Understanding Gratuity Laws under the Social Security Code 2020 in India

Legal Framework of Gratuity under the Social Security Code 2020: A Comprehensive Guide

The Code on Social Security, 2020 (SSC 2020), enacted on September 28, 2020, marks a significant milestone in India's labor laws by consolidating 13 existing statutes, including the Payment of Gratuity Act, 1972. This unification aims to create a robust social security framework that addresses the evolving needs of the workforce. Chapter V of the SSC 2020, encompassing Sections 53 to 58, specifically deals with gratuity, enhancing its provisions to cover contemporary employment models such as gig, platform, and fixed-term work. As of October 2025, the full implementation of the Code remains pending due to the finalization of rules, yet its legal structure for gratuity balances employee protections with employer responsibilities. This article explores the legal framework of gratuity under the Social Security Code 2020, providing insights into applicability, eligibility, calculation, payment mechanisms, forfeiture, enforcement, and ongoing challenges—essential knowledge for employers, employees, and legal professionals navigating gratuity laws in India.

Applicability of Gratuity under SSC 2020

Gratuity under the Social Security Code 2020 applies to a wide range of establishments, including factories, mines, oilfields, plantations, ports, railway companies, shops, and any other entity employing 10 or more workers on any day within the preceding 12 months. The appropriate government—whether Central or State, as outlined in Section 2(7)—holds the authority to extend this coverage through notifications, potentially encompassing smaller units or emerging sectors like e-commerce and startups. This approach retains the employment threshold from the Payment of Gratuity Act, 1972, while introducing greater flexibility to promote universal social security. Certain exclusions exist, such as employees governed by separate government rules, like those in Central or State services, to prevent regulatory duplication. Additionally, establishments exempted via specific notifications or schemes are not covered, ensuring clear demarcation. The broad scope of applicability guarantees that workers in both traditional and modern industries can claim gratuity entitlements, with the notification mechanism allowing for adaptive expansion to bridge gaps in unorganized and informal sectors, which constitute over 80% of India's workforce according to ILO reports from 2020. By setting a low threshold of 10 employees, the Code fosters inclusivity for small and medium enterprises (SMEs) while maintaining practical compliance standards.

Eligibility Criteria for Gratuity

Eligibility for gratuity under Section 53 of the Social Security Code 2020 requires employees to have completed five years of continuous service, qualifying them upon superannuation, retirement, resignation, death, or disablement caused by accident or disease. Superannuation refers to retirement at the employer-prescribed or statutory age, while retirement involves voluntary exit after meeting service conditions, and resignation denotes voluntary termination. In cases of death, payments go to nominees or legal heirs, and disablement covers instances rendering the employee unfit for work. Continuous service is interpreted liberally, encompassing interruptions from lay-offs, strikes, lockouts, or authorized leaves like maternity or medical absences, as supported by judicial precedents such as Jaswant Singh Gill v. Bharat Coking Coal Ltd. (2007). A key innovation in Section 53(2) waives the five-year mandate for fixed-term contract employees, enabling pro-rata gratuity based on service length upon contract end, which is particularly beneficial for short-term roles in IT, construction, and gig economies. For seasonal establishments, like sugar mills or agricultural units, service counts as continuous if workers complete 75% of operational days annually. The Code further promotes inclusivity by extending eligibility to gig and platform workers, defined in Section 2(35) as those outside conventional employer-employee dynamics, aligning with India's growing gig sector of over 7 million workers per NITI Aayog 2022 estimates. Journalists enjoy a reduced threshold of three years, acknowledging the instability in media jobs. This framework safeguards against disqualifications from involuntary breaks and democratizes access, though ambiguities in pro-rata calculations for contracts under one year—stemming from links to the Industrial Relations Code, 2020—pose challenges, as noted in PRS Legislative Research 2021 analyses. Overall, these criteria ensure equitable gratuity rights for diverse and precarious worker groups.

