Date:

Mr. Farooq Akhtar

Manager Accounts and Finance
Central Boulevard Pvt. Ltd.
FIFA Building, Punjab Stadium
Ferozepur Road, Lahore.

Subject: Legal Requirements for Retirement Benefits of Employees.

Dear Sir,

This is with reference to your email dated February 16, 2017 wherein you have requested the
legal requirements for retirement benefits of employees with reference of law.
There are two prevalent retirement benefits in the private sector employment in Pakistan.
1. Gratuity
2. Provident Fund

Gratuity
The relevant law on the payment of gratuity applicable to the Company is The Industrial and
Commercial Employment (Standing Orders) Ordinance, 1968 (hereinafter the Ordinance).
Gratuity is actually a benefit for services rendered in the past. It is a reward of good, efficient
and faithful service for a substantial period of time. Before 1972, gratuity was paid by an
employer either on voluntary basis or in consequence of an award by a labor court. However,
the Labour Laws Amendments Ordinance, 1972 made payment of gratuity a legal obligation.
Amendments were subsequently made in the Standing Order 12 of Industrial and Commercial
Establishments (Standing Orders) Ordinance 1968. Gratuity is now a statutory right for workers
who have worked at least twelve months in an organization. The relevant laws governing
gratuity in private sector are:

The Industrial and Commercial Establishments (Standing Orders) Ordinance, 1968

(applicable in ICT, Sindh & Baluchistan)

Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 (adapted by

the province of Punjab through Amendment Act of 2012)

The Khyber Pakhtunkhwa Industrial and Commercial Employment (Standing Orders)

Act, 2013
 Payment of Wages Act, 1936 (applicable in ICT, Sindh & Baluchistan)

Payment of Wages Act, 1936 (adapted by the province of Punjab through Amendment
Act of 2014)

The Khyber Pakhtunkhwa Payment of Wages Act, 2013

Factories Act, 1934

Factories Act, 1934 (adapted by the province of Punjab through Amendment Act of 2012)

The Khyber Pakhtunkhwa Factories Act, 2013

Shops and Establishments Ordinance, 1969

Shops and Establishments Ordinance, 1969 (adapted by the province of Punjab through
Amendment Act of 2014)

Khyber Pakhtunkhwa Shops and Establishments Act, 2015

Which Organizations are liable to pay gratuity to their

workers?
In accordance with section 1(4) of the Standing Orders Ordinance, 1968 (and its variant in
Punjab), every commercial establishment (employing 20 or more workers) and industrial
establishment (employing 50 or more workers) are required to pay gratuity to a worker once
he/she has met the minimum criteria. The table below shows all the organizations liable to pay
gratuity to their workers.

Commercial Establishments Minimum Industrial Minimum Number of

Number of Establishments Workers
Workers

The Industrial and Commercial Establishments (Standing Orders) Ordinance, 1968

commercial establishment At least 20 Industrial At least 50 workers must

means an establishment in which the workers must establishment means have been employed by
business of advertising, commission have been any the organization for
or forwarding is conducted, or which employed by continuous 12 months
is a commercial agency, and includes the (a) tramway or motor
a clerical department of a factory or organization omnibus service;
of any industrial or commercial for continuous (b) dock, wharf or jetty;
undertaking, the office establishment 12 months
of a person who for the purpose of (c) inland steam-vessel;
fulfilling a contract with the owner
of any commercial establishment or (d) mine, quarry or oil-
industrial establishment, employs field;
 workmen, a unit of a joint stock (e) plantation;
company, an insurance company, a
banking company or a bank, a (f) workshop or other
brokers office or stock-exchange, a establishment in which
club, a hotel, a restaurant or an articles are produced,
eating house, a cinema or theater, adapted or manufactured,
and such other establishment or class with a view to their use,
thereof, as Government may, by transport or sale;
notification in the official Gazette, (g) establishment of a
declare to be a commercial contractor who, directly
establishment for the purpose of this or indirectly, employs
Ordinance; persons to do any skilled
or unskilled, manual or
clerical Labour for hire or
reward in connection with
the execution of a
contract to which he is a
party, and includes the
premises in which, or the
site at which, any process
connected with such
execution is carried on;
Explanation.
Contractor includes a sub-
contractor, headman or
agent.

