Gratuity Laws in Pakistan | Importance of Gratuity in Employment Benefits

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Navigating Gratuity Laws for Retirement Benefits in Pakistan’s Private Sector

Significance of Gratuity in Pakistan

Gratuity is one of the three prominent retirement benefits in private-sector employment, with the other two being “Pensions” and “Provident Fund.” It represents a lump-sum payment made to employees upon their departure from service, which can occur through retirement, passing away, or termination. This payment is calculated based on factors like the employee’s highest or final salary and the duration of their service, provided it exceeds a minimum of six months.

Gratuity As Reward

A gratuity is a form of recognition and reward for dedicated, efficient, and faithful service rendered over a substantial period. In the past, before the year 1972, employers had the option to provide gratuity voluntarily or as a result of a labor court award. However, enacting the Labor Laws Amendments Ordinance in 1972 transformed gratuity into a legal obligation.

Gratuity Laws Amendments

Subsequent amendments were introduced to the Standing Order 12 of the Industrial and Commercial Establishments (Standing Orders) Ordinance of 1968, firmly establishing gratuity as a statutory entitlement for workers who have accumulated at least twelve months of service within an organization.

The relevant laws governing gratuity in the private sector of Pakistan encompass various legislative acts, including the following:

Standing Orders Legislation:

The Industrial and Commercial Establishments (Standing Orders) Ordinance, 1968 (applicable in the Islamabad Capital Territory)
Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 (adapted by the province of Punjab through the Amendment Act of 2012)
The Khyber Pakhtunkhwa Industrial And Commercial Employment (Standing Orders) Act, 2013
The Sindh Terms of Employment (Standing Orders) Act, 2015
The Balochistan Industrial and Commercial Employment (Standing Orders) Act, 2021

Legislation Concerning Wage Payments:

Payment of Wages Act, 1936 (applicable in the Islamabad Capital Territory)
Payment of Wages Act, 1936 (adapted by the province of Punjab through the Amendment Act of 2014)
The Khyber Pakhtunkhwa Payment of Wages Act, 2013
The Sindh Payment of Wages Act, 2015
The Balochistan Payment of Wages Act, 2021

Legislation regarding factories:

The Factories Act, 1934
The Factories Act, 1934 (adapted by the province of Punjab through the Amendment Act of 2012)
The Khyber Pakhtunkhwa Factories Act, 2013
The Sindh Factories Act, 2015
Balochistan Factories Act, 2021

Regulations for Businesses and Workplaces:

The Shops and Establishments Ordinance, 1969
The Shops and Establishments Ordinance, 1969 (adapted by the province of Punjab through the Amendment Act of 2014)
The Khyber Pakhtunkhwa Shops and Establishments Act, 2015
The Sindh Shops and Commercial Establishment Act, 2015
The Balochistan Shops and Establishments Act, 2021

These laws collectively define the legal framework governing gratuity in Pakistan’s private sector, ensuring that employees receive their rightful entitlements upon leaving their service.

Which Organizations Must Provide Gratuity to Employees in Pakistan?

As outlined in section 1(4) of the Standing Orders Ordinance, 1968 (with a similar provision in Punjab), certain criteria determine which organizations are obligated to offer gratuity to their employees in Pakistan. Commercial establishments employing 20 or more workers, and industrial establishments, with a workforce of 50 or more fall under this obligation. However, specific provincial acts have modified these criteria in certain regions.

In Khyber Pakhtunkhwa, the Act lowers the threshold for commercial establishments to 10 workers and industrial establishments to 20 workers.
In Sindh, the Terms of Employment (Standing Orders) Act of 2015 establishes a similar threshold reduction for commercial establishments to 10 workers and industrial establishments to 20 workers.
Balochistan, under the Industrial and Commercial Employment (Standing Orders) Act of 2021, has set the minimum worker requirement for all types of establishments at 10 workers.

The table below provides a comprehensive list of organizations that are required to provide gratuity to their employees, taking into account the applicable provincial regulations.

The Industrial and Commercial Establishments (Standing Orders) Ordinance, 1968 (applicable in ICT and Punjab)
Advertising/commission/forwarding Agency, clerical department of a factory, joint-stock company	At least 20 workers must have been employed by the organization for continuous 12 months	Factory	At least 50 workers must have been employed by the organization for continuous 12 months
Insurance company, banking company, bank, broker office, stock exchange		Railways
Club, hotel, restaurant		Establishment of a contractor
Cinema, theatre		Establishment in connection with the construction industry
The Khyber Pakhtunkhwa Industrial And Commercial Employment (Standing Orders) Act, 2013 The Sindh Terms of Employment (Standing Orders) Act, 2015 Balochistan Industrial and Commercial Employment (Standing Orders) Act, 2021
Above establishments	At least 10 workers must have been employed by the organization for continuous 12 months	Above establishments	At least 20 workers must have been employed by the organization for continuous 12 months *In Balochistan, the requirement is that at least 10 workers must have been employed by the organizations for continuous twelve months
private educational institutions,		tramway or motor omnibus service; dock, wharf or jetty; inland steam-vessel;
private health centres, clinical laboratories		mine, quarry, oil field or gas field;
private security agencies		plantation;
societies registered under the Societies Registration Act, 1860 (Act No. XXI of 1860) and the Voluntary Social Welfare Originations (NGOs, NPOs)		workshop or other establishments in which articles are produced, adapted or manufactured, with a view to their use, transport or sale
Other organizations as declared and notified by the government

