Forfeiture of Gratuity

1. FORFEITURE OF GRATUITY:-

The gratuity of an employee whose service have been terminated for any Act of willful omission or negligence causing any damage or loss to or destruction of property belonging to the employer, gratuity shall be forfeited to the extent of the damage or loss caused. The right of forfeiture is limited to the extent of damage.

The gratuity payable to an employee shall be wholly forfeited in any following conditions:-

1. If the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part,

                               Or

2. If the service of such employee have been terminated for any act which constitutes an offense involving moral turpitude, provided that such offense is committed by him in the course of his employment.

Gratuity is a lump sum payment considered necessary for an orderly and humane elimination from the industry of superannuation or disabled employees, who but for such retiring benefit would continue in employment even though they function inefficiently as held by the Supreme Court in  

‘Burhanpur Tapti Mills Limited V. Burhanpur Tapti Mills Mazdoor Sangh’ – 1964 (11) TMI 79 - SUPREME COURT.” It is a gratuitous payment extended to an employee on retirement or discharge, in addition to the retrial benefits payable to the employee.

PAYMENT OF GRATUITY:-

Section 4(1) of the Gratuity Act, 1972 (‘Act’ for short) provides that Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years,-

(a) on his superannuation, or

(b) on his retirement or resignation, or

(c) on his death or disablement due to accident or disease.

PROVISIONS RELATING TO FORFEITURE OF GRATUITY:-

Forfeiture of gratuity is different from ineligibility to receive gratuity. Once eligible it shall not be refused or rejected or forfeited unless otherwise provided in law. Gratuity may be forfeited either in partial or in full.   Section 4(6) provides the circumstances under which the gratuity may be forfeited.

Section 4(6) of the Act provides that notwithstanding anything contained in sub-section (1)-

(a) the gratuity of an employee, whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused;

(b) the gratuity payable to an employee shall be wholly forfeited,-

(i) if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, 

or

(ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.

STATUTORY RIGHT

The right of receiving the gratuity by the employee is the statutory right. Once it is eligible to receive the gratuity the employee is entitled to receive the same unless otherwise restricted by the provisions of law. The Court in ‘KSRTC, Bangalore V. Deputy Labor Commissioner and the Appellate Authority, Bangalore and others’ – 2014 (2) TMI 629 - KARNATAKA HIGH COURT held that right to gratuity is a statutory right and cannot be withheld under any circumstances but for the exception enumerated in Section 4(6) of the Act.

In ‘D.S. Nakara V. Union of India’ – 1982 (12) TMI 151 - SUPREME COURT the Supreme Court held that gratuity is a social welfare measure rendering socio-economic justice by providing economic security in the fall of life when physical and mental prowess is ebbing, corresponding to ageing process and when, one falls, back on savings.   Such payment cannot be withheld unless specifically permitted by any statutory provision.

PROTECTION OF GRATUITY

Further the Act gives protection to the gratuity that is receivable by the employee. Section 13 of the Act provides that no gratuity payable under this Act shall be liable to attachment in execution of any decree or order of any civil, revenue or criminal court.

OVERRIDING EFFECT

Section 14 of the Act provides that the provisions of this Act or any rule made there under shall have effect notwithstanding anything inconsistent therewith contained in any enactment other than this Act or in any instrument or contract having effect by virtue of any enactment other than this Act.

In ‘Jaswant Sing Gill V. Bharat Coking Coal Limited and others’ – 2006 (11) TMI 550 - SUPREME COURT OF INDIA the Supreme Court held that the rules framed under the Coal India Executives’ Conduct Discipline and Appeal Rules, 1978 which provided for a forfeiture of gratuity were not statutory rules and the provisions of Gratuity Act must therefore prevail over the rules.

In ‘Rajan Shanthi P. V. Union of India’ – 2010-IV-LLJ-600, the Supreme Court considered a seeming conflict between the provisions of Gratuity act, 1972 with reference to the provisions which have been extracted, namely, Section 4(6) and Section 5 of the Working Journalists and Other Newspaper Employees (Condition of Service) and Miscellaneous Provisions Act, 1955.   Section 5 of the latter Act is very similar to Clause 5 of the Regulations, 1964. Section 5(1)(a)(i) extends the benefit of gratuity to an employee whose services are terminated by the employer for any reason whatever, otherwise than a punishment inflicted by way of disciplinary act.   The Supreme Court reasoned that the Payment of Gratuity Act was a general act and the Working Journalists and Other Newspaper Employees (Conditions of service) and Misc. Provisions of Act, 1955 was a special enactment will prevail when there is a conflict between a general act and a special act.   Thus if the service of an employee has been terminated by way of disciplinary action under the Working Journalists and other Newspaper Employees (Conditions of Service) and Misc. Provisions of Act,1955, he is not entitled to gratuity

WITHHOLDING OF GRATUITY

In ‘D.V. Kapoor V. Union of India’ – 1990 (8) TMI 390 - SUPREME COURT OF INDIA it was held that the right to gratuity is also a statutory right.   The appellant was not charged with nor was given an opportunity that this gratuity would be withheld as a measure of punishment.   No provision of law has been brought to our notice under which, the President is empowered to withhold gratuity as well, after his retirement as a measure of punishment. Therefore, the order to withhold the gratuity as a measure of penalty is obviously illegal and is devoid of jurisdiction.

