Supreme Court clarifies Gratuity Calculation: BCH Electric Ltd. vs. Pradeep Mehra (29 April 2020)

Introduction

Date of the Judgment: 29 April 2020

Citation: 2020 INSC 342

Judges: Uday Umesh Lalit, J. and Sanjiv Khanna, J.

Can an employee claim gratuity benefits under both the Payment of Gratuity Act, 1972, and a separate scheme provided by their employer, selecting the most beneficial aspects of each? The Supreme Court of India recently addressed this question in a dispute between BCH Electric Limited and one of its former employees, Pradeep Mehra. The core issue revolved around whether an employee, covered by the Payment of Gratuity Act, could claim a higher gratuity amount under the company’s scheme, which did not specify a ceiling, while also using the calculation method prescribed by the Act. The Supreme Court bench, comprising Justices Uday Umesh Lalit and Sanjiv Khanna, delivered the judgment.

Case Background

In 1979, BCH Electric Limited established an “Approved Gratuity Fund” through a Trust Deed to provide gratuities to its employees under the Payment of Gratuity Act, 1972. The Trust Deed included rules for administering the fund and calculating gratuity payments.

Pradeep Mehra was appointed as Chief Operating Officer of BCH Electric Limited on June 12, 2000. His appointment letter stated that he would be entitled to gratuity as per the laws and that his services would be governed by the company’s Central Services Rules. Mehra resigned from his position on June 1, 2012, after serving for approximately 12 years.

Upon resignation, Mehra received ₹36,70,015 towards retiral dues. However, he claimed that he was entitled to a gratuity amount of ₹1,83,75,000. The company initially paid him ₹10,19,452, which included ₹10 lakhs towards gratuity and interest. Mehra then filed a claim petition under Section 7 of the Payment of Gratuity Act, 1972, seeking the balance amount.

Timeline

Course of Proceedings

The Controlling Authority under the Payment of Gratuity Act allowed Mehra’s claim petition on July 31, 2017, stating that employees are entitled to receive higher gratuity amounts under contracts or schemes. The authority noted that the company’s scheme did not specify a cap on gratuity and that several employees had received gratuities exceeding the statutory limit. The Controlling Authority ordered that Mehra was entitled to a gratuity of ₹1,83,75,000 without any cap.

BCH Electric Limited appealed to the Appellate Authority, which dismissed the appeal on March 23, 2018, affirming that the Gratuity Fund created by the company was a term of service contract under Section 4(5) of the Act.

The company then filed a Writ Petition in the High Court, which was also dismissed on February 6, 2019. The High Court held that the company’s gratuity scheme did not limit the gratuity to the ceiling under Section 4(3) of the Payment of Gratuity Act. The High Court also noted that the company itself had calculated gratuity for other employees exceeding the statutory limit.

The Division Bench of the High Court affirmed the Single Judge’s decision on February 12, 2019, stating that the company’s scheme adopted the rates under Section 4(2) of the Act but not the ceiling under Section 4(3).

Legal Framework

The case primarily revolves around the interpretation of the Payment of Gratuity Act, 1972, specifically Section 4, which deals with the payment of gratuity.

Section 4(1) of the Payment of Gratuity Act, 1972, specifies that gratuity is payable to an employee after rendering continuous service for not less than five years on termination of employment.

Section 4(2) of the Payment of Gratuity Act, 1972, states that for every completed year of service, the employer shall pay gratuity at the rate of fifteen days’ wages based on the last drawn wages.

Section 4(3) of the Payment of Gratuity Act, 1972, stipulates that the amount of gratuity payable to an employee shall not exceed a certain limit, which was ₹10,00,000 at the time of the respondent’s resignation.

Section 4(5) of the Payment of Gratuity Act, 1972, provides that nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer.

The Trust Deed executed on 19.03.1979 between the appellant and three trustees, constituted an “Approved Gratuity Fund” for providing gratuities to the employees of the Company under the Payment of Gratuity Act, 1972.

Clause 15(a) of the Trust Deed states:
“On behalf of the Company, the Trustees shall provide for the payment of gratuity on termination of service, on death or retirement of the Member or otherwise as provided in the Rules of Scheme.”

