Gratuity for Teachers: Supreme Court Upholds Retrospective Application of Payment of Gratuity Act in Private Schools (29 August 2022)

Introduction

Date of the Judgment: 29 August 2022

Citation: Civil Appeal No. 8162 of 2012

Judges: Sanjiv Khanna, J. and Bela M. Trivedi, J.

Are teachers in private schools entitled to gratuity benefits? The Supreme Court of India recently addressed this crucial question, examining the validity of retrospective amendments to the Payment of Gratuity Act, 1972 (PAG Act). This case revolves around whether teachers in private educational institutions should receive gratuity, a benefit typically given to employees upon retirement or resignation. The court’s decision has significant implications for the teaching community and private educational institutions across the country. This judgment was delivered by a two-judge bench comprising Justice Sanjiv Khanna and Justice Bela M. Trivedi, with Justice Sanjiv Khanna authoring the opinion.

Case Background

The case originated from a series of appeals and writ petitions challenging the retrospective application of amendments to the Payment of Gratuity Act, 1972. These amendments, made in 2009, aimed to include teachers within the definition of “employee,” thereby entitling them to gratuity benefits. The central issue arose because, prior to these amendments, the definition of “employee” under the PAG Act was interpreted by the Supreme Court to exclude teachers, thus denying them gratuity.

The dispute began when the Central Government issued a notification on April 3, 1997, extending the PAG Act to educational institutions with ten or more employees. However, some private schools argued that teachers did not qualify as “employees” under the existing definition in Section 2(e) of the PAG Act. This led to a legal battle, culminating in the Supreme Court’s initial ruling that teachers were not covered by the Act.

To rectify this, the Parliament amended the PAG Act in 2009, with retrospective effect from April 3, 1997, to include teachers within the definition of “employee” and validate past gratuity payments. This amendment was challenged by private schools, leading to the present case before the Supreme Court. The schools contended that the retrospective application of the amendments was unconstitutional and financially burdensome.

Timeline

Legal Framework

The core of this case involves the interpretation and application of the Payment of Gratuity Act, 1972. Key provisions include:

• Section 1(3) of the PAG Act: This section specifies the types of establishments to which the Act applies. Clause (c) allows the Central Government to extend the Act to other establishments via notification.
  
  “It shall apply to – (c) such other establishments or class of establishments, in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf.”
• Section 2(e) of the PAG Act: This section defines “employee.” The original definition, prior to the 2009 amendment, was interpreted by the Supreme Court to exclude teachers.
  
  “employee means any person (other than apprentice) employed on wages, in any establishment, factory, mine, oilfield, plantation, port, railway company or shop, to do any skilled, semi-skilled, or unskilled, manual, supervisory, technical or clerical work, whether the terms of such employment are express or implied, and whether or nor such person is employed in a managerial or administrative capacity, but does not include any such person who holds a post under the Central Government or a State Government and is governed by any other Act or by any rules providing for payment of gratuity.”
• Section 2(e) of the PAG Act (Amended in 2009): The amended definition of “employee” includes any person employed for wages in any kind of work, thus encompassing teachers.
  
  “employee” means any person (other than an apprentice) who is employed for wages, whether the terms of such employment are express or implied, in any kind of work, manual or otherwise, in or in connection with the work of a factory, mine, oilfield, plantation, port, railway company, shop or other establishment to which this Act applies, but does not include any such person who holds a post under the Central Government or a State Government and is governed by any other Act or by any rules providing for payment of gratuity;”
• Section 13A of the PAG Act: This section, inserted in 2009, validates gratuity payments made to employees based on the notification of April 3, 1997, with retrospective effect.
  
  “13A. Validation of payment of gratuity. – Notwithstanding anything contained in any judgement, decree or order of any court, for the period commencing on and from the 3rd day of April, 1997 and ending on the day on which the Payment of Gratuity (Amendment) Act, 2009, receives the assent of the President, the gratuity shall be payable to an employee in pursuance of the notification of the Government of India in the Ministry of Labour and Employment vide number S.O. 1080, dated the 3rd day of April, 1997 and the said notification shall be valid and shall be deemed always to have been valid as if the Payment of Gratuity (Amendment) Act, 2009 had been in force at all material times and the gratuity shall be payable accordingly: Provided that nothing contained in this section shall extend, or be construed to extend, to affect any person with any punishment or penalty whatsoever by reason of the non-payment by him of the gratuity during the period specified in this section which shall become due in pursuance of the said notification.”