Qualifying conditions for a worker to earn gratuity?

A worker is entitled to gratuity if the following four conditions are satisfied.

1. Industrial and Commercial Establishments (Standing Orders) Ordinance 1968 (or any of its
variants) is applicable to that establishment (whether commercial or industrial) i.e. it must have the
minimum number of workers as mentioned above

2. A person has to be a workman as defined in Standing Orders Ordinance 1968. A workman is "any
person employed in any industrial or commercial establishment to do any skilled or unskilled, manual
or clerical work for hire or reward".

3. He/she must be a permanent workman. If a worker is temporary, badli, probationer or a contract

worker, he/she is not eligible for gratuity under the law.

4. The minimum qualifying employment period is twelve months or above. However, if a worker has
worked over six months in a specific year, he will be entitled to gratuity of one year.
What are the qualifying events for payment of gratuity
to a worker?
An employee is entitled to gratuity when:

1. He resigns from his service (voluntary retirement or voluntary redundancy in exchange

for financial benefits like golden handshake schemes)

2. His organizations terminate his services due to reasons other than misconduct

3. He dies while in service of his employer (it is not necessary that employee should be on
duty at the time of death)

4. He reaches the superannuation age and retires

However, if an employee's services were terminated on account of misconduct (like

harassment, theft etc.), gratuity would no longer be admissible to him.
In case of death of a workman, gratuity is payable to the legal dependents of a workman. As
mentioned above, death may not necessarily occur on duty but the worker should be in
continuous service at that time. The amount of gratuity, in this case, is transferred to "Workmen
Compensation Commissioner" who will then allocate this amount to the dependents of a worker.
The dependents of a deceased worker include "his widowed mother, his own widow, minor son
and unmarried daughter".

What is the rate of gratuity and how is it calculated?

In accordance with the provisions of law, rate of gratuity is "thirty (30) days wages for every
completed year of service or any period in excess of six months". Any employment period
exceeding six months will be considered as one year.
The basis for calculation of wages is "wages admissible to a fixed-rate worker in the last month
of his service" or "the highest drawn pay by a piece-rate worker during the preceding twelve
months". Wages for gratuity calculation are the "gross wages" including all permanent and
regular allowances (like house rent allowance, cost of living allowance and conveyance
allowance), however, these don't include any such contingent or unpredictable payments like
temporary relief to workers (e.g. flood relief) or bonus provided by the employer. Other than
wage rate, the second determining factor in gratuity calculation is the time period a worker has
served with an establishment/organization. Any length of service higher than six months over
the number of years of service is considered as one year for the purpose of gratuity calculation.
Whereas any length of service less than six months is not included in the course of calculating
gratuity.
Consider the following illustration:

Date of joining/first appointment in an establishment 01st September, 1989

Date of voluntary retirement/resignation 30th April, 2015

 Gross salary paid in 2015 Rs. 30,000

Temporary relief (flood relief) 5,000

Bonus (at the end of year indicating profitable situation for 10,000
firm)

Total length of service 25 years and 8 months

Admissible period for calculation of gratuity 26 years

To calculate gratuity, last drawn monthly gross pay Rs. 30,000

Pay per day 30,000/26(working days)

=1153.85

One year gratuity (pay per day*30) 1153.85*30=34615.4

Gratuity for the whole period served i.e. 26 years 26*34,615.4=Rs. 900,000.4

Types of Gratuities;
Approved Gratuity are funded gratuity approved by the Commissioner of
Income Tax under part-III of the sixth Schedule to the Income Tax Ordinance,
2001. Any payment received by way of gratuity by an employee on his
retirement or, in the event of his death, by his heirs is 100 % exempt under
part I of second schedule of Income tax ordinance 2001.

