Section 4(5) of Gratuity Act Applies only when there are options

Section 4(5) of the Gratuity Act applies only when there are options for the employee under the Act and under contract with employer: Supreme Court 

APEX COURT DECISION IN THE MATTER OF BCH ELECTRIC LIMITED VS. PRADEEP MEHRA & ANOTHERS [CIVIL APPEAL NOS. 2379 TO 2382] 

The Hon’ble Apex Court held that Section 4(5) of Payment of Gratuity Act, 1972 (“the Act”) will apply only when there are alternative options, one in terms of the Act and one as per the award or agreement or contract with the employer. An employee must take complete package as offered by the employer or that which is available under the Act. Further, the employee could not have synthesis or combination of some of the terms under the scheme provided by the employer while retaining the other terms offered by the Act.

We have put our efforts with an aim to explain the judgment and true intent of the legislature. Therefore, the judgment has been segregated into parts for ease of understanding.

(A) BRIEF FACTS

That Mr. Pradeep Mehra [“Respondent”] was appointed as Chief Operating Officer of M/s BCH Electric Limited [“Appellant” or “Company”] with basic salary of Rs.1,05,000/- per month on terms and conditions indicated therein. The emoluments payable to the Respondent were raised from time to time. After having put in about 12 years’ of service, the Respondent resigned with effect from 01.06.2012 when his last drawn wages were Rs.24,50,000/-per month. A sum of Rs.36,70,015/- was thereafter paid to the Respondent towards retiral dues.

In this regard, a bank draft in the sum of Rs.10,19,452/- was forwarded by the Company to the Respondent being the sum of Rs.10 Lakhs towards gratuity along with interest accrued thereon from the date of cessation of service of the Respondent.

However, the Respondent, on the other hand, claimed that he was entitled to a total of Rs.1,83,75,000 as gratuity for the entire period of his service. The Respondent issued a legal notice to the Company claiming this sum as gratuity. 

(B) PROCEEDINGS SO FAR 

• The Respondent filed a Claim Petition before the Controlling Authority under Section 7 of the Act. Consequently, the Controlling Authority vide Order dated 31.07.2017 allowed his claim for gratuity and directed the Company to pay him Rs.1,73,75,000 over and above the gratuity amount already paid to him, along with simple interest at the rate of 10% per annum for delayed payment.
• The Company  being aggrieved, filed an appeal before the Appellate Authority under the Act challenging the aforesaid order dated 31.07.2017 passed by the Controlling Authority and applied for waiver of the requirement of pre-deposit of the amount directed to be paid to the Respondent. However, the application for waiver was not considered by the Appellate Authority.
• The Company then filed a writ petition before the Delhi High Court challenging the findings of the Controlling Authority and Appellate Authority. The Writ Petition was disposed of by the High Court on 22.11.2017 directing the Company to submit appropriate bank guarantee in the sum representing the amount of gratuity along with interest till the date of filing of the appeal.
• After compliance, the appeal was taken up for hearing. By order dated 23.03.2018 the appeal was dismissed by the Appellate Authority.
• The Company filed Writ Petition No.3385 of 2018 in the High Court challenging the Orders passed by the Authorities under the Act. The Single Judge of the High Court, thus by order dated 06.02.2019 dismissed the aforesaid Writ Petition as well as connected petitions. The matter was carried further by the Company by filing Letters Patent Appeal No. 97 of 2019 before the Division Bench of the High Court which by its judgment and order dated 12.02.2019 affirmed the view taken by the Single Judge and dismissed the appeal.
• Hence, Special Leave Petitions were filed before the Hon’ble Supreme Court, which got converted into Civil Appeals.

(C) RELEVANT EXTRACTS OF THE TRUST DEED, GRATUITY SCHEME AND RULES APPENDED TO THE SCHEME

RELEVANT PORTION OF TRUST DEED 

• “4. RULES: 

The Fund shall be governed by the Rules and any reference to the Rules in these presents shall mean the Rules for the time being in force which shall be binding on the Members, their Beneficiaries and on the Company. A copy of the current Rules is annexed to and the same shall be deemed to form part of these presents.

11. MEMBERS TO HAVE NO LEGAL RIGHT 

Except as provided in these presents and in the Rules, no Member or his Beneficiary shall have any legal claim, right or interest in the Fund. Provided always that the Trustees shall administer the Fund for the benefit of the Members and their Beneficiaries in accordance with the provisions of these presents and the Rules.

