectors for the purposes of this Act and may
define the limits within which they shall exercise jurisdiction.
(2) An Inspector appointed under sub-section (1) may, for the purpose of ascertaining whether
any of the provisions of this Act has been complied with --
(a) Require an employer to furnish such information as he may consider necessary;
(b) at any reasonable time and with such assistance, if any, as he thinks fit enter any
establishment or any premises connected therewith and require any one found in charge thereof

1
to produce before him for examination any accounts, books, registers and other documents
relating to the employment of persons or the payment of salary or wage or bonus in the
establishment;
(c) examine with respect to any matter relevant to any of the purposes aforesaid, the employer,
his agent or servant or any other person found in charge of the establishment or any premises
connected therewith or any person whom the Inspector has reasonable cause to believe to be or
to have been an employee in the establishment;
(d) make copies of, or take extracts from, any book, register or other document maintained in
relation to the establishment;
(e) exercise such other powers as may prescribed.
(3) Every Inspector shall be deemed to be a public servant within the meaning of the Indian
penal Code (45 of 1860).
(4) Any person required to produce any accounts, book, register or other documents or to give
information by an Inspector under sub-section (1) shall be legally bound to do so.
(5) Nothing contained in this section shall enable an Inspector to require a banking company to
furnish or disclose any statement or information or to produce, or give inspection of any its
books of account or other documents which a banking company cannot be compelled to furnish,
disclose, produce or give inspection of, under the provision of section 34A of the Banking
Regulation Act, 1949.

Section 28. Penalty.- if any person-

(a) contravenes any of the provision of this Act or any rule made thereunder, or
(b) to whom a direction is given or a requisition is made under this Act fails to comply with the
direction or requisition, he shall be punishable with imprisonment for a term which may extend
to six months, or with fine which may extend to one thousand rupees, or with both.

Section 36 Power of exemption. – If the appropriate Government, having regard to the financial
position and other relevant circumstances of any establishment or class of establishment, is of
opinion that it will not be in public interest to apply all or any of the provisions of this Act
thereto, it may, by notification in the Official Gazette, exempt for such period as maybe specified

1
therein and subject to such conditions as it may think fit to impose, such establishment or class of
establishment from all or any of the provisions of this Act.
In Associated Publishers (Madras) Ltd. V. Government of Tamil Nadu and others, the
scope of Section 36 has been examined. It was held that it was within the domain of the
Government either to grant or refuse exemption. What is important is whether the State had
taken into account the relevant aspects in refusing or granting exemption. In the instant case the
Associated Publishers placed only the financial position and no other relevant circumstance
before the State Government. Therefore, when the petitioner has not discharged the onus placed
on him and failed to furnish materials about other relevant circumstances, the impugned order of
the Government cannot be said to have been passed without any basis. If the exemption is
granted on the ground of public interest, the Government must spell out the aspect of public
interest failing which an order would be contrary to public interest. The words “public interest”
need not be used when the liability to pay which is already there under the Act, continues.

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 CHAPTER-3

The Payment of Gratuity Act, 1972

I) Introduction
 Scope and application
II) Definitions
- Appropriate Government
- Completed year of service
- Continuous service
- Employee
- Employer
- Family
- Wages
 Considerations towards ascertaining gratuity
- Payment of gratuity
- Determination of the amount of gratuity
- Recovery of Gratuity
- Formula for Calculation of Gratuity
- Chart showing Determination of Gratuity

The Payment of Gratuity Act, 1972

I) Introduction
Gratuity is defined as a benefit given by the employer to the employee for rendering
services continuously for five years or more. It is a mandatory and monetary benefit usually
given at the time of employee separation from organization or retirement. But there are certain
rules which make an employee eligible to receive gratuity. The main purpose and concept of
gratuity is to help the workman after the retirement, whether the retirement is a result of the rules
of superannuation or physical disability or impairment of the vital part of the body. Gratuity is
the amount which is not connected with any consideration and has to be considered as something
given freely for the service the employee has rendered to the organization for more than 5 years.

