Gratuity is a one of the retirement benefits for long service.

Before May 1972, the

payment of gratuity by employer was on voluntary basis, after that it was incorporated in
Standing Orders and becomes a statutory obligation of employers. Since then payment
of gratuity is a legal benefit of eligible worker.
There are three different retirement benefits defined in Standing Order 12(6) i.e.
Gratuity or Provident Fund or Approved Pension Fund. The commercial
establishment employed 20 or more workmen OR any industrial establishment
employed 49 or more workmen, directly or indirectly, during any days of preceding 12months, are legally liable to offer at least any one of these retirement benefit.
S.O 12(6) of W.P. Industrial & Commercial (Standing Orders) Ordinance, 1968 defines,
where a workman resigns from service or services are terminated by the employer, for
any reason other than misconduct, shall be entitled for gratuity equivalent to thirty (30)
days wages, calculated on the basis of the (wages admissible to him in the last month of
service if he is a fixed-rated workman or the highest pay drawn by him during the last
twelve months if he is a piece-rated workman), for every completed year of service or
any part thereof in excess of six months: provided that, where the employer has
established a provident fund to which the workman is a contributor and the contribution
of the employer to which is not less than the contribution made by the workman, no such
gratuity shall be payable for the period during which such provident fund has been in
existence. Provided further that if through collective bargaining the employer offers and
contributes to an Approved Pension Fund as defined in the Income Tax Ordinance,
2001, and where the contribution of the employer is not less than fifty per cent of the
limit prescribed in the aforesaid Ordinance, and to which the workman is also a
contributor for the remaining fifty per cent or less, no gratuity shall be payable for the
period during which such contributions has been made.]
Which Establishment is Liable to Pay Gratuity?
As per Section 1 of the Ordinance, the provision of gratuity becomes applicable to:
every commercial establishment employing or employed twenty or more workmen and
every industrial establishment employing or employed fifty or more workmen, on any
day during the preceding twelve month.

When Gratuity becomes payable?

Gratuity becomes payable at time of separation from services which could be: (i) by
resignation by the workman, (ii) termination of services by employer due any reason
other than misconduct (in case of proved misconduct employer is not bound to pay
gratuity), (iii) in case of death and (iv) retirement or superannuation of a worker.
Who is entitled for Gratuity?
There are following conditions to check the entitlement of gratuity:
(i) provision of statutory gratuity is applicable on the establishment i.e. industrial or
commercial, in respect to number of workmen employed, as explained above.
(ii) employee is a "workman" as defined in Section 2(i) of this Ordinance as someone
who is employed to do any skilled or unskilled, manual or clerical work. According to
various Courts judgments, it is the nature of duties he is performing rather than his
designation or wages which determine whether he is a "workman" or not.
(iii) length of service should be excess to six months or more.
Rate of Gratuity
Earlier the rate of gratuity was 15-days of wages for each completed year of service and
later on it was revised as 20-days wages. Right now the present rate of gratuity is 30days wages for every completed year of service or for any period in excess of six month
in the same establishment.
How to calculate the amount of Gratuity payable?
Following is procedure to calculate the payable gratuity of an eligible worker:
1.

Calculate per day wage rate based on 26-days in a month, by dividing

monthly wages by 26-days;

2.

Rate per day is multiplied by rate of gratuity which is 30 days wages

(i.e. per day wage x 30); and

3.

Finally calculate payable amount of gratuity for the entire service

period, the formula is per day wage x 30 (rate of gratuity) x No. of
service years

Six-month rule is followed to decide whether to pay gratuity for the last year of service
depending upon whether the service is more or less than six months. For service of
more than six months, gratuity is payable otherwise not.
The 26-days month is defined in the Explanation of Section 3 of the Minimum Wages for
Unskilled Workers Ordinance, 1969 i.e. "month" means a normal working period of
twenty-six days calculated at the rate of forty-eight hours of work per week. Similarly the
minimum wages for skilled and semi-skilled workers is also based on 26 days in a
month. The yearly provincial gazettes specify the same for these categories of workers.
Meaning of Wages for Calculation of Gratuity
All payments or allowances which are regular, permanent and non-contingent in
nature, no matter by what name they are called, are included in wages for the purpose
of gratuity. Any payments which are irregular (unpredictable and/or depend on the
goodwill of employer) or contingent in nature (payable upon existence or
disappearance of certain conditions (e.g., profit) which could not be predicted in
advance) then those payments are not part of wages for the purpose of calculating
gratuity.
In the case of fixed-rated worker, gratuity is to be calculated on the basis of wages
admissible to worker in the last month of service.
In the case of piece-rated worker, gratuity is to be calculated on the basis of highest pay
drawn during the last twelve months, for every completed year of service or any part
thereof in excess of six months.
Payment of Gratuity in case of Death of Worker
In case of death of a workman, gratuity is payable to the legal dependents of a
workman. As mentioned above, death may not necessarily occur on duty but the worker
should be in continuous service at that time. The amount of gratuity, in this case, is
transferred to "Workmen Compensation Commissioner" who will then allocate this
amount to the dependents of a worker. The dependents of a deceased worker include
"his widowed mother, his own widow, minor son and unmarried daughter". The
Commissioner shall proceed with the allocation of the deposit amount to the dependents
of the deceased in accordance with the provisions of Section 8 of the Workmens
Compensation Act, 1923. If the employer fails to deposit the gratuity amount then the

dependents of the deceased may submit an application to Commissioner for the

recovery.
Important points to be remembered regarding payment of gratuity:

Gratuity has no connection with loss or profit or the financial position of

an employer; it has to be paid to eligible worker.

Completed year of service means a period of 12-months service

counted from the date of first appointment in the same establishment.
It does mean calendar year, financial year or any other period.

The period of service which is 6-months or less, will not be considered

for payment of gratuity.

Retirement on attaining the age of superannuation is treated as

termination of service by employer and voluntary retirement is
considered resignation by worker.

Legally employer is bound to offer only one retirement benefit out of

three. However, employer at its sole discretion may also offer provident
fund or worker unions have to right to negotiate and get more benefits
simultaneously.