Advertising/commission/forwarding Agency, clerical department of a factory, joint-stock company	At least 20 workers must have been employed by the organization for continuous 12 months	Factory	At least 50 workers must have been employed by the organization for continuous 12 months
Insurance company, banking company, bank, broker office, stock exchange		Railways
Club, hotel, restaurant		Establishment of a contractor
Cinema, theatre		Establishment in connection with the construction industry
The Khyber Pakhtunkhwa Industrial And Commercial Employment (Standing Orders) Act, 2013 The Sindh Terms of Employment (Standing Orders) Act, 2015 Balochistan Industrial and Commercial Employment (Standing Orders) Act, 2021
Above establishments	At least 10 workers must have been employed by the organization for continuous 12 months	Above establishments	At least 20 workers must have been employed by the organization for continuous 12 months *In Balochistan, the requirement is that at least 10 workers must have been employed by the organizations for continuous twelve months
private educational institutions,		tramway or motor omnibus service; dock, wharf or jetty; inland steam-vessel;
private health centres, clinical laboratories		mine, quarry, oil field or gas field;
private security agencies		plantation;
societies registered under the Societies Registration Act, 1860 (Act No. XXI of 1860) and the Voluntary Social Welfare Originations (NGOs, NPOs)		workshop or other establishments in which articles are produced, adapted or manufactured, with a view to their use, transport or sale
Other organizations as declared and notified by the government

Gratuity in Pakistan: Qualifying Conditions, Events, and Calculation

Are you curious about the qualifying conditions, events triggering gratuity payments, and how to calculate gratuity in Pakistan’s private sector employment? This comprehensive guide provides insights into these crucial aspects of gratuity.

Qualifying Conditions for Earning Gratuity

To be eligible for gratuity, a worker must meet the following criteria:

Applicability of Standing Orders: The Industrial and Commercial Establishments (Standing Orders) Ordinance 1968, or its variants, must apply to the establishment in question. This applies to both commercial and industrial entities, depending on the minimum worker requirement.
Worker Definition: An individual must qualify as a “workman” under the Standing Orders Ordinance 1968. A workman is broadly defined as anyone engaged in skilled or unskilled, manual or clerical work for hire or reward.
Length of Service: Except for temporary workers (with a maximum employment period of nine months) and probationers whose employment terminates after a three-month probationary period, all workers, including permanent, Badli (replacement workers), contract workers, or apprentices, are eligible for gratuity if their service period exceeds one year.
Minimum Employment Period: The minimum qualifying employment period is twelve months or more. After completing the first year, a worker is entitled to the full gratuity for any year in which their employment surpasses six months. For example, if an employee terminates their contract after two years and seven months, they are eligible for three years of gratuity.

Qualifying Events for Gratuity Payment

An employee is entitled to gratuity under the following circumstances:

Voluntary Retirement or Voluntary Redundancy: When an employee resigns from their service, opting for voluntary retirement or voluntary redundancy with financial benefits (e.g., golden handshake schemes).
Non-Misconduct Termination: If the organization terminates the employee’s services for reasons other than misconduct.
Death in Service: In the event of an employee’s death while in the service of their employer (duty status at the time of death is not a prerequisite).
Superannuation and Retirement: Upon reaching the superannuation age and retiring.

However, employees terminated for misconduct, such as harassment or theft, are not eligible for gratuity.

In the case of a workman’s death, gratuity is payable to the legal dependents, including the widowed mother, widow, minor son, and unmarried daughter. The worker should be in continuous service at the time of death, regardless of whether it occurred on duty.

Rate and Calculation of Gratuity

The gratuity rate, as per legal provisions, is “thirty (30) days’ wages for every completed year of service or any period exceeding six months.” Any employment period exceeding six months is considered a full year. Originally set at 15 days’ wages per completed year of service, this rate was increased to 20 days’ wages in 1973 and further to 30 days’ wages in 1994.

After the 18th Constitutional Amendment of 2010, provincial legislation governs gratuity on termination of employment:

Punjab and Islamabad Capital Territory: Provide 30 days’ wages for each year of service.
Khyber Pakhtunkhwa and Sindh: Offer one month’s wages for each year of service.
Balochistan: Requires two months’ wages as gratuity for each year of service.

Gratuity calculation is based on the “wages admissible to a fixed-rate worker in the last month of service” or “the highest drawn pay by a piece-rate worker during the preceding twelve months.” It includes all permanent and regular allowances, such as house rent, cost of living, and conveyance, while excluding unpredictable payments like temporary relief or employer-provided bonuses.