15. PAYMENT OF GRATUITY:

(a) On behalf of the Company, the Trustees shall provide for the payment of gratuity on termination of service, on death or retirement of the Member or otherwise as provided in the Rules of Scheme

RELEVANT EXTRACTS OF RULES 

• Rule 4 (b) The Company shall pay to the Trustees in respect of each member an ordinary annual contribution in each year based on an actuarial valuation by a Qualified Actuary subject to Rule 103 of the Income Tax Rules 1962 or any statutory enactment or any modification thereof from time to time.
•  Rule 6 A member on ceasing to be a member of the Fund shall be entitled to be paid by the Trustees, the amount due as computed in the manner laid down hereunder in this Scheme: –

(a) The amount of Gratuity payable to the beneficiary shall be calculated in the manner provided in the Company’s Gratuity Scheme.

(b) Notwithstanding the provision herein contained, if any member is covered by the provisions of the Payment of Gratuity Act 1972, the amount of gratuity shall be calculated in accordance with the provisions of that Act.” 

APPENDIX TO THE SCHEME 

“Gratuity will be payable to the Employees to whom the Payment of Gratuity Act, 1972 applies as per the rates prescribed by the said Act.

Gratuity will be payable to the other employee of the company at the following rates:-

(a) On the death or permanent total physical disablement, while in the service of the Company, or retirement at the age of 55 years or if retained by the Company after 55 years, then at the time of separation from the Company:

15 days basic salary for each completed year of service subject to maximum of 20 months basis pay, payable to the employees or payable to his heirs, executors or nominee in case of death of the employee.

(b) On termination of Service:

i. Beyond five years upto 8 years of continuous service at the rate of 5 (five) days basic pay for every completed year of service.

ii. Beyond 8 years upto 10 years of continuous service at the rate of 10 days (ten) basic salary for every completed year of service.

iii. Beyond 10 years upto 15 years of continuous service at the rate of 12 (twelve) days basic salary for every completed year of service.

iv. Beyond 15 years of continuous service at the rate of 15 (fifteen) days basic salary for every completed year of service subject to maximum of 20 months basic salary.

(c) On resignation or voluntary retirement:

After completion of 5 years of continuous service or more at the rate of 15 days basic salary per year of completed service, subject to maximum of 20 months basic pay provided that the management is satisfied that such resignation or voluntary retirement is in the interest of the administration.

The rate of basic salary for payment of Gratuity shall be the last pay drawn by the employee.”

(D) COMPANY’S SUBMISSIONS

• From bare reading of the above Clause 15 read with Rule 6(b), it is apparent that the employees of the Company, if covered by the provisions of the Act were entitled for gratuity in accordance with the provisions of the Act.
• The Gratuity was always determined as per the method prescribed under the Act and when the Gratuity for any employee exceeded the maximum limit (as prescribed from time to time), under the Act, it was capped at the prevailing upper limit at the relevant time i.e., the Gratuity amount was reduced so as to stay within the upper caps prescribed by the Act.
• In terms of law laid down by this Court in Beed District Central Cooperative Bank Ltd. and Union Bank of India and others vs. C.G. Ajay Babu and Another either the statutory provisions or the contractual scheme can be followed and not a combination of both the elements.

(E) RESPONDENTS SUBMISSIONS 

• Since Section 4(5) of the Act has been given overriding effect over other provisions of Section 4, as held by this Court, it would override the provisions of Section 3 of the Act and as such, all that the Respondent needed to show was that the Company had a scheme for its employees (contract) and that it did not prescribe any ceiling and that such a scheme would be protected by Section 4(5) of the Act.
• It is true that Rule 6(b) (appended to the Scheme) contains a non-obstante clause. However, Section 4(5) also contains a non obstante clause. Section 4(5) being a statutory provision, will prevail.
• In any case Rule 6(b) must also be reconciled with Rule 6(a) which makes “the Company’s Gratuity Scheme” applicable to every member, otherwise Rule 6(a) would become otiose. Thus, if “the Company’s Gratuity Scheme” is more beneficial than the Act, Rule 6(a) will get its play.
• There is nothing in Rule 6(b) that excludes a more beneficial scheme under Section 4(5) and / or Rule 6(a).

(F) QUESTION BEFORE THE APEX COURT 

After going through the relevant provisions of the Act, the Hon’ble Apex Court observed that when two choices are available, one under provisions of the Act and one under such arrangement with the employer and if the latter offers better terms, the employee cannot be denied right to receive those higher benefits.

