Gratuity is a lump sum amount that an employer pays the employee (on contract) when he retires or resigns from the organization. An employee does not contribute any portion of his salary towards this amount. The rationale for gratuity is to encourage employees to offer longer service to the employer and to ease the termination of contract of employment by offering the sum of gratuity as consolation.
Gratuity is not provided for as a minimum condition of employment. But it has developed as a good practice in employment and employees have come to expect it from their employers.
Gratuity is usually paid in the following circumstances:
(i) when the employee retires
(ii) When the employee resigns
(iii) In event of death of the employee
(iv) In event of disablement i.e. because of accident or illness.
Generally, gratuity is payable upon successful completion of the agreed contract term. In alternative, an employee qualifies for gratuity payment after a specified period of employment, usually five years of service with the employer.
The gratuity payable depends on the terms of the contract of service. The prevalent practice is that the employer pays the employee a month’s basic salary for every year of service. However, there is no reason why the employer and employee cannot agree on alternative amounts.
In essence, gratuity should be a term of the contact of employment. It is not payable if the employee is summarily dismissed as the employee is usually in fundamental of the terms of employment. In such an instance, the employee cannot insist on enforcing the terms of employment against the employer having failed to keep his part of the bargain. But that does not prevent the employee from staking a claim in the industrial court alleging unfair dismissal and citing the need to avoid paying the gratuity as why the employer dismissed him.
With regard to resignation, the contract of employment should state the minimum period that the employee should have served to be entitled to gratuity. Thus if an employee resigns after 5 years he is eligible for gratuity. The law does not anticipate that one will work for a single employer all his life.
If the employee resigns citing ill-health, depending on the stipulations of the contract, he may or may not be eligible for gratuity. The contract of employment may put a limit on the period which the employee must have served to be eligible for gratuity. However, if the ill-health is as a result of work injury acquired while with the employer, the employee may be entitled to claim gratuity, at least for the period already served.
In event of death of the employee, the gratuity is to be paid to the nominee of the employee or the personal representative. Just like in resignation, the contract of employment may stipulate the period that the employee must have served to be eligible for gratuity.
When an employee is laid-off due to redundancy reasons, depending on the stipulation of the contract of employment, the employee should be entitled to gratuity. That is, at least for the years worked as he can argue that, but for the lay-off, he was willing to work until he was entitled to gratuity. But usually, gratuity here is part of the negotiated golden handshake for the lay-off.
Finally, if the employer is undergoing losses or goes into receivership, those are not reasons enough to disentitle the employee to gratuity. Losses do not afford a company the defense to breach a contract, and gratuity is clearly a matter of contract of employment. If the company is under receivership, the affected employees will be entitled to claim gratuity against the receiver of the employer as a contractual debt.