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 As the right of industrial workers to receive gratuity has long been recognized by the
Tribunals, yet the law relating to payment of gratuity was very vague and uncertain before
passing of the present Act. There was good deal of disparity in the various schemes for the
payment of gratuity. The Supreme Court has made efforts to regulate through judicial decisions
by laying down principles for grant of gratuity. Still controversies with regard to the rules and
principles for grant of gratuity. Still controversies with regard to the rules and principles were
continuing. Ultimately all controversies were set at rest by passing of the Payment of Gratuity
Act in the year 1972. As the preamble of the Act suggests, this Act aims to provide for a scheme
for the payment of gratuity to employees engaged in factories, mines, oil fields, plantations,
ports, railway companies, shops or other establishments and for matters connected therewith or
incidental thereto. It was pointed out in Delhi Cloth and General Mills Co. Ltd. V. Their
Workmen, that the object of providing a gratuity scheme is to provide a retiring benefit to the
workmen who have rendered long and unblemished service to the employer and thereby
contributed to the prosperity of the employer.
In Indian Ex-services League and others v. Union of India and others, writ petitions were
filed by some commissioned and non-commissioned ex-servicemen. Gratuity was payable at
enhanced rate to persons retiring on a later date. Therefore those who had retired earlier to the
specified date also claimed enhancement and payment of gratuity at rates payable to retirees after
the specified date on the ground of one rank one pension rule. It was held that the claim for
gratuity can be made only on the date of retirement on the basis of salary drawn on the date of
retirement and being already paid on that footing, the transaction was completed and closed. It
could then not be reopened as a result of enhancement made at a later date for persons retiring
subsequently. The concept of gratuity is different from pension. Therefore claim for payment of
gratuity at enhanced rate made on the basis of enhancement for persons retiring on a later date
cannot be accepted.
 Scope and application
The Payment of Gratuity Act, 1972 (the Gratuity Act) is applicable to employees engaged
in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments
with ten or more employees. The full official text of the Gratuity Act can be found here. Gratuity
is fully paid by the employer, and no part comes from an employee’s salary. To be eligible for
gratuity under the Gratuity Act, an employee needs to have at least five full years of service with

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the current employer, except in the event that an employee passes away or is rendered disabled
due to accident or illness, in which case gratuity must be paid.

II) Definitions
Section 2(a) – “Appropriate Government” means –
(i) In relation to an establishment –
(a) Belonging to, or under the control of , the Central Government,
(b) Having branches in more than one State,
(c) Of a factory belonging to or under the control of, the Central Government,
(d) Of major port, mine, oil-field or railway company, the Central Government,
(ii) In any other case, the State Government.
In Bharat Pump and Compressors Ltd. V. Regional Labour Commissioner (Central) and
others, the respondent No.3 was an employee of Bharat Pumps and Compressors Ltd., Naini,
Allahabad. The services of the respondent workman was terminated on May 24, 1986. He
preferred an appeal before Managing Director but he was dismissed on April 4, 1987. Later on
taking a humanitarian approach corporation gave re-employment to the respondent. Later on he
made an application for payment of gratuity to the State authority which was objected by the
employer on the ground that the petitioner corporation was wholly owned by the Central
Government and only Central authority was competent to pass order for payment of gratuity.
Later on the respondent employee approached the Central authority which ordered paymentof
gratuity. In this writ petition the petitioner company impugned the order of Central Authority to
pay gratuity to its employee. The High Court negatived the contention of the petitioner that the
third respondent employee having earlier invoked the State authority could not approach the
Central Authority. Hence the Central Authority being the competent authority its order could not
be challenged.

Section 2(b) “completed year of service” means continuous service for one year.

Section 2(c) “continuous service” means continuous service as defined in Section 2(A)
In Lalappa Ligappa and others v. Laxmi Vishnu Textile Mills, Sholapur, the question for
consideration was about the meaning of the term “Continuous service” as defined in Section 2(c)

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of the Payment Gratuity Act, 1972. It was held that the expression “actually employed” in
Explanation 1 to Section 2(c), in the context in which it occurs must mean “actually worked”.
The Supreme Court held that the High Court has right in holding that the permanent employees
were not entitled to payment of gratuity for the years they remained absent without leave and had
actually worked for less than 240 days in a year. It was also held that the badly employees are
not covered by the substantive part of the definition of “continuous service” in Section 2(c) but
come within Explanation I and therefore are not entitled to payment of gratuity for the badly
period, i.e., in respect of the years in which there was no work allotted to them due to their
failure to report to duty.