DEDUCTION FOR BANK LOAN

No amount can be deducted from the payment of gratuity granted to an employee. If any amount is deducted from the gratuity, unless as specified in Section 4(6), it is not legal. In ‘KSRTC, Bangalore V. Deputy Labor Commissioner and the Appellate Authority, Bangalore and others’ – 2014 (2) TMI 629 - KARNATAKA HIGH COURT the employer deducted a sum of Rs.54,350/- from the gratuity of the employee on the premise that the employee was liable to pay towards discharge of a loan extended by the State Bank of Mysore, while in service.   The Court held that Sec. 4(1) and Sec. 4(6) of the Act when read, in conjunction, the only irresistible conclusion is deduction by way of forfeiture to the extent of damage or loss caused by the employee during his service, from the gratuity of that employee, whose service is terminated for any act, willful omission or negligence causing any damage or loss or destruction of property belonging to the employer and the gratuity payable to an employee wholly or partially forfeited; if the service of such employee is terminated for his riotous disorderly conduct or any other act of violence on his part; or if the service of such employee is terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.   In the instant case, it is not that the services of the employee is terminated for any of the above said reasons, so as to withhold gratuity on the wholly or partially so as to fall within Section 4(6) of the Act. That being the factual position, deduction of Rs.54,350/- allegedly towards discharge of the loan extended to the employee by the State Bank of Mysore cannot but be held to be illegal.

SPECIFIC ORDER FOR FORFEITURE

If circumstances require forfeiting either partially or fully a specific order shall be passed by the employer in this regard.   For this purpose the employer shall issue a show cause notice to the employee indicating the grounds for forfeiture of gratuity and he shall be given a reasonable opportunity of being heard.   The final decision will be taken on the basis of reply, if any, given by the employer and the order of forfeiture shall be passed and intimated to the employee.

In ‘Bharat Gold Mines Limited V. Regional Labor Commissioner’ – 1986 (7) TMI 357 - KARNATAKA HIGH COURT it was held that the employer is requested to take an independent decision after the termination of service of an employee as to whether the gratuity is payable should at all be forfeited in case which fall under Section 4(6)(a) and (b) of the Act. The decision must necessarily depend on the facts and circumstances of the case such as the length and past record of service, extend and magnitude of the offence and other relevant considerations.   The decision has to be taken after giving notice of the proposal to the employee concerned and after due consideration of the reply furnished, if any.

In ‘Vijaya Bank, Bangalore and Others V. Mohan Das Ramana Shetty’ – 2009-II-LLJ-241 the Karnataka High Court observed that when a bank employee was dismissed from service for allowing over drawings without prior approval of the Controlling Authority, thereby causing loss to the Bank, the decision to forfeit the gratuity can be taken only after quantifying the amount of loss and after affording opportunity to the employee to present his defence against the decision proposed and where no proceeding is initiated by the Bank for assessment of loss caused by employee, gratuity cannot be forfeited.

In ‘Karnataka State Road Transport Corporation, Bangalore V. Deputy Labor Commissioner and the Appellate Authority, Bangalore and others’ – 2012-III-LLJ-384 (Kant) the Court held that having regard to the mandate of Section 4(6) of the Act before forfeiting the gratuity amount, the petitioner employer ought to have extended an opportunity of hearing to the employee over the proposal to forfeit the amount of gratuity.   Even otherwise, the statutory provision for forfeiture of gratuity when construed strict the petitioner corporation was required to prove before the Controlling Authority the extent of damage or loss cause by the employee for the acts of alleged misconduct by reason of which the employer is disentitled to gratuity.

In ‘Dhanalakshmi Bank Limited V. Ramachandran’ – 2012-IV-LLJ-235 (Kar) the employee of the petitioner bank was dismissed from service for misconduct involving moral turpitude. He claimed gratuity for the service of 26 years he had rendered.   The Controlling Authority dismissed the claim but the appellate authority allowed the claim.   The High Court observed that the petitioner bank has not passed an order forfeiting the gratuity with notice to employee which dismissed him from service.   Hence the order of appellate authority under challenge did not merit interference.