Conditions for Tax Approval:

1- Fund is established under an irrevocable trust and not less than 90%
employees shall be employed in Pakistan.
2- The sole purpose of the fund is to give gratuity to employees on their
retirement at or after a specified age or on their becoming
incapacitated prior to such retirement, or on termination of their
employment after a minimum period of service specified in the
regulations of the fund or to the widows, children or dependents of
such employees on their death.
3- The employer shall be a contributor to the fund; and
 4- all benefits granted by the fund shall be payable only in Pakistan

Approved Gratuity Schemes

Approved Gratuity Schemes are unfunded scheme but which have been
approved by the FBR. No separate fund is required to be maintained and
merely provision for the unfunded liability are made from year to year which
are not tax deductible until it is paid. Total exemption here is not more than
300 thousand.

Unapproved Gratuity

Unapproved Gratuity are those which are neither approved by the

Commissioner nor by the FBR. Total exemption is up to the lower of 75
thousand or the 50% of the gratuity amount.

Provided that exemption shall not apply

(a) to any payment which is not received in Pakistan;
(b) to any payment received from a company by a director of such company
who is not regular employee of such company;
(c) to any payment received by an employee who is not a resident individual;
and to any gratuity received by an employee who has already received any
gratuity from the same or any other employer.

Provident Fund
PF scheme is a retirement benefit scheme.
PF scheme is contributory in nature and definition
Employee and Employer, both make contribution to PF
Employee and Employer make equal contribution to PF
The contributions from both are invested in profitable schemes.
Investment Income is credited to members account.
At resignation, total of employer and employees contribution and its interest is paid to
the employee free of income tax.
The fundamental liability to pay the PF stem from the SO Ordinance, 1968.
(Industrial Undertaking with > 50 employees and Commercial Undertaking with 20
employees)

Types of Provident Fund;

Statutory Provident Fund

Statutory Provident Fund is setup under the Provident Fund Act, 1925 and is maintained by
Government, Semi Government Organization, Local authorities, railways and recognized
educational institutions. Payment from such fund does not need Commissioner recognition
separately and are exempted from income tax.

Recognized Provident Fund

Recognized Provident Fund is the PF, which is recognized by the Commissioner under Part l of
the 6th schedule of ITO, 2001. This type of PF is maintained by private sector organizations.
Payment from such fund gets exempt from income tax after recognition.

Unrecognized Provident Fund

Un-recognized Provident Fund is actually not a separate type. It is a fund, which is neither a
recognized Fund (as it has not been approved) nor it is a Statutory Fund. No exemption is
available but there is no yearly taxability either. Employers contribution and interest thereon will
be fully taxable at the time of payment to the employee only.

What is the difference between gratuity, provident fund?

Gratuity and provident fund are two different retirement benefits under the Standing Orders
Ordinance 1968. Workers don't have legal right to both of these benefits. It is rests with an
employer's discretion to decide as to whether he wants to set up provident fund or provide
gratuity at the end of employment or grant both of these benefits voluntarily. The law can't force
an employer to provide either of these benefits or both the benefits simultaneously.
Gratuity is usually awarded in addition to other benefits payable to an employee. However,
gratuity is not payable during the period an employer has set up a provident fund in his
establishment with at least 50% of the contribution by the employer and the remaining by
employee. The sum of both of these contributions would be payable to a workman even if he
resigns or is dismissed from service for any reason including misconduct (remember gratuity is
not admissible in case of misconduct). However, the law does not stop an employer to provide
both gratuity and provident fund to its employees. The Khyber Pakhtunkhwa Act further provides
that the amount paid to the worker under provident fund must not be less than the amount of
gratuity admissible to such worker.

We hope that above opinion addresses your query.

The opinion solicited here above is based on best of our understanding on current law and
interpretation as of today under the facts explained to us. This opinion is only for central
boulevard (private) limited at their specific request without any recourse of liability on us and not
for any third party. This opinion may not be solicited / disseminated to any third party or relied by
any third party without our prior written consent.

Yours truly
Junaidy Shoaib Asad
Chartered Accountants