Gratuity Law in Pakistan (2024)

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

Gratuity is one of three prevalent retirement benefits in private sector employment. The other two are "Pensions (approved Pensions Fund) 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 for good, efficient and faithful service for a substantial period of time. Before 1972, gratuity was paid by an employer either on a voluntary basis or in consequence of an award by a labour 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 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 the private sector are:

Standing Orders Legislation

• 1. The Industrial and Commercial Establishments (Standing Orders) Ordinance, 1968 (applicable in IC)
• 2. Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 (adapted by the province of Punjab through Amendment Act of 2012)
• 3. The Khyber Pakhtunkhwa Industrial And Commercial Employment (Standing Orders) Act, 2013
• 4. The Sindh Terms of Employment (Standing Orders) Act, 2015
• 5. The Balochistan Industrial and Commercial Employment (Standing Orders) Act, 2021

Payment of Wages Legislation

• 1. Payment of Wages Act, 1936 (applicable in ICT)
• 2. Payment of Wages Act, 1936 (adapted by the province of Punjab through Amendment Act of 2014)
• 3. The Khyber Pakhtunkhwa Payment of Wages Act, 2013
• 4. The Sindh Payment of Wages Act, 2015
• 5. The Balochistan Payment of Wages Act, 2021

Factories Legislation

• 1. The Factories Act, 1934
• 2. The Factories Act, 1934 (adapted by the province of Punjab through the Amendment Act of 2012)
• 3. The Khyber Pakhtunkhwa Factories Act, 2013
• 4. The Sindh Factories Act, 2015
• 5.Balochistan Factories Act, 2021

Shops and Establishments Legislation

• 1. The Shops and Establishments Ordinance, 1969
• 2. The Shops and Establishments Ordinance, 1969 (adapted by the province of Punjab through Amendment Act of 2014)
• 3. The Khyber Pakhtunkhwa Shops and Establishments Act, 2015
• 4. The Sindh Shops and CommercialEstablishment Act, 2015
• 5. The Balochistan Shops and Establishments Act, 2021

Which Organizations are liable to pay gratuity to their workers?

In accordance with section 1(4) of the Standing Orders Ordinance, 1968 (and its variant in Punjab), 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 Khyber Pakhtunkhwa Act and theSindh Terms of Employment (Standing Orders) Act, 2015 reduce the minimum number of workers in commercial establishments to 10 workersand in industrial establishments to 20 workers. The Balochistan Industrial and Commercial Employment (Standing Orders) Act, 2021 reduces the minimum number of workers for all kinds of establishments to 10 workers. The table below shows all the organizations liable to pay gratuity to their workers.

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

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

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 organization terminates his services due to reasons other than misconduct
3. He dies while in service of his employer (it is not necessary that the 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.), a gratuity would no longer be admissible to him.

In the case of the 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 the "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, the 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. Originally, gratuity was set at 15 days' wages for every completed year of service. In 1973, the rate was revised to 20 days' wages. In 1994, it was further revised to 30 days' wagesfor every completed year of service or any period in excess of six months. After the 18th Constitutional Amendment of 2010, provinces have enacted necessary legislation providing for gratuity on termination of employment. Punjab and the Islamabad Capital Territory provide 30 days' wages for each year of service. Khyber Pakhtunkhwa and Sindh provide one-month wages for each year of service. Balochistan requires two-months wages as gratuity for each year of service.

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:

Note: If the employment period in the above example was 31 years and 4 months, the gratuity would be payable only for 31 years.

Wages for workers are determined on a 26-day month basis as defined in theMinimum Wages for Unskilled Workers Ordinance, 1969. Minimum wage notifications, issued by the provincial governments, also determine wages for unskilled, semi-skilled and skilled workers on a 26-day basis.

Gratuity is calculated on the basis of gross wages including all those allowances and fringe benefits which are permanent, regular and non-contingent in nature. The irregular and non-contingent payments (bonus, profit, payment for annual leave etc.) are not part of wages for the purpose of calculating gratuity. In the case of fixed-rated workers, gratuity is calculated on the basis of wages payable to a worker in the last month of service. In the case of piece-rated workers, gratuity is calculated on the highest pay drawn during the last 12 months.

What is the difference between gratuity, provident fund, and pension 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. Both the Khyber Pakhtunkhwa and Sindh Standing Orders Acts further provide that the amount paid to the worker under provident fund must not be less than the amount of gratuity admissible to such worker.

It must be emphasized here though that after a 2007 amendment, there is also a provisions for an Approved Pension Fund. If, agreed through collective bargaining, an employer offers and contributes to an “Approved Pension Fund” as defined in the Income Tax Ordinance, 2001 (XLIX of 2001), and where the contribution of the employer is at least 50% of the limit prescribed in the aforesaid Ordinance, and to which the workman is also a contributor for the remaining 50% or less, no gratuity is payable for the period during which such contributions has been made. The Pension Fund option is not provided under the Khyber Pakhtunkhwa and Sindh Standing Orders Acts.

It is interesting to note however that in the case of misconduct, an employer is not required to pay gratuity however if a Provident Fund is maintained, the workman is entitled to receive the amount standing to his credit in the provident fund, including the contributions of the employer to such fund, even if he resigns or is dismissed from service.

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.

How is gratuity paid to the worker's dependents in the case of worker's death?

In the event of a worker's death, gratuity is payable to the legal dependents of a worker. The amount of gratuity, as calculated above, is transferred to theWorkmen Compensation Commissioner, appointed under theWorkmen Compensation Act 1923. The Commissioner then allocates the amount to the worker's dependents who are defined as thewidow, minor son (under 18 years), and unmarried daughter, or a widowed mother. The amount of gratuity is allocated among the dependents in accordance with the provisions of section 8 of theWorkmen’s Compensation Act, 1923 (or its provincial variants).

Some points to remember

1. Gratuity is payable on completion of 12 months of service after first day of employment. It is not related to calendar year (January to December) or fiscal or financial year (July to June) or any other arbitrary period.

2. Gratuity is payable for more more than six months of employment. If the period of employment is less than 6 months, no gratuity is payable.

3. As stated above, employer is required to provide only one benefit: Gratuity or Provident Fund or Pension Fund. However, under a collective agreement/memorandum of understanding, the employer may provide multiple benefits or the rate of gratuity may be raised from 30 days' wages to 40-45 days' wages.

4. Unlike Bonus or workers' participation in profits, gratuity has no connection with the financial position of the employer. It must be paid to an eligible worker at the end of service, whether by superannuation or resignation or death or termination (for any reason other than misconduct).