The Kerala High Court has affirmed that employees of institutional bodies governed by non-statutory service rules remain entitled to the full benefits of the Payment of Gratuity Act, 1972, if those benefits exceed the limits prescribed by internal policies. This ruling clarifies that statutory rights under the Act cannot be diluted by administrative orders, even when the employer is an instrumentality of the state.
Background & Facts
The Dispute
The petitioners, four retired employees of the Institute of Management in Government, a body established by the State of Kerala, were granted gratuity capped at ₹14 lakhs upon retirement in 2019 and 2020. They contended that this amount was below the statutory ceiling of ₹20 lakhs introduced by the Central Government through the Payment of Gratuity (Amendment) Act, 2018, effective from 29 March 2018. The Institute, while adopting certain provisions of the Kerala Service Rules, had not formally incorporated the updated statutory ceiling into its internal gratuity scheme.
Procedural History
- The petitioners filed writ petitions in the Kerala High Court challenging the denial of enhanced gratuity.
- The Institute and the State Government opposed the petitions, asserting that the Institute’s own service rules, which capped gratuity at ₹14 lakhs, governed the entitlement.
- The respondents relied on Government Order Ext.P1 dated 12 February 2021, which enhanced the ceiling to ₹17 lakhs for state employees, but argued this did not extend to the Institute’s non-governmental staff.
- The petitioners cited prior judgments of the same High Court establishing that statutory gratuity rights prevail over employer-specific schemes.
Relief Sought
The petitioners sought a declaration that they are entitled to gratuity under the Payment of Gratuity Act, 1972, at the revised ceiling of ₹20 lakhs, along with 10% interest for delayed payment under Section 7(3) of the Act.
The Legal Issue
The central question was whether employees of an instrumentality of the state, governed by non-statutory service rules, can claim gratuity under the Payment of Gratuity Act, 1972, even when the employer has adopted a lower ceiling through internal policy, and whether Section 14 of the Act overrides such administrative limitations.
Arguments Presented
For the Petitioner
The petitioners relied on Section 14 of the Payment of Gratuity Act, which mandates that the Act overrides any other law, custom, or contract to the contrary. They cited Ext.P3, Ext.P4, and Ext.P5 judgments of the Kerala High Court, which held that employees are entitled to the more beneficial gratuity calculation under the Act, regardless of whether they are paid by the government or fall under a group scheme. They emphasized that the Institute, though funded by the state, is not a government employer and thus cannot unilaterally restrict statutory rights.
For the Respondent
The respondents argued that the Institute operates under its own service rules, which were adopted from the Kerala Service Rules and incorporated a ceiling of ₹14 lakhs. They contended that the petitioners had accepted the revised pay package, including the ₹17 lakh ceiling, and could not now seek a higher benefit under a central amendment. They further asserted that the Central Government’s notification under the 2018 Amendment does not bind state instrumentalities unless explicitly adopted.
The Court's Analysis
The Court examined the nature of the Institute of Management in Government and concluded that it is an instrumentality of the state, but not a government employer. The adoption of Kerala Service Rules did not transform those rules into statutory provisions applicable to the Institute’s employees. The Court emphasized that Section 14 of the Payment of Gratuity Act is a clear legislative directive: it overrides any contrary provision, whether contractual, administrative, or even statutory, if it operates to the detriment of the employee’s statutory right.
"The fact that employees have accepted KSR or a government salary package, by itself will not exclude applicability of the Act, 1972."
The Court distinguished the Institute’s internal gratuity scheme from statutory entitlements. It held that the 2018 Amendment, which raised the ceiling to ₹20 lakhs, is a substantive change in the law and applies to all covered employees, irrespective of whether their employer is a state department or a state-funded institution. The Court relied on Municipal Corporation of Delhi v. Dharam Prakash Sharma to affirm that an employee may opt for the more beneficial scheme. The respondents’ argument that acceptance of the ₹17 lakh ceiling precluded further claim was rejected as legally untenable.
The Court further clarified that the Institute’s Group Gratuity Scheme, while operational, cannot supplant the statutory rights conferred by the Act. The Act’s purpose is to ensure minimum statutory protection, and any administrative ceiling lower than the statutory limit is void under Section 14.
The Verdict
The petitioners won. The Court held that Section 14 of the Payment of Gratuity Act, 1972 overrides any internal ceiling imposed by the employer, and employees are entitled to the higher statutory gratuity of ₹20 lakhs. The respondents were directed to pay the balance amount due within three months, along with 10% interest for delay under Section 7(3).
What This Means For Similar Cases
Statutory Gratuity Rights Cannot Be Contracted Out
- Practitioners must now argue that any employer-imposed ceiling below ₹20 lakhs is void under Section 14, regardless of whether the employer is a government department, public corporation, or state-funded institution.
- Employers cannot rely on internal service rules to deny enhanced gratuity if the Act provides a higher benefit.
- The burden shifts to the employer to prove that the employee has expressly waived statutory rights, which is legally impermissible.
Instrumentalities of the State Are Not Exempt
- Entities like universities, training institutes, or research bodies funded by the state but not formally part of the government hierarchy remain subject to the Act.
- Adoption of KSR or similar rules does not convert non-statutory schemes into statutory ones.
- Employees in such institutions may claim gratuity under the Act even if they receive pensions or other benefits under state schemes.
Enhanced Ceiling Applies Retroactively to Eligible Retirees
- The 2018 Amendment’s ₹20 lakh ceiling applies to all employees retiring after its effective date, even if their employer had not updated internal policies.
- Delayed payment triggers interest liability under Section 7(3), which must be calculated from the date of retirement.
- Employers must proactively review gratuity calculations for all retirees since 29 March 2018 to avoid litigation.