Section 2(e) “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;
In Secretary O.N.G.C. Ltd. V. V.U. Warrier, the Supreme Court held that the respondent
was holding the post of Additional Director (Finance and Accounts) in O.N.G.C. Ltd. at the time
of his retirement and was getting a salary exceeding Rs.2500/- was not an ‘employee’ with the
meaning of Section 2(e) of the Payment of Gratuity Act, 1972.
In E.I.D. Parry (I) Ltd. V. G. Omkar Murthy and others, the respondent employees were in
the employment of the appellant between 1958 and 1984. On October 1, 1984 voluntary
retirement scheme was introduced and the respondents availed of that benefit and left the service
after obtaining the benefits as provided under the Payment of Gratuity Act, 1972. The employees
thereafter claimed the difference between the gratuity received by them and the gratuity payable
under Section 40(3) of the Andhra Pradesh Shops and Establishments Act, 1966. The Supreme
Court observed that at the relevant time when the respondents voluntarily retired from service,
the Payment of Gratuity Act, 1972 could not apply to them as they were getting wages of more
than Rs.1600 p.m. by virtue of Section 2(e) of the Central Act. Moreover the finding was that the
gratuity under the State Act was more beneficial than Central Act. Hence, the other contention of
repugnancy of State Act would not arise at all.

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Section 2(f) “Employer” means, in relation to any establishment, factory, mine, oilfield,
plantation, port, railway company or shop:-
(i) belonging to, or under the control of, the Central Government or a State Government, a
person or authority appointed by the appropriate Government for the supervision and control of
employees, or where no person or authority has been so appointed, the head of the Ministry or
the Department concerned,
(ii) belonging to, or under the control of, any local authority, the person appointed by such
authority for the supervision and control of employees or where no person has been so appointed,
the chief executive officer of the local authority.
(iii) in any other case, the person, who, or the authority which, has the ultimate control over the
affairs of the establishment, factory, mine, oilfield, plantation, port, railway company or shop,
and where the said affairs are entrusted to any other person, whether called a manager, or
managing director or by any other name, such person;
Section 2(h) “family”, in relation to an employee, shall be deemed to consist of:-
(i) in the case of a male employee, himself, his wife, his children, whether married or unmarried,
his dependent parents and the dependent parents of his wife and the widow and children of his
predeceased son, if any.
(ii) in the case of a female employee, herself, her husband, her children, whether married or
unmarried, her dependent parents and the dependent parents of her husband and the widow and
children of her predeceased son, if any:
Explanation.-Where the personal law of an employee permits the adoption by him of a
child, any child lawfully adopted by him shall be deemed to be included in his family, and where
a child of an employee has been adopted by another person and such adoption is, under the
personal law of the person making such adoption, lawful, such child shall be deemed to be
excluded from the family of the employee.
Section 2(s) “wages”, means all emoluments which are earned by an employee while on duty or
on leave in accordance with the terms and conditions of his employment and which are paid or
are payable to him in cash and includes dearness allowance but does not include any bonus,
commission, house rent allowance, overtime wages and any other allowance.

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 In Kirloskar Brothers Ltd. v. Appellate Authority (under Payment of gratuity Act) and
other, the employees of the petitioner claimed that incentive bonus paid to them should be
included in wages for the purposes of calculating gratuity payable to them. The authority under
the Payment of Gratuity Act and the Single Judge of the High Court held that the incentive bonus
was included in wages as defined in Section 2(s) of the Act. This appeal is against the above
order. It was held by the High Court has the definition of ‘wages’ makes it clear that it shall not
include any bonus, commission, house rent allowance, overtime wages and any other allowance.
Therefore the definition does not leave any doubt that incentive bonus/production bonus could
not be included in the wages under the Payment of Gratuity Act, 1972.
Considerations towards ascertaining Gratuity
Section 2-A. Continuous Service – (1) For the purpose of this Act-
(1) An employee shall be said to be in continuous service for a period if he has, for that period,
been in uninterrupted service, including service which may be interrupted on account of
sickness, accident, leave, absence from duty without leave (not being absence in respect of which
an order treating the absence as break in service has been passed in accordance with the standing
orders, rules or regulations governing the employees of the establishment), lay-off, strike or a
lock-out orcessation of work not due to any fault of the employee, whether such uninterrupted or
interrupted service was rendered before or after the commencement of this Act;
(2) Where an employee (not being an employee employed in a seasonal establishment) is not in
continuous service within the meaning of clause (1), for any period of one year or six months, he
shall be deemed to be in continuous service under the employer-
(a) for the said period of one year, if the employee during the period of twelve calendar months
preceding the date with reference to which calculation is to be made, has actually worked under
the employer for not less than-
(i) one hundred and ninety days, in the case of an employee employed below the ground in a
mine or in an establishment which works for less than six days in a week; and
(ii) two hundred and forty days, in any other case:
(b) for the said period of six months if the employee during the period of six calendar months
preceding the date with reference to which the calculation is to be made, has actually worked
under the employer for not less than-

