Interest for delayed Payment under Payment of Gratuity Act, 1972 - Need for Change?
By: Adv. M.N. Radhakrishna Menon
Date:01 February 2022
The Payment of Gratuity Act, 1972 is a synthesis of many acts, including the Minimum Wages Act, Employment and Social Policy, and others, this serves to be an extension of labour laws by establishing the minimum benefits that must be offered to workers. It is a social security law that protects the welfare of workers in industries, businesses, and organisations. The Gratuity Act, 1972 was enacted solely to provide a gratuity, i.e., a monetary award for services rendered, to employees working in factories, oilfields, mines, plantations, railway companies, shops, or other establishments upon their superannuation (e.g., old age retirement amount), retirement, resignation, death, or disablement.
Payment of Gratuity
Along with the pension, a retired individual is entitled to a gratuity. Gratuity is payable to an employee who has completed five years of continuous service prior to superannuation, retirement, resignation. However, five years of continuous service is not required if the termination occurs as a result of death or disability. This was established in the case of Allahabad Bank and others v. All India Allahabad Bank Retired Employees Association when the honourable court determined that pensionary benefits may comprise of both pension and gratuity, but that gratuity must be given to employees.
The individual entitled to the gratuity must submit a written application to the employer. Employers are responsible for calculating gratuities, notifying affected employees, and controlling authorities in writing. Payment should be paid within 30 days of the employee's due date. Failure to make the required payment within the specified time period will result in the payment of simple interest. However, if the employer is unable to pay the simple interest because of the employee's delay, the company is not obligated to do so.
Earlier, there was no provision for payment of interest on the delayed payment of gratuity. Sub-section (3-A) was added to Section 7 by Act 022 of 1987: Payment of Gratuity Amendment Act, 1987, which came into force with effect from 1-10-1987.
A focused and studied perusal of the previously mentioned provisions would show that under Section 7 (3) of the Act of 1972, the employer is obliged to make payment of gratuity within 30 days from the date it becomes due to the person to whom the gratuity is payable. The employer has given this period to deposit the gratuity amount once it becomes payable. Sub-section (3-A) of Section 7 provides the consequence of not making payment of gratuity within 30 days from the date it becomes due. The employer is saddled with statutory interest at the simple interest rate, not exceeding the rate notified by the Central Government from time to time for repayment of long-term deposits, as the Government may, by notification specify, as such, the provision is imperative in nature.
Therefore, once the peremptory provision incorporated in Section 7(3) of the Act of 1972 is not complied with, the statutory consequence follows, and the employer is statutorily bound to make payment to the employee at a simple interest rate.
In the case of Charan Singh v. Birla Textiles, this aspect was explained as follows: The Act made no provision for the payment of interest after the controlling authority calculated it and before the Collector addressed it for realisation. Indeed, it is based on the recognition of the argument that there was a "lacuna in the law" that needed to be addressed and hence, Amendment Act 22 of 1987 included sub-section (3-A) into Section 7. This provision is prospective in nature.
Notification No. S.O.- 874(E) of 1987
As per notification no.SO-874(E) dated 01.10.1987, the simple interest on delayed payment of gratuity under the Payment of Gratuity Act, 1972, has been specified as @10% per annum.
Interpretation Of Statutory Provision Vis-À-Vis 1987 Notification
From a bare perusal of the Central Government notification, it can be ascertained that this is a specific notification about the specification of a 10% rate of simple interest per annum payable by the employer to the employee on account of delayed gratuity payment. Thus, by application of rules of interpretation, it may be concluded that the Amendment to Section 7 and the Central Government notification in the same year are complementing and supplementing each other and are not in conflict with one another. Additionally, since the notification serves as a special law regarding interest rate on delayed gratuity payment, it would be prudent for the information to be empowered through the application of Section 7 (3A). Section 7 (3A) mentions that for the calculation of the rate of interest, it should not exceed the last notified rate of simple interest on long term deposits by the Central Government. Upon the enactment of Notification No. S.O. 874 (E), the Central Government notified the rate of interest specifically on delayed payment of gratuity to be set at 10%. Therefore, it would be prudent for the courts to enforce a rate of interest either equal to or not exceeding 10% (that 1987 was the last dated notification from the Central Government regarding interest on delayed payment of gratuity). This would be in conformity with Section 7 (3A) (which directs the rate of interest to not exceed the last notified rate by the Central Government) and empower and implement notification No. S.O. 874 (E) (which specifies the rate of interest on delayed gratuity payment to be 10% for the time being). Rate of interest prescribed by the notification at 10% is ‘for the time being’. Considering the interest prevailed in respect of long term deposits during 1987, the interest rate was fixed at 10%. The rate of interest is transitional. When the rate of interest on long term deposits varies from time to time, fresh notification fixing interest rate in respect of delayed payment of gratuity is to be issued, considering the variations.
