Payment of Gratuity Act and Employees' Provident Funds Act notes — Unit 5

Industrial workers often retire without any savings, leaving them destitute in their old age. The EPF Act forces both the employer and the employee to save money for the employee's future.

⇒Object of the Act

To institute a compulsory provident fund (PF) for employees in factories and other establishments. It acts as a shield against old age, sickness, and unforeseen circumstances.

⇒Applicability

It applies to factories/establishments employing 20 or more persons. Once applied, it continues to apply even if the employee count falls below 20. It covers employees drawing a basic salary up to a statutory ceiling (e.g., ₹15,000/month).

The Act operates through three distinct schemes managed by the Employees' Provident Fund Organisation (EPFO).

• 1. Employees' Provident Fund (EPF) Scheme: A retirement savings account. Both employee and employer contribute a fixed percentage of the wages (usually 12%). The money earns interest and is given as a lump sum upon retirement/resignation.
• 2. Employees' Pension Scheme (EPS): Out of the employer's 12% contribution, a portion (8.33%) goes into this pension fund. This ensures the employee gets a monthly pension after retirement or death.
• 3. Employees' Deposit-Linked Insurance (EDLI) Scheme: Provides a life insurance cover. If the employee dies while in service, the family gets a lump sum amount.

⇒Employer's Duty

The employer must deduct the employee's 12% share, add their own 12% share, and deposit the total 24% to the EPFO every month. Deducting the employee's share but failing to deposit it is a criminal offence (criminal breach of trust).

Gratuity is a lump-sum payment made by an employer to an employee as a mark of gratitude for long and continuous service. What started as a voluntary gift by good employers is now a statutory right.

⇒Applicability

It applies to factories, mines, oilfields, plantations, ports, railway companies, and every shop/establishment in which 10 or more persons are employed.

⇒Eligibility for Gratuity (Section 4)

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.

⇒When is it Paid?

Gratuity is payable upon the termination of employment (after 5 years) due to:

• Superannuation (retirement).
• Retirement or Resignation.
• Death or Disablement due to accident or disease.

⇒Calculation of Gratuity

For every completed year of service (or part thereof in excess of six months), the employer shall pay gratuity at the rate of 15 days' wages based on the rate of wages last drawn by the employee.

Formula: (Last drawn salary × 15 / 26) × Total years of service.

Gratuity is earned through long, loyal, and unblemished service. Can an employer refuse to pay it if the employee misbehaves?

⇒Partial Forfeiture

If the services are terminated for any act, willful omission, or negligence causing any damage/loss to or destruction of property belonging to the employer, gratuity can be forfeited to the extent of the damage/loss.

⇒Total Forfeiture

The entire gratuity can be wholly forfeited only in two extreme cases:

• If the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part.
• If the services 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.

⇒Summary of Master Concepts

• EPF Act: Compulsory retirement savings. Covers establishments with 20+ workers. Comprises PF (lump sum), Pension, and Insurance.
• Gratuity Act: A reward for long service. Covers establishments with 10+ workers.
• Eligibility: 5 years of continuous service required (waived for death/disablement).
• Calculation: 15 days' wages for every completed year of service.
• Forfeiture: Can be partially forfeited for causing damage, and totally forfeited for violence or moral turpitude.

⇒University Exam Tips for this Unit (Premium Advice)

• Gratuity 5-Year Rule: Always mention the general 5-year rule, but never forget to mention the exception: the 5-year rule does not apply in cases of death or disablement.
• Forfeiture: Exam questions often feature a scenario where an employee who worked for 20 years gets caught stealing and is fired. The question asks: "Does he lose his gratuity?" The answer is yes, under Section 4(6) for moral turpitude in the course of employment.