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(i) ninety-five days, in the case of an employee employed below the ground in a mine or in an
establishment which works for less than six days in a week; and
(ii) one hundred and twenty days, in any other case;
Explanation.- For the purpose of clause (2), the number of days on which an employee has
actually worked under an employer shall include the days on which-
(i) he has been laid-off under an agreement or as permitted by standing orders made under the
Industrial Employment(Standing Orders) Act, 1946 (20 of 1946), or under the Industrial
Disputes Act, 1947 (14 of 1947), or under any other law applicable to the establishment;
(ii) he has been on leave with full wages, earned in the previous year;
(iii) he has been absent due to temporary disablement caused by accident arising out of and in the
course of his employment; and
(iv) in the case of a female, she has been on maternity leave; so, however, that the total period of
such maternity leave does not exceed twelve weeks.
(3) Where an employee, employed in a seasonal establishment, is not in continuous service
within the meaning of clause (1), for any period of one year or six months, he shall be deemed to
be in continuous service under the employer for such period if he has actually worked for not
less than seventy-five per cent of the number of days on which the establishment was in
operation during such period.
In D.B.R. Mills Ltd. v. Appellate Authority, under Payment of Gratuity Act, the question
for determination was whether public holidays including Sundays are to be excluded computing
240 days. It was held that the cessation of work by the employees on these days cannot be said to
be due to any fault of the employee. Therefore he would be deemed to be in continuous service if
he has been actually employed by an employer during the 12 months, immediately preceding the
year for not less than 240 days in an establishment.

Section 4 – Payment of gratuity – (1) Gratuity shall be payable to an employee on the

termination of his employment after he has rendered continuous service for not less than five
years,-
(a) on his superannuation, or
(b) on his retirement or resignation,
(c) on his death or disablement due to accident or disease:

1
Provided that the completion of continuous service of five years shall not be necessary where the
termination of the employment of any employee is due to death or disablement:
Provided further that in case of death of the employee, gratuity payable to him shall be paid to
his nominee or, if no nomination has been made, to his heirs, and where any such nominees or
heirs is minor, the share of such minor, shall be deposited with the Controlling Authority who
shall invest the same for the benefit of such minor in such bank or other financial institution, as
may be prescribed, until such minor attains majority.
Explanation.- For the purposes of this section, disablement means such disablement as
incapacitates an employee for the work which he was capable of performing before the accident
or disease resulting in such disablement.
(2) For every completed year of service or part thereof in excess of six months, the employer
shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last
drawn by the employee concerned:
Provided that in the case of a piece-rated employee, daily wages shall be computed on the
average of the total wages received by him for a period of three months immediately preceding
the termination of his employment, and, for this purpose, the wages paid for any overtime work
shall not be taken into account: Provided further that in the case of 2[an employee who is
employed in a seasonal establishment, and who is not so employed throughout the year, the
employer shall pay the gratuity at the rate of seven days' wages for each season.
Explanation.-In the case of a monthly rated employee, the fifteen days' wages shall be calculated
by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the
quotient by fifteen.
(3) The amount of gratuity payable to an employee shall not exceed ten lakh rupees.
(4) For the purpose of computing the gratuity payable to an employee who is employed, after his
disablement, on reduced wages, his wages for the period preceding his disablement shall be
taken to be the wages received by him during that period, and his wages for the period
subsequent to his disablement shall be taken to be the wages as so reduced.
(5) Nothing in this section shall affect the right of an employee to receive better terms of gratuity
under any award or agreement or contract with the employer.
(6) Notwithstanding anything contained in sub-section (i),-