Arguments

The private schools and educational institutions raised several arguments against the retrospective amendments:

• Overruling Judicial Decisions: They argued that the 2009 amendments effectively overruled the Supreme Court’s decision in Ahmedabad Private Primary Teachers’ Association v. Administrative Officer, violating the doctrine of separation of powers.
• Unreasonable Retrospective Application: The schools contended that the retrospective application of the amendments was unreasonable, excessive, and harsh, imposing a significant financial burden on them.
• Financial Hardship: They claimed that they would be liable to pay gratuity for a period of service prior to 3rd April 1997, which was financially unfeasible.
• Violation of Fundamental Rights: The schools argued that the amendments violated their fundamental rights under Articles 14, 19(1)(g), 21, and 300-A of the Constitution of India.
• Repeal of Amendment Act: The schools contended that the Amendment Act 2009 was repealed by the Repealing and Amending Act 2016.

The Union of India, representing the government, countered these arguments by asserting:

• Legislative Competence: The government argued that the Parliament has the power to amend laws retrospectively to rectify defects and achieve the intended purpose of the legislation.
• Rectification of Legal Flaw: The amendments were necessary to correct the legal flaw identified by the Supreme Court in the Ahmedabad Private Primary Teachers’ Association case, which had excluded teachers from the benefit of gratuity.
• Public Interest: The retrospective amendments were in the larger public interest, ensuring that teachers receive the gratuity benefits they were intended to have.
• No Vested Right: The private schools did not have a vested right to deny gratuity to teachers based on a technical defect in the law.
• Limited Financial Impact: The financial burden on private schools was limited by the upper cap on gratuity payments.
• Savings Clause: The repeal of the Amendment Act 2009 does not affect the validity of the amendments due to the savings clause in the Repealing and Amendment Act 2016 and Section 6A of the General Clauses Act, 1897.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the legislation vide the Amendment Act 2009 overrules the judicial decision in Ahmedabad Private Primary Teachers’ Association and violates the doctrine of separation of powers.
2. Whether the retrospective amendments are unreasonable, excessive and harsh, and therefore, unconstitutional.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• Ahmedabad Private Primary Teachers’ Association v. Administrative Officer and Others, (2004) 1 SCC 755: This case was the basis for the amendment, as the Supreme Court had previously held that teachers were not “employees” under the PAG Act.
• A. Sundarambal v. Government of Goa, Daman and Diu and Others, (1988) 4 SCC 42: This case interpreted the definition of an “employee” under the Minimum Wages Act, 1948.
• Haryana Unrecognised Schools’ Association v. State of Haryana, (1996) 4 SCC 225: This case interpreted the definition of an “employee” under the Payment of Bonus Act, 1965.
• Shri Prithvi Cotton Mills Ltd. and Another v. Broach Borough Municipality and Others, (1969) 2 SCC 283: This case affirmed the legislature’s power to amend laws with retrospective effect.
• Ujagar Prints and Others (II) v. Union of India and Others, (1989) 3 SCC 488: This case discussed the power of the legislature to rectify a legal error through retrospective legislation.
• National Agricultural Cooperative Marking Federation of India Ltd. and Another v. Union of India and Others, (2003) 5 SCC 23: This case also affirmed the legislature’s power to amend laws with retrospective effect.
• Management of Goodyear India Limited v. Shri K.G. Devessar, (1985) 4 SCC 45: This case clarified that gratuity is payable for continuous service, including periods before the PAG Act came into effect, if the termination of service occurs after the Act’s enforcement.
• Shanti Conductors Private Limited and Another v. Assam State Electricity Board and Others, (2019) 19 SCC 529: This case clarified the difference between retroactive and retrospective operation of a statute.
• Vineeta Sharma v. Rakesh Sharma and Others, (2020) 9 SCC 1: This case discussed the operation of retrospective statutes and vested rights.
• Darshan Singh v. Ram Pal Singh and Another, 1992 Supp. (1) SCC 191: This case discussed the meaning of retrospective laws and their effect on vested rights.
• State of Tamil Nadu v. Arooran Sugar Ltd., (1997) 1 SCC 326: This case affirmed the legislature’s power to legislate retrospectively.
• State of Gujarat and Another v. Raman Lal Keshav Lal Soni and Others, (1983) 2 SCC 33: This case also affirmed the legislature’s power to legislate retrospectively.
• T.R. Kapur and Others v. State of Haryana and Others, (1986) Supp SCC 584: This case also affirmed the legislature’s power to legislate retrospectively.
• Union of India and Others v. Tushar Ranjan Mohanty and Others, (1994) 5 SCC 450: This case also affirmed the legislature’s power to legislate retrospectively.
• T.M.A. Pai Foundation and Others v. State of Karnataka and Others, (2002) 8 SCC 481: This case discussed the permissibility of charging capitation fees and profiteering by educational institutions.
• Indian School, Jodhpur and Another v. State of Rajasthan and Others, (2021) 10 SCC 517: This case held that schools can fix and collect just and permissible school fees.
• Lohia Machines Ltd. and Another v. Union of India and Others, (1985) 2 SCC 197: This case discussed the validity of retrospective amendments in tax laws.
• Jethanand Betab v. State of Delhi, (1960) 1 SCR 755: This case discussed the effect of repealing and amending acts.
• Secretary of State for India in Council v. Hindusthan Co-operative Insurance Society, Ltd., 1931 SCC OnLine PC 37: This case discussed the principle that the repeal of an earlier act does not affect a later act in which the earlier act has been applied, incorporated, or referred to.
• Khuda Bux v. Manager, Caledonian Press, 1954 SCC OnLine Cal 132: This case discussed the purpose and scope of repealing and amending acts.
• Bakshish Singh v. M/s Darshan Engineering Works and Others, (1994) 1 SCC 9: This case held that payment of gratuity is a minimal condition of service.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The court relied on Ahmedabad Private Primary Teachers’ Association v. Administrative Officer and Others, (2004) 1 SCC 755* to highlight the legal flaw that the amendment sought to rectify.
• The court followed the ratio in Management of Goodyear India Limited v. Shri K.G. Devessar, (1985) 4 SCC 45* to clarify that gratuity is payable for continuous service, including periods before the PAG Act came into effect, if the termination of service occurs after the Act’s enforcement.
• The court relied on Shri Prithvi Cotton Mills Ltd. and Another v. Broach Borough Municipality and Others, (1969) 2 SCC 283*, Ujagar Prints and Others (II) v. Union of India and Others, (1989) 3 SCC 488* and National Agricultural Cooperative Marking Federation of India Ltd. and Another v. Union of India and Others, (2003) 5 SCC 23* to affirm the legislature’s power to amend laws with retrospective effect.
• The court relied on Shanti Conductors Private Limited and Another v. Assam State Electricity Board and Others, (2019) 19 SCC 529* and Vineeta Sharma v. Rakesh Sharma and Others, (2020) 9 SCC 1* to clarify the difference between retroactive and retrospective operation of a statute.
• The court relied on Jethanand Betab v. State of Delhi, (1960) 1 SCR 755*, Secretary of State for India in Council v. Hindusthan Co-operative Insurance Society, Ltd., 1931 SCC OnLine PC 37* and Khuda Bux v. Manager, Caledonian Press, 1954 SCC OnLine Cal 132* to hold that the repeal of the Amendment Act 2009 does not affect the validity of the amendments due to savings clauses.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to rectify a legal anomaly that had deprived teachers of gratuity benefits. The court emphasized that the retrospective amendments were necessary to correct a legislative mistake and ensure equal treatment for teachers, who were previously excluded due to a flawed definition of “employee.” The court also considered the public interest in providing gratuity as a minimal condition of service and rejected the private schools’ arguments about financial hardship, noting the upper cap on gratuity payments.