Calculation of Gratuity

The calculation of gratuity under Section 54 follows a standardized formula: 15 days' wages for each completed year of service or any part exceeding six months. Wages here include basic pay and dearness allowance but exclude overtime, bonuses, house rent allowance, or other incentives, as per Section 2(91). For monthly-rated employees, 15 days' wages is computed as (last drawn wages × 15) ÷ 26, accounting for working days minus weekly offs. Piece-rated or daily-wage workers use the average daily wage from the prior three months, while seasonal workers receive seven days' wages per season to suit their sporadic schedules. A ceiling caps the maximum payable gratuity at ₹20 lakhs, based on 2023 amendments retained from the 1972 Act, with provisions for Central Government revisions to reflect inflation. Journalists apply the same formula but with their three-year eligibility. In death or disablement scenarios, gratuity is disbursed to nominees or heirs based on service up to the incident. This uniform approach minimizes disputes and ensures transparency, though the wage exclusions could disadvantage those with variable income. The mechanism's adaptability to various pay structures underscores its role in delivering fair payouts, supporting financial stability for retiring or affected workers.

Payment and Funding Mechanisms

Sections 55 and 56 outline the payment and funding of gratuity, requiring employers to disburse it within 30 days of the due date, such as retirement or termination, with simple interest at Central Government rates for any delays to enforce timeliness. Employees may nominate family members—like spouses, children, or dependent parents—or legal heirs for gratuity in death cases, following a prioritized hierarchy, with employers obligated to keep records for smooth transfers. Funding is mandated through approved insurance schemes or Pension Fund Regulatory and Development Authority (PFRDA) managed funds under Section 56, where establishments with 10 or more employees must register with insurers to form dedicated gratuity funds. Exemptions are possible for those with vetted internal trusts. This 30-day rule alleviates employee financial strain during transitions, while insurance protects against employer bankruptcy, common in small firms, and eases business burdens. The nomination process bolsters family support in crises, integrating gratuity into broader social security like provident funds for enhanced reliability and compliance.

Forfeiture of Gratuity

Forfeiture under Section 57 is narrowly defined, applicable only to terminations for riotous or disorderly conduct, violence against employers or colleagues, or willful property damage causing financial loss, and limited strictly to the loss extent for proportionality. Judicial oversight, as in the Supreme Court's ruling in Travancore Plywood Industries v. Regional Joint Labour Commissioner (1996), demands justified evidence and quantified losses to curb arbitrary actions. This restrictive policy shields employees from losing benefits over minor issues, upholding gratuity as a non-waivable right in line with fair treatment principles. By confining forfeiture to severe misconduct, the Code builds confidence in the labor system, ensuring secure entitlements.

Enforcement and Dispute Resolution

Enforcement under Section 58 vests in a Controlling Authority appointed by the appropriate government, tasked with determining gratuity amounts, adjudicating disputes, and recovering dues as land revenue arrears through quasi-judicial powers like summoning witnesses. Claims by employees or nominees must be filed within prescribed timelines (typically 90 days, awaiting rules), with employers depositing contested sums during proceedings. Appeals to an appellate body are allowed within 60 days, requiring deposits from employers to deter delays. Penalties for non-payment include up to one year imprisonment, ₹50,000 fines, or both, escalating to two years and ₹2 lakhs for repeats, with similar sanctions for false statements or insurance lapses. This structure expedites resolutions, bypassing slow courts, and the penalties promote adherence, fairly balancing rights while empowering workers in the social security landscape.

Implementation Challenges

Despite its promise, SSC 2020's implementation faces hurdles as of October 2025, with 2021 draft rules still pending, causing procedural uncertainties in nominations, pro-rata computations, and insurance. Fixed-term gratuity ambiguities for sub-year contracts, tied to the Industrial Relations Code, 2020, demand clearer directives per PRS 2021 insights. Small employers grapple with funding requirements, calling for simplified aids and awareness for gig platforms. Judicial cases like Jaswant Singh Gill v. Bharat Coking Coal Ltd.(2007) prioritize statutory rules, and future rulings will refine applications, especially for non-traditional workers.

Conclusion

The legal framework for gratuity in the Social Security Code 2020 advances the 1972 Act by broadening coverage to fixed-term, gig, and platform workers, standardizing processes, requiring insured funding, and fortifying enforcement. Emphasizing prompt payments, minimal forfeiture, and effective disputes resolution, it upholds constitutional ideals under Articles 39(a), 41, and 43 for fair welfare. Yet, success depends on rule finalization, ambiguity fixes, and SME support. As a social security pillar, gratuity under SSC 2020 secures economic stability for India's 50 crore-plus workers, driving labor harmony amid dynamic changes.