Rule 6 of the Rules appended to the Scheme states:
“A member on ceasing to be a member of the Fund shall be entitled to be paid by the Trustees, the amount due as computed in the manner laid down hereunder in this Scheme: – (a) The amount of Gratuity payable to the beneficiary shall be calculated in the manner provided in the Company’s Gratuity Scheme. (b) Notwithstanding the provision herein contained, if any member is covered by the provisions of the Payment of Gratuity Act 1972, the amount of gratuity shall be calculated in accordance with the provisions of that Act.”

Arguments

Submissions by the Appellant (BCH Electric Limited):

• The appellant argued that the respondent was covered by the Payment of Gratuity Act, 1972, and was subject to the ceiling of ₹10 lakhs under Section 4(3) of the Act.
• It was submitted that while Section 4(5) of the Payment of Gratuity Act, 1972, allows for better terms of gratuity, such terms must be under a specific award, agreement, or contract, which was absent in this case.
• The appellant contended that the respondent was trying to combine the benefits of the company’s scheme and the Act, which is not permissible as per the law laid down by the Supreme Court in Beed District Central Cooperative Bank Ltd. v. State of Maharashtra and others [(2006) 8 SCC 514] and Union Bank of India and others vs. C.G. Ajay Babu and Another [(2018) 9 SCC 529].
• The appellant relied on Clause 15 of the Trust Deed and Rule 6(b) of the Rules, which state that employees covered by the Payment of Gratuity Act are entitled to gratuity as per the Act.
• The appellant argued that the company’s scheme was intended to provide gratuity benefits to those employees not covered by the Act and not to provide a better package to those who are covered under the Act.

Submissions by the Respondent (Pradeep Mehra):

• The respondent submitted that Section 4(5) of the Payment of Gratuity Act, 1972, overrides other provisions of Section 4, as held in Union Bank of India [(2018) 9 SCC 529].
• The respondent argued that the company had a scheme for its employees that did not prescribe any ceiling on gratuity, which is protected by Section 4(5) of the Act.
• It was submitted that Rule 6(b) of the Scheme should be reconciled with Rule 6(a), which makes the “Company’s Gratuity Scheme” applicable to every member.
• The respondent contended that if the “Company’s Gratuity Scheme” is more beneficial than the Act, Rule 6(a) should apply.
• The respondent argued that there is nothing in Rule 6(b) that excludes a more beneficial scheme under Section 4(5) and/or Rule 6(a).

The innovativeness of the argument by the respondent lies in the interpretation of Section 4(5) of the Payment of Gratuity Act, 1972, as an overriding provision that allows for better terms of gratuity under any scheme, even if the scheme is not explicitly an award, agreement, or contract, and in reconciling Rule 6(b) with Rule 6(a) of the scheme.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the respondent was covered by the Payment of Gratuity Act, 1972, and subject to the ceiling of ₹10 lakhs as provided under Section 4(3).
2. Whether the respondent could claim better terms of gratuity under Section 4(5) of the Act based on the company’s scheme.
3. Whether the respondent could combine the benefits of the company’s scheme and the Act.

Treatment of the Issue by the Court

Authorities

Judgment

How each authority was viewed by the Court:

• Beed District Central Cooperative Bank Ltd. v. State of Maharashtra and others [(2006) 8 SCC 514]: The Supreme Court applied this case to emphasize that an employee must choose either the employer’s scheme or the Act in its entirety, and cannot pick and choose the most beneficial parts from both.
• Union Bank of India and others vs. C.G. Ajay Babu and Another [(2018) 9 SCC 529]: While the respondent relied on this case to argue that Section 4(5) has an overriding effect, the Supreme Court clarified that this is only applicable if there is a better scheme available, which was not the case here.
• The Court referred to Section 4(1), Section 4(2), Section 4(3) and Section 4(5) of the Payment of Gratuity Act, 1972 to lay down the law on the subject.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the Payment of Gratuity Act, 1972, and the specific terms of the company’s Trust Deed and Scheme. The Court emphasized the importance of adhering to the statutory provisions and the intent of the company’s scheme. The Court also considered the fact that the company’s scheme was designed to provide gratuity benefits to employees not covered by the Act, rather than to offer better terms to those who were covered.

Fact:Law Ratio:

The Court’s reasoning was heavily based on legal interpretation of the Payment of Gratuity Act, 1972, and the terms of the Trust Deed and Scheme. The Court emphasized that the scheme did not offer a better alternative to the Act for employees covered by the Act, and the employee cannot claim the best of both the scheme and the Act.