In gratuity calculation, any service period exceeding six months over the number of years is counted as one year, while service less than six months is not considered. Understanding these nuances is essential for both employers and employees in Pakistan’s private sector.

Consider the following illustration:

Date of joining/first appointment in an establishment	01 September 1990
Date of voluntary retirement/resignation	30 April 2022
The gross salary paid in 2022	Rs. 50,000
Temporary relief (flood relief)	10,000
Bonus (at the end of the year indicating a profitable situation for the firm)	20,000
The total length of service	31 years and 8 months
Admissible period for the calculation of gratuity	32 years
To calculate gratuity, the Last drawn monthly gross pay	Rs. 50,000
Pay per day	50,000/26(working days)=1923
One year gratuity (pay per day*30)	1923*30=57,692
Gratuity for the whole period served i.e. 32 years	32*57,692=Rs. 1,846,153

Note: If the employment period in the above example was 31 years and 4 months, the gratuity would be payable only for 31 years.

Understanding Wages, Gratuity, and Retirement Benefits in Pakistan’s Private Sector Employment

In the realm of private sector employment in Pakistan, worker compensation operates on a foundation rooted in specific regulations and guidelines. The determinants for wages follow a 26-day month basis, as stipulated by the Minimum Wages for Unskilled Workers Ordinance of 1969. Furthermore, provincial governments issue notifications establishing minimum wage rates for unskilled, semi-skilled, and skilled workers, all adhering to this 26-day framework.

Regarding gratuity, the calculation hinges on gross wages, encompassing permanent, regular, and non-contingent allowances and fringe benefits. Notably, irregular and non-contingent payments, such as bonuses, profits, and payment for annual leave, do not contribute to the gratuity calculation. For fixed-rated workers, gratuity is based on the last month’s wages, while piece-rated workers see their gratuity calculated based on the highest pay drawn over the past 12 months.

Now, let’s delve into the distinctions between gratuity, provident fund, and pension fund. Under the Standing Orders Ordinance of 1968, these are distinct retirement benefits, and workers don’t have a legal right to both. The decision to implement either a provident fund or provide gratuity upon employment termination is at the employer’s discretion. It’s essential to recognize that the law cannot mandate an employer to offer either or both benefits simultaneously. However, it does set a minimum legal protection standard, not a maximum one.

Moreover, a significant amendment in 2007 introduced the concept of an Approved Pension Fund. When employers, through collective bargaining, establish and contribute to an “Approved Pension Fund” defined in the Income Tax Ordinance of 2001, with the employer’s share being at least 50% of the prescribed limit, gratuity is not payable during the period of these contributions. It’s noteworthy that this Pension Fund option is not present in the Khyber Pakhtunkhwa and Sindh Standing Orders Acts.

In cases of misconduct, employers are not obligated to pay gratuity. However, if a Provident Fund is maintained, a workman is entitled to receive the amount in the provident fund, including the employer’s contributions, even if they resign or are dismissed from service.

Now, let’s address what action a worker (or their dependents) should take if an employer refuses to pay gratuity or offers an amount lower than what is due. The initial step is to request payment of the owed amount from the employer. If delays or underpayments persist, the aggrieved party, be it the worker or their dependents in case of the worker’s death, can file a claim with the Commissioner appointed under section 15 of the Payment of Wages Act of 1936. This complaint can be lodged within three years of the incident, and each district designates a Workmen Compensation Commissioner to handle labor-related matters.

Finally, in the unfortunate event of a worker’s demise, gratuity is disbursed to their legal dependents. This calculated gratuity sum is transferred to the Workmen Compensation Commissioner, appointed under the Workmen Compensation Act of 1923. The Commissioner then allocates the amount among the dependents, defined as the widow, minor son (under 18 years), unmarried daughter, or widowed mother, in accordance with section 8 of the Workmen’s Compensation Act, 1923, or its provincial variations.

Important Points about Gratuity in Pakistan:

Gratuity eligibility is based on completing 12 months of service, not tied to specific calendar or fiscal years.
Gratuity is payable only after six or more months of employment; less than six months of service does not qualify.
Employers must provide one of the following benefits: Gratuity, Provident Fund, or Pension Fund, but not necessarily all three.
Gratuity is distinct from bonuses or profit-sharing and must be paid upon the worker’s exit, regardless of the reason, except in cases of misconduct.

Contact Us for Gratuity Matters and Calculations

At our firm Qanoon Group, we specialize in handling gratuity-related issues and providing precise calculations. Contact Our team of experts is well-versed in the legal aspects and nuances surrounding gratuity in Pakistan’s private sector. If you need guidance or assistance with gratuity matters, don’t hesitate to get in touch. We’re here to ensure accurate calculations and comprehensive support tailored to your needs. Reach out to us today for reliable and professional assistance.