• Section 4(1) of the Act provides that gratuity shall be payable to an employee in the eventualities referred to therein if he had rendered continuous service for not less than five years.
• Explanation to Section 4(2) inter-alia states that the gratuity shall be payable at the rate of 15 days’ wages for every completed year of service or part thereof in excess of six months. Explanation to Section 4(2) lays down how the gratuity is to be calculated.
• Section 4(3) stipulates that the amount of gratuity payable to an employee shall not exceed certain limit and thus puts a cap on the amount payable towards gratuity.
• Section 4 (5) has an overriding effect on all other sub-Sections under Section 4 of the Act. Thus, notwithstanding anything contained under Section 4 of the Act, an employee is entitled to receive better terms of gratuity under any award or agreement or contract with the employer.

Therefore, the question before the Apex Court, as to whether there was such a choice available or not under the given circumstances and whether the Respondent was covered under the Scheme or under the Act.

20. We must, therefore, see what exactly has been provided for in the Trust Deed, Scheme and the Rules framed thereunder. The Trust Deed was executed “for the purpose of providing gratuities to the employees of the company under the Payment of Gratuity Act”. Clause 15 of the Trust Deed casts an obligation on the trustees to provide payment of gratuity upon termination of service or upon death or retirement of service of the Member “as provided in the Rules of Scheme” Rule 6(b) of the Rules clearly stipulates that notwithstanding the Scheme of the Company, if any member is covered by the Act, the amount of gratuity shall be calculated in accordance with the provisions of the Act. Similar thought is expressed in the Appendix to the Scheme which prescribes the rates at which the gratuity is to be paid.

The Scheme thus divides the employees in two categories. First, the employees to whom the Act applies and with respect to whom the amount of gratuity shall be “calculated in accordance with the provisions of the Act and as per the rates prescribed by the Act”; the Second category of employees are those to whom the Act does not apply. According to said Rule 6(b) and Appendix, the calculation of amount of gratuity at the rates prescribed in the manner laid down in the Appendix, is to be done only in the case of employees in the Second category. 

21. The intent of the Trust Deed and the Scheme is thus clear that the governing principles as regards the amount to be calculated and the rates to be applied have to be in accordance with the provisions of the Act, if an employee is covered by the provisions of the Act. If the amount is to be so calculated according to the provisions of the Act, in case of employees covered by the provisions of the Act, there is no other alternative which is offered by the Company or which is part of any award or agreement or contract entered into between the employer and employees. Thus, no reliance could be placed on Section 4(5) of the Act to submit that the employees are entitled to some greater advantage than what is available under the Act. As stated earlier, for Section 4(5) to apply there must be two alternatives, one in terms of the Act and one as per the award or agreement or contract with the employer. The Scheme on which heavy reliance was placed to submit that it afforded and made available better terms of gratuity itself emphasizes that in case of the employees who are covered under the Act, the amount payable as gratuity shall be in terms of the provisions of the Act. The Scheme does not therefore offer to the employees covered by the Act any other alternative apart from what is payable under the Act. 

22. Rather than making available an alternative to the model and modalities of calculation of amount of gratuity, as placed on statute book by the provisions of the Act, the Trust Deed and the Scheme contemplates two kinds of employees. One, who are covered under the provisions of the Act and the other, who are not so covered. The historical background and the changes that the provisions of Section 2(e) and Section 4 have undergone show that not all employees were initially sought to be covered under the Act. Those, who were in wage-brackets greater than what was stipulated in Section 2(e) till it was finally amended to do away with the wage-bracket, were not covered by the Act. The Trust Deed and the Scheme sought to devise an apparatus and make provision for those who were otherwise not covered by the Act and for this reason contemplated two kinds of employees. The Trust Deed and the Scheme were executed and formulated in the year 1979 when the wage-bracket was a definite parameter for an employee to be covered under the Act. The intent of the Trust Deed and the Scheme has to be understood in that perspective. The idea was not to afford to the employees who are covered by the provisions of the Act, a package better than what was made available by the Act, but it was to extend similar benefit to those who would not be covered by the Act. 

