Gratuity

Gratuity is a payment an employer owes an employee who has completed five years of continuous service, made when employment ends — by resignation, retirement, superannuation, death or disablement. It is a statutory entitlement where the Act applies, not a discretionary bonus.

The formula is written into the Act. For a monthly-rated employee it is fifteen days’ wages for every completed year of service, where fifteen days’ wages means the last drawn monthly wages divided by twenty-six and multiplied by fifteen. A part-year in excess of six months counts as a full year, so five years and seven months is calculated as six years, while five years and six months is not.

"Wages" here is narrower than gross pay: it means basic salary plus dearness allowance, and excludes bonus, house rent allowance, overtime and other allowances. Using gross pay in the calculation overstates the entitlement, which is the most common error people make.

The five-year requirement does not apply where employment ends because of death or disablement. Where the Act does not cover an establishment, an employer may still pay gratuity as a matter of contract or goodwill, but the statutory formula and ceiling do not govern it.