The courts have interpreted the statutory provision and Central Government notification over the years and have in most instances enforced a rate of interest on delayed gratuity payment to not exceed 10%, as the rate of interest for long term deposits ranges from 9% to 11% and according to the provision laid down under Section 7 (3A) the notified interest shall not exceed the rate of interest. Considering the notified interest is 10%, it is safe to presume that the threshold does not cross the standard limit set forth, and the courts have implemented the same. However, some exceptions exist. Some of these interpretations and instances have been assessed below.
Cases wherein not exceeding 10%:
In D.D.Tewari (D) v. Uttar Haryana Bijli Vitran Nigam, the Supreme Court adjudicated upon the present matter on an appeal from the High Court of Punjab and Haryana, wherein the appellant was denied interest for the delayed payment of the gratuity amount and pension, to which the appellant was legally entitled to. Therefore, considering the said matter, the Apex court directed the respondent to pay interest at the rate of 9% for the delay in the payment of pension and gratuity amount, and the same shall be applicable from the date of entitlement till the date of payment by the respondent. If the amount was not paid within six weeks from the date of the said order, then the Apex Court imposed interest at the rate of 18% p/a from the date of which the amount is due to this employee.
In Ramchandra Majumdar v State of West Bengal, the Apex Court dealt with the delay on the payment of gratuity to a retired employee, wherein the court referred to Union of India v. Tarsem Singh and reiterated that gratuity is not a bounty to be handed out by the state at its whim. Therefore, when there is a delay in the payment of the same, then the employee is entitled to get an interest on the same, and therefore herein, the respondents, including the Government of West Bengal, were directed to pay an interest of 9% p/a till the date of actual payment.
In Karnail Singh v. General Manager, Bishrampur Area of SECL, Surajpur & Ors, the employer declined to pay the interest on gratuity on the ground of questionable conduct by the employee by not vacating the official quarter. However, the Chandigarh High Court opined that although Section 13 of the Act ensures total immunity to gratuity from attachment, the same cannot be granted leave under Section 7(3A) of the Act, which attributes to the delay of gratuity payment to the employee, wherein the statutory interest cannot be denied. Therefore, the interest rate of 8% p/a was charged, which had to be paid within four weeks, failing which the employer would require to pay an interest of 10% p/a.
In the matter of R. Kapur v. Director of Inspection (Painting and Publication) Income Tax and another, the Supreme Court has held that the right of a retired employee to obtain gratuity is not dependent on vacating the Government accommodation and imposed 18% interest on the authority concerned for non-payment of gratuity. The judges opined that the retired employee deserved more interest, and according to their judicial interpretation, levied an interest of 18% on delayed payment.
The gratuity amount to be awarded to the employees is necessary, and so is the interest on gratuity for delayed payment. The NOTIFICATION NO. S.O.- 874(E) OF 1987 mentions 10% as the rate of interest for delayed payment of gratuity, whereas the rate of interest on long term deposit was said to range between 9% to 11% during 1987, and the same has been complied with, by the Courts in India, as there has been no further notification by the Central Government on the interest rate on gratuity for delayed payment. Therefore, the said notification of 1987 shall remain in effect.
The Courts have complied with the 10% rate of interest in some matters and have further adjudged a few matters on interest according to the facts of the case along with changing times and have therein crossed the threshold of 10%. Therefore, two decades since the notification has passed, the same requires to be altered according to the current rate of interest to adhere to the prominence of the provision. It can be deduced through this that notification on the interest of delayed payment of gratuity is the need of the hour, as it is essential for the Notified interest to be on par with and not exceed the threshold of the current rate of interest for long term deposits which is said to range between 4% to 5.5%.