Logical Reasoning

Key Takeaways

• Employees covered by the Payment of Gratuity Act, 1972, are subject to the statutory ceiling on gratuity amounts, unless there is a specific award, agreement, or contract offering better terms.
• An employee cannot combine the benefits of an employer’s gratuity scheme and the Payment of Gratuity Act, 1972, by choosing the most beneficial parts of each. They must opt for either the complete package under the scheme or the complete package under the Act.
• Employer-specific gratuity schemes should be carefully drafted to clearly specify whether they provide an alternative to the Act or merely supplement it for employees not covered by the Act.
• The intent of the gratuity scheme is important. If the scheme is designed to provide gratuity to employees not covered by the Act, it will not be considered as a better alternative for those covered by the Act.

Directions

The Supreme Court allowed the appeal, set aside the impugned judgment and order, and dismissed the claim petition preferred by the respondent.

Specific Amendments Analysis

The judgment discusses the various amendments to the Payment of Gratuity Act, 1972, specifically focusing on changes to Section 2(e) and Section 4. These amendments are summarized below:

Original Act (1972):

• Section 2(e) defined “employee” as those earning wages not exceeding ₹1,000 per month.
• Section 4(3) capped gratuity at 20 months’ wages.

Act 25 of 1984:

• Increased the wage limit in Section 2(e) to ₹1,600 per month.

Act 22 of 1987:

• Increased the wage limit in Section 2(e) to ₹2,500 per month or such higher amount specified by the Central Government.
• Amended Section 4(3) to cap gratuity at ₹50,000.

Notification No. S.O. 863 (E), dated 26.11.1992:

• Raised the wage limit in Section 2(e) to ₹3,500 per month.

Act 35 of 1994:

• Omitted the wage limit in Section 2(e), effectively covering all employees regardless of wages.
• Increased the gratuity cap in Section 4(3) to ₹1,00,000.

Act 47 of 2009:

• Substituted Section 2(e) to include all employees except those under Central/State Government and governed by other Acts or rules.

Act 11 of 1998 and Act 15 of 2010:

• Increased the gratuity cap in Section 4(3) to ₹3,50,000 and then to ₹10,00,000 respectively.

Act 12 of 2018:

• Substituted the gratuity cap in Section 4(3) with “such amount as may be notified by the Central Government from time to time”.

These amendments show a gradual increase in the coverage of the Act, eventually including all employees regardless of wages, and a progressive increase in the gratuity ceiling.

Development of Law

The ratio decidendi of this case is that an employee covered by the Payment of Gratuity Act, 1972, cannot claim the benefits of both the Act and an employer’s scheme by selecting the most beneficial parts of each. The employee must choose either the complete package under the Act or the complete package under the employer’s scheme, if such scheme is indeed a better alternative.

This judgment clarifies the interpretation of Section 4(5) of the Payment of Gratuity Act, 1972, and emphasizes that for an employee to claim better terms of gratuity, there must be a specific award, agreement, or contract that provides an alternative to the Act, and such scheme must be more beneficial than the Act in its entirety. It also clarifies that if the scheme is designed to cover employees who are not covered by the Act, such scheme will not be considered as a better alternative for those who are covered by the Act.

This decision reaffirms the principle laid down in Beed District Central Cooperative Bank Ltd. v. State of Maharashtra and others [(2006) 8 SCC 514], that an employee cannotpick and choose the most beneficial aspects of both the Act and the employer’s scheme.

Conclusion

The Supreme Court’s judgment in BCH Electric Limited vs. Pradeep Mehra provides critical clarity on the calculation of gratuity under the Payment of Gratuity Act, 1972, and employer-specific schemes. The Court held that an employee cannot combine the benefits of the Act and a company’s scheme but must choose one in its entirety. The judgment emphasizes the importance of statutory compliance and the clear drafting of company schemes. This decision reaffirms that employees covered by the Act are subject to the statutory ceiling unless a specific, more beneficial alternative scheme is provided.

The ruling is significant for employers and employees alike, as it clarifies the parameters within which gratuity claims can be made and settled. It underscores the need for employers to ensure their gratuity schemes are clear and aligned with the provisions of the Payment of Gratuity Act, 1972, and for employees to understand their entitlement under the Act and any employer-provided schemes.