The Madhya Pradesh High Court has clarified that dearness allowance forms an integral part of wages for the purpose of calculating gratuity under the Payment of Gratuity Act, 1972. This ruling reinforces the statutory mandate that all cash emoluments earned during employment, including dearness allowance, must be factored into the final gratuity computation, closing a common point of contention in employer-employee disputes.
Background & Facts
The Dispute
The petitioner, Madhya Pradesh Rajya Sahkari Bank Maryadit, challenged the computation of gratuity awarded to a former employee by the Controlling Authority under the Payment of Gratuity Act, 1972. The bank contended that its internal policy, as reflected in an internal amendment, limited gratuity calculation to the employee’s last substantive pay, excluding dearness allowance. It argued that this internal rule, which had been consistently applied, should prevail over the statutory definition of wages.
Procedural History
- The employee’s gratuity claim was adjudicated by the Controlling Authority under the Payment of Gratuity Act, 1972.
- The Authority computed gratuity using the employee’s last drawn wages inclusive of dearness allowance.
- The bank filed a writ petition before the High Court seeking to set aside this computation, asserting that its internal policy governed the calculation.
- No other grounds of challenge were raised by either party.
Relief Sought
The petitioner sought to have the Controlling Authority’s order set aside and requested that gratuity be recalculated based solely on the employee’s basic pay, excluding dearness allowance.
The Legal Issue
The central question was whether dearness allowance forms part of the term "wages" under Section 2(s) of the Payment of Gratuity Act, 1972, and whether an employer’s internal policy can override this statutory definition in gratuity computation.
Arguments Presented
For the Petitioner
The bank argued that its internal amendment, which excluded dearness allowance from gratuity calculations, was a legitimate exercise of contractual autonomy. It relied on the principle of expressio unius est exclusio alterius, asserting that since the amendment specified calculation based on "substantive pay," dearness allowance was intentionally excluded. It further contended that the Controlling Authority had disregarded the bank’s established practice, creating inconsistency.
For the Respondent/State
The State contended that the statutory definition of wages under Section 2(s) of the Act is exhaustive and unambiguous. It emphasized that dearness allowance is explicitly included in the definition and cannot be excluded by private agreement or internal policy. The State relied on Clause 6 of Form "U" appended to the Payment of Gratuity (Central) Rules, 1972, which mandates computation based on "last wages drawn," and argued that the Controlling Authority had correctly applied the law.
The Court's Analysis
The Court undertook a strict textual interpretation of Section 2(s) of the Payment of Gratuity Act, 1972, which defines "wages" as "all emoluments... paid or payable in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance." The Court held that this definition is not merely indicative but mandatory, and any attempt to exclude dearness allowance contravenes the statute.
"The definition of wages under Section 2(s) is clear, comprehensive and leaves no room for interpretation or deviation by the employer."
The Court further examined Clause 6 of Form "U" under the Central Rules, which requires gratuity to be calculated on the basis of "last wages drawn." It found that this clause aligns with the statutory definition and reinforces the inclusion of dearness allowance. The Court rejected the bank’s reliance on its internal policy, holding that statutory provisions override internal rules, especially where the statute is designed to protect employee rights. The Court emphasized that the Act is a welfare legislation and must be interpreted liberally in favor of employees. The bank’s argument that its practice had been longstanding was deemed irrelevant where it conflicted with a mandatory statutory provision.
The Verdict
The petition was dismissed. The Court held that dearness allowance must be included in the calculation of gratuity under Section 2(s) of the Payment of Gratuity Act, 1972, and that the Controlling Authority’s computation was legally correct. The bank was directed to pay the outstanding balance of Rs. 5,88,824 within 60 days, with interest at 6% per annum for delay.
What This Means For Similar Cases
Statutory Definitions Override Internal Policies
- Employers cannot unilaterally exclude dearness allowance from gratuity calculations through internal circulars or service rules.
- Any policy inconsistent with Section 2(s) is void ab initio and unenforceable.
- Practitioners must advise clients that statutory definitions prevail over contractual or administrative interpretations.
Gratuity Calculations Must Be Statutorily Compliant
- All employers, including cooperative banks and public sector entities, must revise their payroll systems to ensure dearness allowance is included in the wage base for gratuity.
- Employees who were previously paid gratuity excluding dearness allowance may now claim arrears through the Controlling Authority.
- Auditors and HR departments must audit past gratuity payments for compliance with Section 2(s) and Form "U".
No Room for Equitable Discretion in Welfare Statutes
- Courts will not entertain arguments based on "longstanding practice" if they contradict clear statutory language.
- The principle of lex superior derogat legi inferiori applies: statutory law overrides internal rules.
- Employers seeking to modify gratuity structures must seek legislative amendment, not unilateral policy changes.
