Gratuity is a terminal benefit: a payment for length of service, made when employment ends. Employers frequently describe it as a gesture, which it is not. Where the applicable law covers the establishment, it is an entitlement and it is recoverable.
Where the entitlement comes from
The principal source is the Standing Orders - the West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968, and its provincial successors following the 18th Amendment. Sindh, Punjab and Khyber Pakhtunkhwa have each enacted their own versions, and the applicable statute depends on where the establishment is.
Standing Order 12 deals with termination of employment and provides for gratuity, or provident fund where the employer maintains one, on the ending of employment for any reason.
The Standing Orders apply to industrial and commercial establishments above a specified employee threshold, and the threshold differs between the provincial statutes. Establishments below the threshold, and categories excluded from the definition of "workman", fall outside - and for those, gratuity is whatever the contract or the service rules provide.
The calculation
The standard formula under the Standing Orders is:
Thirty days' wages for every completed year of service, or any part of it in excess of six months.
The two points that generate disputes are:
- Which wage. The wage taken is ordinarily the last drawn wage. Whether that means basic pay alone or basic plus allowances depends on the definition of "wages" in the applicable statute and on how the employer has structured the package. Employers who keep basic pay artificially low and load the package with allowances do so partly for this reason, and it is regularly litigated.
- Part years. A period exceeding six months counts as a full year. Six months exactly does not.
So an employee on a last drawn wage of a given amount with seven years and eight months of service is entitled to eight months' worth of that figure - eight completed years, the last part-year exceeding six months.
Gratuity or provident fund, not both
The Standing Orders frame the entitlement as gratuity or a contributory provident fund. Where the employer operates a recognised provident fund to which it contributes, that generally discharges the obligation. Where it does not, gratuity is payable.
An employer cannot deduct its own provident fund contributions from a gratuity calculation and pay the difference, unless the scheme is properly constituted as an alternative.
When it is payable
On the ending of employment for any reason - resignation, retirement, redundancy, or termination by the employer. Resigning does not forfeit gratuity, which is the misconception employers most often rely on.
The position on dismissal for misconduct is narrower: where an employee has been dismissed following a proper inquiry for misconduct, forfeiture may be available depending on the applicable statute and the service rules. A dismissal without a valid inquiry will not support forfeiture, and "misconduct" asserted after the event to avoid payment is a familiar tactic.
What else is due on exit
Gratuity is one component of the final settlement. The others are:
- Salary to the last working day
- Notice pay or pay in lieu, per the contract or the statutory minimum
- Encashment of earned leave, where the rules provide for it
- Provident fund - both the employee's contributions and the employer's, with accrued profit
- Any bonus accrued
- EOBI entitlements, which are claimed separately from EOBI and not from the employer
If it is not paid
- Send a written demand setting out the calculation - date of joining, date of leaving, last drawn wage, years of service, amount claimed. Keep proof of delivery. This document fixes the date for limitation and is the first exhibit in any case.
- Approach the Labour Department of the province; the labour inspectorate can intervene and many claims settle at this stage.
- File a grievance under the applicable Industrial Relations Act, which requires the employee to raise the grievance with the employer within a prescribed period before proceeding.
- File before the Labour Court constituted under the applicable Industrial Relations legislation.
The grievance-notice requirement matters: the applicable statutes require the grievance to be communicated to the employer within a defined period - commonly ninety days from the cause of action - and failing to do that is a technical objection that defeats otherwise good claims.
If you are not covered by the Standing Orders
Managerial and supervisory staff are frequently outside the definition of "workman", and establishments below the employee threshold are outside the Ordinance. In those cases the claim is contractual: what does the appointment letter, the employee handbook or the service rules say? A contractual gratuity provision is enforceable as a contract, in the ordinary civil courts, and a consistent practice of paying gratuity can itself become a term of employment.
This article describes the general position on gratuity in Pakistan. The applicable statute, threshold and definitions depend on the province and on the nature of the establishment. It is not advice on any specific claim; consult an advocate.