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(a) the gratuity of an employee, whose services have been terminated for any act, wilful omission
or negligence causing any damage or loss to, or destruction of, property belonging to the
employer, shall be forfeited to the extent of the damage or loss so caused.
(b) the gratuity payable to an employee 1[may be wholly or partially forfeited.
(i) if the services of such employee have been terminated for his riotous or disorderly conduct or
any other act of violence on his part; or
(ii) if the services of such employee have been terminated for any act which constitutes an
offence involving moral turpitude, provided that such offence is committed by him in the course
of his employment.
For the purpose of claiming gratuity under the Act, the employer must have rendered
continuous service for a period of 5 years. Where such period of service has not been rendered
gratuity shall not be paid under the Act. Where an employee claims gratuity on the basis of an
agreement it was held in D.S.Purwar v. Elphinstone Spinning and Weaving Mills, that claim of
gratuity on the basis of an agreement is outside the scope of adjudication under the Payment of
Gratuity Act, 1972.
In Suchil Kumar Maloo v. Gujarat Raffia Industries Ltd., Gujarat High Court has held that
considering Section 4 of the Payment of Gratuity Act any employee, who has rendered service
for not less than five years; on his superannuation or on his retirement or resignation or on his
death or disablement due to accident or disease is eligible for gratuity. On fair reading of Section
4 of the Act what is required to be considered is that on the eventuality as mentioned in Section
4, whether an employee has rendered continuous service for not less than five years or not and
nothing further than that. The object and purpose of amendment in Section 2(e) of the Act by
removing the ceiling o wages for coverage of the Act is to widen the scope and to give the
benefit of gratuity to all the employees and to widen the coverage.
In Duncun Agro Industries Ltd. v. Subanna B., the question involved for determination
was whether the workmen were entitled for gratuity for the period of service rendered before
coming into force of this Act. It was held that gratuity is payable to an employee who has
rendered continuous service of not less than five years and continuous service in view of
provisions of Section 2(c) which defines ‘continuous service’ as service whether rendered prior
or after commencement of the Act, workmen would be entitled for gratuity for the period of
service rendered prior to or after the commencement of the Act.

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Section 7 Determination of the amount of gratuity – (1) A person who is eligible for payment
of gratuity under this Act or any person authorised, in writing, to act on his behalf shall send a
writtenapplication to the employer, within such time and in such form, as may be prescribed, for
payment of such gratuity.
(2) As soon as gratuity becomes payable, the employer shall, whether an application referred to
in sub-section (i) has been made or not, determine the amount of gratuity and give notice in
writing to the person to whom the gratuity is payable and also to the controlling authority
specifying the amount of gratuity so determined.
(3) The employer shall arrange to pay the amount of gratuity within thirty days from the date it
becomes payable to the person to whom the gratuity is payable.
(3-A) If the amount of gratuity payable under sub-section (3) is not paid by the employer within
the period specified in sub-section (3) the employer shall pay, from the date on which the
gratuity becomes payable to the date on which it is paid, simple interest at such rate, not
exceeding the rate notified by the Central Government from time to time for repayment of long
term deposits, as that Government may, by notification specify:
Provided that no such interest shall be payable if the delay in the payment is due to the fault of
the employee and the employer has obtained permission in writing from the Controlling
Authority for the delayed payment on this ground.
(4)(a) If there is any dispute as to the amount of gratuity payable to an employee under this Act
or as to the admissibility of any claim of, or in relation to, an employee for payment of gratuity,
or as to the person entitled to receive the gratuity, the employer shall deposit with the Controlling
Authority such amount as he admits to be payable by him as gratuity.
(b) Where there is a dispute with regard to any matter or matters specified in Clause (a), the
employer or employee or any other person raising the dispute may make an application to the
Controlling Authority for deciding the dispute.
(c) The Controlling Authority shall, after due inquiry and after giving the parties to the dispute a
reasonable opportunity of being heard, determine the matter or matters in dispute and, if, as a
result of such inquiry any amount is found to be payable to the employee, the Controlling
Authority shall direct the employer to pay such amount or, as the case may be, such amount as
reduced by the amount already deposited by the employer.

