Gratuity Law in Pakistan

last modified Oct 16, 2012

Gratuity is one of three prevalent retirement benefits in the private sector employment.
The other two are “Pensions and Provident Fund”. It is a “lump-sum” amount of money
payable to a worker on leaving service.

What is gratuity and what laws are governing gratuity in Pakistan?

Gratuity is one of three prevalent retirement benefits in the private sector employment.
The other two are "Pensions and Provident Fund". It is a "lump-sum" amount of money
payable to a worker on leaving service (through retirement, death or termination of
service) based on salary (highest or the final salary) and period of service (over and
above six months).

Gratuity is actually a benefit for services rendered in the past. It is a reward of good,
efficient and faithful service for a substantial period of time. Before 1972, gratuity was
paid by an employer either on voluntary basis or in consequence of an award by a labor
court. However, the Labour Laws Amendments Ordinance, 1972 made payment of
gratuity a legal obligation. Amendments were subsequently made in the Standing Order
12 of West Pakistan Industrial and Commercial Establishments (Standing Orders)
Ordinance 1968. Gratuity is now a statutory right for workers who have worked at least
twelve months in an organization. The relevant laws governing gratuity in private sector
are:

 West Pakistan Industrial and Commercial Establishments (Standing Orders)

Ordinance, 1968
 Payment of Wages Act, 1936
 Factories Act, 1934
 Shops and Establishments Ordinance, 1969

Which Organizations are liable to pay gratuity to their workers?

In accordance with section 1(4) of the Standing Orders Ordinance, 1968, every
commercial establishment (employing 20 or more workers) and industrial establishment
(employing 50 or more workers) are required to pay gratuity to a worker once he/she has
met the minimum criteria. The table below shows all the organizations liable to pay
gratuity to their workers.

Minimum Minimum
Industrial
Commercial Establishments Number of Number of
Establishments
Workers Workers
Advertising/commission/forwarding At least 20 Factory At least 50
Agency, clerical department of a workers must workers must
factory, joint stock company, be employed by be employed by

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Insurance company, banking company,
Railways
bank, broker office, stock exchange,
Establishment of
Club, hotel, restaurant,
a contractor
the organization the organization
Establishment in
for continuous for continuous
connection with
Cinema, theater, 12 months 12 months
construction
industry
Other organizations as declared and
notified by the government

What are the qualifying conditions for a worker to earn gratuity?

A worker is entitled to gratuity if the following three conditions are satisfied.

1. West Pakistan Industrial and Commercial Establishments (Standing Orders) Ordinance

1968 is applicable to that establishment (whether commercial or industrial) i.e. it must
have the minimum number of workers as mentioned above
2. A person has to be a workman as defined in Standing Orders Ordinance 1968. A
workman is “any person employed in any industrial or commercial establishment to do
any skilled or unskilled, manual or clerical work for hire or reward.
3. The minimum qualifying employment period is twelve months or above. However, if a
worker has worked over six months in a specific year, he will be entitled to gratuity of one
year.

What are the qualifying events for payment of gratuity to a worker?

An employee is entitled to gratuity when:

1. He resigns from his service (voluntary retirement or voluntary redundancy in

exchange for financial benefits like golden handshake schemes)
2. His organizations terminates his services due to reasons other than misconduct
3. He dies while in service of his employer (it is not necessary that employee should
be on duty at the time of death)
4. He reaches the superannuation age and retires

However, if an employee's services were terminated on account of misconduct (like

harassment, theft etc.), gratuity would no longer be admissible to him.

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

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 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".

What is the rate of gratuity and how is it calculated?

In accordance with the provisions of law, rate of gratuity is "thirty (30) days wages for
every completed year of service or any period in excess of six months". Any employment
period exceeding six months will be considered as one year. Similarly, a completed year
of service is 12 months of service from the date of appointment of a worker in an
establishment.

The basis for calculation of wages is "wages admissible to a fixed-rate worker in the last
month of his service" or "the highest drawn pay by a piece-rate worker during the
preceding twelve months". Wages for gratuity calculation are the "gross wages" including
all permanent and regular allowances (like house rent allowance, cost of living allowance
and conveyance allowance), however, these don't include any such contingent or
unpredictable payments like temporary relief to workers (e.g. flood relief) or bonus
provided by the employer. Other than wage rate, the second determining factor in gratuity
calculation is the time period a worker has served with an establishment/organization.
Any length of service higher than six months over the number of years of service is
considered as one year for the purpose of gratuity calculation. Whereas any length of
service less than six months is not included in the course of calculating gratuity.

Consider the following illustration:

Date of joining/first appointment in an establishment 01st September, 1985

Date of voluntary retirement/resignation 30th April, 2011

Gross salary paid in 2011 Rs. 30,000

Temporary relief (flood relief) 5,000

Bonus (at the end of year indicating profitable situation

10,000
for firm)

Total length of service 25 years and 8 months

Admissible period for calculation of gratuity 26 years

To calculate gratuity, Last drawn monthly gross pay Rs. 30,000

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 30,000/26(working
Pay per day
days)=1153.85

One year gratuity (pay per day*30) 1153.85*30=34615.4

Gratuity for the whole period served i.e. 26 years 26*34,615.4=Rs. 900,000.4

What is the difference between gratuity and provident fund?

As mentioned before, gratuity and provident fund are two different retirement benefits
under the Standing Orders Ordinance 1968. Workers don't have legal right to both of
these benefits. It is rests with an employer's discretion to decide as to whether he wants to
set up provident fund or provide gratuity at the end of employment or grant both of these
benefits voluntarily. The law can't force an employer to provide either of these benefits or
both the benefits simultaneously.

Gratuity is usually awarded in addition to other benefits payable to an employee.

However gratuity is not payable during the period an employer has set up a provident
fund in his establishment with at least 50% of the contribution by the employer and the
remaining by employee. The sum of both of these contributions would be payable to a
workman even if he resigns or is dismissed from service for any reason including
misconduct (remember gratuity is not admissible in case of misconduct). However, the
law does not stop an employer to provide both gratuity and provident fund to its
employees. What is provided in the law is the minimum legal protection i.e. floor and not
the ceiling.

If an employer refuses to pay gratuity or is paying less than the due amount, what
should a worker (or his dependents) do?

The first step to get gratuity is to apply to the employer for payment of the due amount. If
there are delays on the employer side or employer is paying less than the due amount, the
aggrieved party (worker or his dependents, in case of his death) can file a claim to the
Commissioner appointed under section 15 of the Payment of Wages Act 1936. The
complaint to the Workmen Compensation Commissioner's office can be filed within three
years of the incidence of the act. A Workmen Compensation Commissioner is the officer
of directorate of labor welfare and every district has a designated Commissioner for labor
related matters.