Reflection on the Payment of Gratuity Act

in light of Promotion of Social Security of Workmen

A.Sarveswaran
Department of Private and Comparative Law, University of Colombo, Sri Lanka

Extended Abstract

Background

Gratuity is a retirement benefit of the workmen in the semi-government sector and in the private sector.
Gratuity is paid to the workmen as gratitude for the services rendered to their employers. In 1983, the
Payment of Gratuity Act1 has been enacted to provide a statutory right for gratuity to the workmen
employed in workplaces where fifteen or more workmen are employed. This paper discusses the extent to
which the Act promotes social security of workmen.

Objectives

The objectives of this paper are to identify the provisions of the Payment of Gratuity Act which promote
social security of workmen, and to assess the extent to which they promote social security of workmen,
and to make suggestions, if any, to amend the Payment of Gratuity Act to promote social security of
workmen.

Research Methods

Qualitative research method has been adopted to carry out this research. The provisions of the Payment of
Gratuity Act that promote social security of workmen have been identified and assessed in light of
decided cases to make findings as to the extent that they promote social security of workmen.

Findings

The key provision in the Act for payment of gratuity is Section 5(1). Section 5 (1) of the Act provides:
“Every employer who employs or has employed fifteen or more workmen…on termination …of the
services …of a workman who has a period of service of not less than five completed years under that
employer, pay to that workman..., a gratuity computed in accordance with the provisions of this Part ...
within a period of thirty days of such termination.”

1
No 12 of 1983.
1
The legal provision relating to payment of gratuity covers the workmen employed in workplaces where
fifteen or more workmen are employed, and excludes the workmen employed in workplaces which
employ less than fifteen workmen. According to the Act, if the workmen are employed in work places
which employ fifteen or more workers, a surcharge is added with gratuity for non-payment of gratuity
within the specified period2 and the gratuity dues are recovered by the Commissioner from the defaulters.3

The workmen who are employed in workplaces where less than fifteen workmen are employed will have
to make their application to a Labour Tribunal4 within six months from the date of termination of their
services or the dispute relating to payment of gratuity will have to be referred for settlement by
arbitration.5 The workmen have practical and financial difficulties in filing applications and fighting their
cases in the Labour Tribunals. If the workmen fail to make their applications within the period, they will
lose their gratuity.

The differentiation of workmen based on the number of workmen in their workplace is not a reasonable
criteria, and the differentiation have the effect of non-payment of gratuity to a large number of workmen
employed in workplaces which employ less than fifteen workmen. Therefore, it is suggested to amend
Section 5(1) of the Payment of Gratuity Act to provide gratuity to workmen irrespective of number of
workmen employed by their employers.

Section 5(1) requires to have “a period of service of not less than five completed years under that
employer” to qualify for gratuity. The Section has created an ambiguity as to what is meant by ‘completed
years’. Section 20 interprets ‘completed service’ as: “…uninterrupted service and includes service which
is interrupted by approved leave on any ground whatsoever, a strike or lock-out or cessation of work not
due to any fault of the workman concerned…” In Ceylon Petroleum Corporation v. Commissioner of
Labour6 the workman was unable to report to work for a period of about 12 years because of political
victimization. The Court of Appeal held that as the cessation of work was not because of the fault of the
workman, the period should be considered not as a break in service, but as continuous period for
calculation of gratuity. In an another case, Ceylon Petroleum Corporation v. Commissioner of Labour7,
the employer interdicted the workman and paid half a month salary during the period of interdiction. The
Court of Appeal held that the interdiction is not a cessation of employment by the workman and the

2
Section 5(4).
3
Section 8.
4
Section 31 B(1)(b) of the Industrial Disputes Act.
5
Sections 3(1)(d) and 4(1) of the Industrial Disputes Act.
6
C.A No.868/2008.
7
C.A 824/2008.
2
period of service continued for the purpose of calculation of gratuity. The liberal interpretation of what is
‘completed service’ promotes social security of workmen.