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(d) The Controlling Authority shall pay the amount deposited, including the excess amount, if
any, deposited by the employer, to the person entitled thereto. (e) As soon as may be after a
deposit is made under Clause (a), the Controlling Authority shall pay the amount of the deposit-
(i)to the applicant where he is the employee; or
(ii)where the applicant is the employee, to the 1[nominee or, as the case may be, the guardian of
such nominee or heir of the employee if the Controlling Authority is satisfied that there is no
dispute as to the right of the applicant to receive the amount of gratuity.
(5) For the purpose of conducting an inquiry under Sub-Section (4), the controlling authority
shall have the same powers as are vested in a Court, while trying a suit, under the Code of Civil
Procedure,1908 (5 of 1908), in respect of the following matters namely:-
(a) enforcing the attendance of any person or examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses.
(6) Any inquiry under this Section shall be a judicial proceeding within the meaning of Sections
193 and 228, and for the purpose of Section 196, of the Indian Penal Code, 1860 (45 of 1860).
(7) Any person aggrieved by an order under sub-section (4), may, within sixty days from the date
of the receipt of the order, prefer an appeal to the appropriate Government or such other
authority as may be specified by the appropriate Government in this behalf:
Provided that the appropriate Government or the appellate authority, as the case may be, may, if
it is satisfied that the appellant was prevented by sufficient cause from preferring the appeal
within the said period of sixty days, extend the said period by a further period of sixty days.
Provided further that no appear by an employer shall be admitted unless at the time of preferring
the appeal, the appellant either produces a certificate of the controlling authority to the effect that
the appellant has deposited with him an amount equal to the amount of gratuity required to be
deposited under subsection (4), or deposits with the appellate authority such amount.
(8) The appropriate Government or the appellate authority, as the case may be, may, after giving
the parties to the appeal a reasonable opportunity of being heard, confirm, modify or reverse the
decision of the controlling authority.
In Gurunath Vithal Thamse v. National Textile Corporation(N.M)., the application of the
petition for payment of gratuity was rejected by the controlling authority and that order was

1
sustained by appellate authority as well under the Payment of Gratuity Act, 1972. Application
was rejected on the ground that it was preferred three years after superannuation of the
employee. It was observed by the High Court that the Legislature had not specified any period of
limitation for moving the controlling authority. The said authority was held to have clearly
exceeded its jurisdiction in passing the impugned order rejecting the claim of employee.
Section 8 Recovery of Gratuity – If the amount of gratuity payable under this Act is not paid by
the employer, within the prescribed time, to the person entitled thereto, the controlling authority
shall, on an application made to it in this behalf by the aggrieved person, issue a certificate for
that amount to the Collector, who shall recover the same, together with compound interest
thereon at such rate as the Central Government may, by notification, specify from the date of
expiry of the prescribed time, as arrears of land revenue and pay the same to the person entitled
thereto:
Provided that the Controlling Authority shall, before issuing a certificate under this section, give
the employer a reasonable opportunity of showing cause against the issue of such certificate:
Provided further that the amount of interest payable under this section shall, in no case, exceed
the amount of gratuity payable under this Act.
In Champaran Sugar Company Ltd. V. The Joint Labour Commissioner, and the
Appellate Authority, it was held that by virtue of provisions of Section 8 of the Act payment of
interest on gratuity amount is the mandate of law itself and its not dependent on an express claim
by the employee thereof. The right to interest accrues to the employee from the failure of the
employer to perform his statutory duty to tender and pay gratuity and not from any formal
demand thereof by the employee. Similarly the liability to pay interest does not stem from the
certificate of the Controlling Authority but from the default in the performance of his duty by
the employer.

Formula for Calculation of Gratuity

Gratuity in India is calculated using the formula:
Gratuity = Last Drawn Salary × 15/26 × No. of Years of Service
Notes:

 The ratio 15/26 represents 15 days out of 26 working days in a month.

 Last drawn salary = Basic Salary + Dearness Allowance.

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  Years of Service are rounded down to the nearest full year. For example, if the employee
has a total service of 20 years, 10 months and 25 days, 21 years will be factored into the
calculations.

Chart showing Determination of Gratuity

REFERENCES
1. Labour and Industrial Laws – S.N.Misra (29th Edition 2019)