The court’s reasoning was also influenced by the principle that the legislature has the power to amend laws retrospectively to rectify defects and achieve the intended purpose of the legislation. The court rejected the argument that the amendments violated the doctrine of separation of powers, holding that the legislature was not overruling a judicial decision but amending the law to correct a flaw.

The court also noted that the private schools were aware of the intent of the government that educational institutions would be covered under the PAG Act and must pay gratuity. The court also rejected the argument that the amendment was financially confiscatory, noting that the upper cap on gratuity payments limited the liability.

Fact:Law Ratio

Logical Reasoning:

Key Takeaways

• ✓ Teachers in private educational institutions are now explicitly included in the definition of “employee” under the Payment of Gratuity Act, 1972.
• ✓ Private schools are legally obligated to pay gratuity to their teachers who have completed five years of continuous service, effective from April 3, 1997.
• ✓ The retrospective application of the amendments means that schools may be liable for gratuity payments for past service periods, subject to the upper cap limits.
• ✓ The Supreme Court has upheld the legislative power to amend laws retrospectively to correct legal flaws and achieve the intended purpose of legislation.
• ✓ The judgment ensures that teachers receive the gratuity benefits they were intended to have, thereby promoting equality and fair treatment.

Directions

The Supreme Court directed the private schools to make payment to the employees/teachers along with interest in accordance with the provisions of the PAG Act within a period of 6 weeks from the date of the judgment. In case of default, the employees/teachers may move the appropriate forum to enforce payment in accordance with the provisions of the PAG Act.

Development of Law

The ratio decidendi of this case is that the legislature has the power to amend laws retrospectively to rectify defects and achieve the intended purpose of the legislation. The court also clarified that the definition of “employee” under the PAG Act includes teachers in private educational institutions, and they are entitled to gratuity benefits. This judgment has changed the previous position of law, which had excluded teachers from the definition of “employee” under the PAG Act. The judgment also clarifies the applicability of the PAG Act to service periods before the enforcement date.

Conclusion

In conclusion, the Supreme Court upheld the constitutional validity of the retrospective amendments to the Payment of Gratuity Act, 1972, ensuring that teachers in private educational institutions receive the gratuity benefits they are entitled to. The court’s decision underscores the importance of legislative power to correct legal flaws and promote social justice, while also clarifying the scope and applicability of the PAG Act. This judgment has significant implications for the teaching community and private educational institutions across India.