However, the Supreme Court had a restrictive approach in the recent case of Brown and Company Ltd v.
Commissioner of Labour.8 In this case, the workman received his gratuity when he retired from his
service after 24 years of service. Thereafter, the workman was employed by the company for about 19
years on fixed term contracts from the very next day of his retirement. The contentious issue in this case
was whether the period of service before the retirement and after the retirement should be considered
together as continuous period of service or the service before the retirement and after the retirement
should be considered separately for calculation of gratuity. The decision makes a difference in the amount
of gratuity as calculation of gratuity is based on period of service and the salary drawn in the last month.9

In this Case, the Supreme Court differentiated the decision of the Court of Appeal in Finance Company v.
10
Kodipilli and held that the total period of service cannot be considered as the workman had accepted
gratuity when he retired from his service, and thereafter he was employed on contract basis.11 The
decision of the Supreme Court defeats the objective of the legislation which is payment of gratuity for
‘completed years of service’ but not for ‘continuous years of service’, and the decision should not be
based on what the workman had accepted, but what the scheme of the Act provides.

When an employer alienates his business within a period of five years, the period of service under the
employer is added with the period of service under the new employer for calculation of gratuity.12 Section
7C provides that in calculation of gratuity when “… a workman in any company which takes over the
functions of a public corporation or takes over and carries on any Government Owned Business
Undertaking has completed five years of service in such company, his period of service with the public
corporation or the Government Owned Business Undertaking shall be included.”

In Colombo Metropolitan Bus Company Ltd v. Nimal Saranathissa, Commissioner of Labour,13 a

workman who worked in the Regional Transport Board had been absorbed by the newly formed public
company. The Regional Transport Board paid his gratuity before the workman joined in the company.
The Court of Appeal interpreted Section 7C and held that the company should consider the period of

8
SC Appeal No. 84/2011.
9
Section 6 (2)(a).
10
CA No. 1111/2003.
11
See Associated Newspapers of Ceylon Ltd v. Abeysinghe, C.A.No.2077/2004.
Colombo Metropolitan Bus Company Ltd v. Nimal Saranathissa, Commissioner of Labour, C.A No.143/2003 for a
different view by the Court of Appeal.
12
Section 14.
13
C.A No.143/2003.
3
service in the Board and in the company together for calculation of gratuity, and deduct the amount of
gratuity paid by the Board and pay the balance to the workman.14

According to the Act, the wage or salary for calculation of gratuity means “the basic or consolidated wage
or salary; cost of living allowance, special living allowance or other similar allowance…”15 In Coca-Cola
Beverages Sri Lanka Ltd v. Edirisinghe, Commissioner General of Labour16 the Court of Appeal held
that payment of a recurring monthly allowance not in the nature of perk should be considered in
calculation of gratuity.

The Act expressly excludes domestic servants and personal chauffeurs from its application.17 As the
domestic workers and personal chauffeurs work very closely with their employers and faithfulness and
sincerity are expected from them more than the workers in other categories, denial of gratuity to them is
ingratitude and denies social security to them. Therefore, it is suggested to amend the Act to cover
domestic workers and personal chauffeurs for payment of gratuity.

Conclusion

The provisions in the Payment of Gratuity Act and the judicial interpretations of the provisions promote
social security of workmen. However, the ambiguous provision relating to ‘five completed years’ requires
judicial interpretation in consonance with promotion of social security of workmen when contracts have
different types of breaks. The Act shall be amended to provide gratuity to workmen irrespective of the
number of workmen employed by their employers, and also to include domestic workers.

References

Legislation

Industrial Disputes Act

Payment of Gratuity Act

Cases

Associated Newspapers of Ceylon Ltd v. Abeysinghe, C.A.No.2077/2004

Brown and Company Ltd v. Commissioner of Labour, SC Appeal No. 84/2011
Ceylon Petroleum Corporation v. Commissioner of Labour, C.A 824/2008
14
See also Lanka Marine Services (Pvt) Ltd v. Wimalasena, Commissioner of Labour, C.A.No.899/1998.
Labour Officer v. Distilleries Company of Sri Lanka Ltd, (2000) 2 Sri LR 380 at p. 384 for similar interpretation
of Section 7C of the Act.
15
Section 20.
16
C.A 382/2009.
17
Section 7.
4
Ceylon Petroleum Corporation v. Commissioner of Labour, C.A No.868/2008
Coca-Cola Beverages Sri Lanka Ltd v. Edirisinghe, Commissioner General of Labour, C.A 382/2009
Colombo Metropolitan Bus Company Ltd v. Nimal Saranathissa, Commissioner of Labour, C.A
No.143/2003
Finance Company v. Kodipilli, CA No. 1111/2003
Labour Officer v. Distilleries Company of Sri Lanka Ltd, (2000) 2 Sri LR 380
Lanka Marine Services (Pvt) Ltd v. Wimalasena, Commissioner of Labour, C.A.No.899/1998