The gratuity perplexity: Complication surrounding payment

Gratuity, in simple terms, is a form of monetary benefit paid to a worker upon being terminated or retired from employment. The Law Lexicon, Second Edition, has offered a detailed definition of "gratuity" in the following terms:

"Gratuity is no synonymous with compensation. A gratuity is something given freely or without recompense and it cannot be demanded as of right as it does not involve compensation. Gratuity is voluntarily given by way of favour and is an act of grace. Gratuity is not founded on any legal liability but a mere bounty stemming from appreciation and graciousness and therefore, it is capable of being given or withheld at the discretion of the giver". 

The above definition indicates that gratuity is a discretionary monetary benefit offered by an employer as a token of appreciation. In Bangladesh, the provision for gratuity is contained in the Bangladesh Labour Act 2006 (2006 Act) and is defined under section 2(10) as wages of at least 30 (thirty) days for every completed year of service and such wages shall be at the rate of the wages the worker received last and where any worker has served for more than 10 years, he shall be paid wages of 45 (forty-five) days. It is worth noting that completion of more than 06 (six) months of service will be deemed as 1 (one) year.

Gratuity is payable in cases of death, discharge, resignation, retrenchment, and termination of employment. Nevertheless, the provisions appertaining the aforementioned circumstances do not clearly spell out as to whether payment of gratuity is mandatory. As a matter of fact, the provisions have been construed in a manner which makes gratuity baffling, albeit, it is an effortless task to calculate it.

The complications surrounding gratuity can be discerned from a perusal of provisions on payment of gratuity. An example is section 26 of the 2006 Act which deals with termination of employment otherwise than by dismissal. This provision provides that when a permanent worker is terminated, he or she shall be paid compensation at the rate of 30 (thirty) days wages for his every completed year of service or "gratuity", if payable, whichever is higher. It further provides that this compensation shall be in addition to any other benefit which is payable to such worker under the 2006 Act.

The phrase "if payable" is the root to the gratuity perplexity. The provision only states "if payable" but does not clarify as to when it becomes payable. In practice, gratuity is paid by a company when it has a gratuity fund, whether or not, approved under Rule 58A of Income Tax Rules 1984. However, not all business entities in Bangladesh maintain a gratuity fund and this is due to the ambiguity involved in its interpretation; unless the law mandatorily requires maintenance of gratuity fund, most private entities will be reluctant to maintain it.

Now the question is: does it only become payable when a company maintains a gratuity fund? If so, then this frustrates the effect of the phrase "whichever is higher" as most companies will not establish a gratuity fund for two main reasons: (i) gratuity payment can be more than severance pay; and (ii) it is more easily available owing to the fact that the definition considers service exceeding 6 (six) months to be equivalent to a year of service.

Another interesting aspect of gratuity is that, in case of death, the phrase "if payable" for gratuity is absent: only the phrase "whichever is higher" is used. "If payable" has only been included in cases of discharge, retrenchment, termination of employment by employer, and termination of employment by employee. It could therefore mean that a dead worker is entitled to gratuity, provided it is higher than compensation, irrespective of whether or not gratuity fund is maintained by the employer. But in other cases, if no such gratuity fund is maintained, the worker would not be entitled to gratuity even if it exceeds the amount of compensation. This is illogical and bemusing.

India has a specific legislation dedicated towards gratuity. It is called the Payment of Gratuity Act 1972 (1972 Act). The 1972 Act makes payment of gratuity mandatory but subject to completion of certain conditions. These are simpler conditions and are principally based on an employee's period of service and the continuity of such services. The period of service is 5 (five) years as per section 4. This seems fair as gratuity is considered a monetary reward and it would be rational to require an employee to work for a certain period of time in order to establish his or her loyalty towards the employer and receive entitlement to gratuity.

The 2006 Act was last amended in 2018 and unfortunately, the complication surrounding payment of gratuity remained. It is of grave importance that the laws of Bangladesh concerning gratuity are at least as clear as the laws of India on the subject. This is because compensation of employees is one of the principal causes of dispute between employer and employee; payment of gratuity being the most debatable issue. Therefore there is an imminent need for the legislature and/or judiciary to intervene and add certainty. If greater clarity is ensured in the laws appertaining gratuity, this will reduce the potential avenues for raising labour disputes.

Mohammad Taqi Yasir, a practising Barrister-at-law, currently works for Stellar

Chambers as an Associate.

[email protected]