23. In Beed District Central Cooperative Bank Ltd., the gratuity scheme provided by the employer had better rate for computing gratuity but the ceiling limit was lower; whereas the entitlement under the provisions of the Act was at a lesser rate but the ceiling prescribed by the Act was higher than what was provided by the employer. This Court laid down that an employee must take complete package as offered by the employer or that which is available under the Act and he could not have synthesis or combination of some of the terms under the scheme provided by the employer while retaining the other terms offered by the Act. That was a situation where two alternatives were available to the employee. The High Court in the present case, however, distinguished said decision on the ground that the Scheme of the appellant “itself provided for the rates as per Section 4(2) of the Act but without upper limit under Section 4(3) of the Act”. In our view, the High Court failed to consider the effect and impact of Rule 6(b) of the scheme. The Single Judge did refer to said Rule 6(b) but found that the Rule was so broadly drafted that it could not be construed to contemplate the ceiling limit under Section 4(3) of the Act. In our view, the true import of Rule 6(b) which gets further emphasized by stipulation in the Appendix to the Scheme was lost sight of by the authorities under the Act and by the High Court. If an employee is covered by the provisions of the Act, according to said Rule 6(b), the amount of gratuity has to be calculated in accordance with the provisions of the Act. The Appendix to the Scheme reiterates the same principle. Thus, in case of such an employee the gratuity has to be calculated in accordance with the provisions of the Act and while so calculating, not only the basic principle available in Section 4(2) as to how the gratuity is to be calculated must be applied but also the ceiling which is part of Section 4(3) must also apply. The rates and the modalities of calculations of gratuity as available under the Scheme of the Rules are to apply only to those employees who are not covered by the provisions of the Act.

(G) HELD 

The Hon’ble Supreme Court after going through the facts and the relevant provisions held that that the Authorities under the Act and the High Court erred in accepting the claim preferred by the Respondent. The Company was right in going by the provisions of the Act in the present matter and by the ceiling prescribed under Section 4(3) of the Act. Any mistakes on the Company’s part in making some extra payments to some of the other employees would not create a right in favour of others in the face of the stipulations in the Trust Deed and the Scheme. 

(H) OUR COMMENTS 

The Act applies to establishments employing 10 or more persons. The main purpose for enacting this Act is to provide social security to workman after retirement, whether retirement is a result of superannuation, or physical disablement or impairment of vital part of the body.   Therefore, the Act is an important social security legislation to wage earning population in industries, factories and establishments.

Earlier, the upper ceiling on gratuity amount under the Act was INR 10 Lakh. The provisions for Central Government employees under Central Civil Services (Pension) Rules, 1972 with regard to gratuity are also similar. With implementation of 7th Central Pay Commission, in case of Government servants, the ceiling was raised to INR 20 Lakhs.

Therefore, considering the inflation and wage increase even in case of employees engaged in private sector, the Central Government decided that the entitlement of gratuity should also be revised in respect of employees who are covered under the Act. Therefore, the Government initiated the process for making necessary amendments to Act to increase the maximum limit of gratuity.

Section 4(3) of the Act amended vide Payment of Gratuity (Amendment) Act, 2018 where the upper ceiling limit of ‘INR 10 Lakhs’ was replaced with ‘such amount as may be notified by the Central Government from time to time. Vide the said amended Act, it was stated that it shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint. Subsequently, the Central Government vide Notification No. S.O. 1419(E) dated 29^th March 2018 appointed the 29^th day of March as the date on which Amended Act came into force.

On the same date vide another Notification No. S.O. 1420 (E) dated 29^th March 2018, the Central Government specified that the amount of gratuity payable to an employee under the said Act shall not exceed twenty lakh rupees.

The decision of the Hon’ble Supreme Court is a welcome decision as the Court has laid down the correct law that if an employee is covered by the provisions of the Act, according to the Rules appended to the Scheme formulated by an establishment, the amount of gratuity has to be calculated in accordance with the provisions of the Act. The employee could not have synthesis or combination of some of the terms under the scheme provided by the employer while retaining the other terms offered by the Act.

Further, if an employee is covered by the provisions of the Act according to the rules laid down appended to the scheme, the amount of gratuity has to be calculated in accordance with the provisions of the Act. Under these circumsatnces, not only the basic principle available in Section 4(2) as to how the gratuity is to be calculated must be applied but also the ceiling which is part of Section 4(3) must also apply. 

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Disclaimer 

The views expressed in this article are the personal views and for informational purposes only. The information which is summarized herein does not constitute a professional / legal advice. A detailed and thorough examination of the facts and circumstances of a particular situation are always needed for any legal opinion / advice.