The Payment of Gratuity Act, 1972 (“Act“) as a labour welfare legislation was enacted to provide a monetary benefit to an employee after retirement. It lays down the rules and regulations for applicability, calculation and payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments. Vide Section 4 (5) of the Act which states that “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“, the Act aims to ensure that when an employee has an alternative and more beneficial option for gratuity, the employee has the right to choose that alternative option.
In a recent judgment delivered by the Supreme Court of India (“Supreme Court“), it was held that for Section 4 (5) of the Act to apply, there must be better terms of gratuity available to the employee under an award or agreement or contract with the employer as against what has been provided under the terms of the Act. The Supreme Court judgment was delivered with respect to an appeal1 (“Appeal“) filed by BCH Electric Limited (“Company“) against Pradeep Mehra (“Employee“). The dispute between the parties arose when the Employee after retirement raised a claim for a larger gratuity amount than what was paid by the Company. It was the Employee’s contention that his gratuity had to be determined as per the gratuity scheme (“Scheme“) formulated by the Company and not as per the provisions of the Act.
The Company in the year 1979 while executing a trust deed (“Trust Deed“) had constituted an ‘Approved Gratuity Fund’ for providing gratuity to their employees. Under Rule 6 of the Scheme in sub rule (a) it was stated that amount of gratuity to be paid to an employee would be calculated in the manner provided under the Scheme and sub rule (b) stated that notwithstanding the provision herein if any member was covered by the Act, the calculation of the amount of gratuity would be in accordance with the provisions of the Act. The Employee was appointed as the chief operating officer of the Company in the year 2000 with a basic salary of Rs. 1,05,000/- per month subject to certain terms and conditions. One of the terms stated that the Employee would be entitled to gratuity on his becoming eligible as per laws. The Employee served about twelve years of services during which the emoluments paid to him were increased from time to time and a certain percentage of his basic salary was adjusted towards gratuity. At the time of retirement, the Employee was paid Rs. 10,00,000/- as gratuity being the maximum limit prescribed under the Act. However, the Employee contended that the Company was required to pay him an amount of Rs. 1,83,75,000/- as gratuity as he was covered under the Scheme and therefore the maximum limit under the Act would not apply to him.
The Employee then filed a claims petition before the Controlling Authority appointed under the Act. The Controlling Authority allowed the claims petition and ruled that the Employee was entitled to the more beneficial terms of the Scheme which did not have a maximum limit. The Controlling Authority stated that the Scheme mentioned only the method of calculation of the gratuity which would be according to the provisions of the Act for employees coming under the purview of the Act and that there was no ceiling on the amount that could be paid as gratuity to the employees. It held that since in some instances certain employees of the Company were paid more than the maximum limit under the Act, and the Company also earmarked a certain percentage of the basic salary of the employees towards gratuity which was beyond the maximum limit prescribed under the Act, the Company intended to make available to the employees a more liberal and beneficial gratuity scheme abandoning the maximum limit under the Act. The Company contested the order before the Appellate Authority and later the Single bench of the High Court and Division Bench of the High Court, however the order passed by the Controlling Authority was upheld in each instance and the appeals filed by the Company were dismissed. The Company was then constrained to file the Appeal before the Supreme Court.
Before the Supreme Court the Company submitted that the Employee was entitled to the gratuity under the provisions of the Act. The Company claimed that to attract the provisions of Section 4 (5) of the Act, there had to be a more beneficial gratuity alternative in the form of an award, agreement or contract with an employee. He stated that no claim or pleading was made by the Employee regarding the existence of any award, agreement or contract. He further relied on the law laid down by the Supreme Court in the case of Beed District Central Cooperative Bank Ltd. v. State of Maharashtra and others and Union Bank of India and others vs. C.G. Ajay Babu and Another stating that either the statutory provisions or the contractual scheme can be followed and not a combination of both the elements.
The Employee relying on the ruling under the case of Union Bank of India and others vs. C.G. Ajay Babu and Another stated that Section 4 (5) of the Act overrode other provisions of Section 4 of the Act and the Employee would only need to show that a scheme was made by the Company which provided no maximum limit and therefore the scheme would be protected and apply to the Employee under the provision of Section 4 (5). He further contended that Rule 6 (b) of the Scheme would not apply since the Employee would have the right to avail more beneficial gratuity terms of the Company’s Scheme under Rule 6 (a) of the Scheme and thus Section 4 (5) of the Act would prevail.
The Supreme Court while deciding the issues noted that two choices needed to be available to an employee with one under the provisions of the Act and another under an arrangement with the employer and if the arrangement provided more beneficial terms, the employee could not be denied the right to avail the better benefits.
Further with regard to the issue as to whether an alternative was available to the Employee under an arrangement with the Company, in the present circumstances the Supreme Court noted that the Scheme divided the employees into two categories. The first category was employees to whom the Act applied and under Rule 6 (b) of the Scheme their gratuity would be calculated under the provisions of the Act and the second category was to whom the Act did not apply and therefore they could receive gratuity as per the provisions under the Company’s Scheme. The Supreme Court held that the Trust Deed and the Scheme were executed when there existed a wage bracket as a parameter to decide whether the employee was covered under the Act or not. Thus, the Trust Deed and the Scheme were executed to provide benefits to the employees who would not be covered under the Act and to not provide employees covered under the Act a better alternative. At the time of retirement of the Employee, due to various amendments in the Act, the criteria of the wage bracket was deleted thus ensuring all the employees irrespective of their wages would be eligible under the Act. The Supreme Court held that no reliance could be placed on Section 4 (5) of the Act since no alternative was provided to the Employee and the only option available to the Employee was of determination of his gratuity under the provisions of the Act.
While referring to the judgment laid down in Beed District Central Cooperative Bank Ltd. v. State of Maharashtra and others, the Supreme Court stated that when provided with an alternative gratuity scheme by the employer, the employee had the option to either accept the complete scheme provided by the employer or otherwise accept the benefits available under the Act. The employee cannot avail a combination of certain terms under the gratuity scheme and other terms under the Act. The Supreme Court reiterated that in the present case, the Employee did not have an alternative option available to him. Further under Rule 6 (b) of the Scheme not only would gratuity be calculated as per the provisions of the Act, but even the maximum limit prescribed under the Act would apply to the Employee.
Thus, while laying down the conditions under which Section 4(5) of the Act would apply, the Supreme Court allowed the Appeal of the Company noting that the Company was right in holding that the provisions of the Act would apply including the prescribed ceiling under the Act while providing gratuity to the Employee.