RECOVERY FROM GRATUITY

In ‘Most. Prabha Shukla V. State of Bihar and other’ – 2014 (2) TMI 630 - Patna High Court the Court observed that the employer has not controverted the statement that the husband of the petitioner was on duty in Police line, Nalanda between the periods for which recovery order has been passed.   Fact remains that the recovery of Rs.99,958/- was directed to be made from the gratuity amount of husband of the petitioner, who died in harness.   The recovery order has been passed after two years from the death of her husband.   It is also not in dispute that before passing order for recovery, no opportunity of hearing was given to the petitioner and violating the principles of natural justice, the order for recovery was passed.   So far as the recovery from amount of gratuity is concerned, the Court is of the opinion that recovery from amount of gratuity was not permissible by the respondents, particularly in view of statutory bar under Section13 of the Payment of Gratuity Act.   It is evident that right to receive the payment of gratuity amount is protected right and it cannot be taken away by the employer.

WHETHER DISMISSAL AMOUNTS TO AUTOMATIC FORFEITURE?

In ‘Haryana Financial Corporation, Chandigarh V. D.R. Sharma and another’ – 2012-IV-LLJ-406 (P&H) the employee was charged with certain irregularities in not securing appropriate securities from a borrower that exposed the Financial Corporation to serious financial crisis.   The Enquiry Officer held that all the charges had been proved and proceeded to dismiss the employee from service.   The appeal filed by the employee was also dismissed. When a claim for gratuity was made by the employee it was denied by resort to 1964 Regulations as disentitling him to claim gratuity.   This application of Regulation was found by the Appellate Authority to be not justified and it held that the provisions of Gratuity act, 1972 restricted the forfeiture only to circumstances spelt out under Section 4(6) of the Act that required proof of damage or loss or destruction arising out of willful omission or negligence.   If there was no loss or damage or destruction to property, even a mere negligent act that may have resulted in termination of service cannot be a bar to secure the gratuity.

There is a seeming conflict between what is contained in 1964 Regulations and what is contained under the Payment of Gratuity Act.   The 1964 Regulations Clause 5 states that no gratuity is to be granted to in the case of an employee had not completed 5 years of service or had been dismissed from service for any misconduct.

The Court held that Section 14 makes it clear that any other Act or Rule which was inconsistent must be taken to be completely excluded by the virtue of Section 14.   The payment of gratuity is a beneficial enactment and it must be so construed as to fulfill the purpose for which the Act was made. Exclusion would be possible only by strict standards which the Act itself lays down.

Dismissal of employee without proof of loss to employer could not be a ground for forfeiture of gratuity although so provided in service regulations of an establishment.

In ‘State Bank of Travancore V. Assistant Labor Commissioner (Central), Trivandrum and others’ – 2012-IV-LLJ-580 (Ker) the employee could not get gratuity and approached the Controlling Authority under the Gratuity Act, 1972.   The payment was ordered and confirmed by the appellate authority. The High Court observed that the punishment imposed on the employee was discharge from service with superannuation benefit.   The petitioner could not therefore invoke Section 4(6)(b) of the Act to forfeit the gratuity.   Even apart from that the order forfeiting the gratuity said to have been passed in November 2001 was not communicated to the employee till December, 2005.   Hence there was no order at all and it should be construed as non est.                  

In ‘Manager, Park Side Estate, Coonoor V. The Appellate Authority and others’ – WP No. 20979 of 2006 decided by Madras High Court on 01.02.2011 the only question that arises for consideration of the High Court is whether mere dismissal on ground of riotous and disorderly behavior by itself is sufficient for forfeiting the gratuity or that an employer should pass a separate order forfeiting the right of employee to receive gratuity. In the present case, the authorities   held that forfeiture of gratuity is the right accrued to the employer. Therefore, held that am employer must express their mind for forfeiting the gratuity. It is not as if the dismissal for riotous and disorderly behavior will automatically enable the gratuity to be forfeited. The section relating to forfeiture viz., 4(6)(b) of the Act says that forfeiture wholly or partially can be made. Therefore, it requires the application of mind by an employer and it will not be automatic on the issuance of the order of dismissal. It is well with their right to pass order of forfeiture on the basis of disqualification under Section 4(6) of the Act. The Court further held that while dealing with the application of Gratuity act, there is no difficulty in holding that a forfeiture order will have to be independent of an order of penalty. Hence, the authorities have found they are not satisfied with the defence taken by the petitioner and hence ordered for the payment of gratuity. The impugned order does not call for any interference.

In ‘Dena Bank V. Manjulaben M. Thakor and another’ (2012 LLR 648) The contention of the Petitioner-Bank was that the deceased workman had committed an act involving moral turpitude and therefore was not entitled to the gratuity amount under Section (6)(b)(ii) of the Gratuity Act read with the Plaintiffs’ Banks Service regulations. The Court, after perusal of the dismissal order by the bank, observed that there was no direction in the dismissal order for forfeiture of the gratuity amount, which the deceased workman was otherwise entitled to, it being a statutory right. The charge sheet had not stated forfeiture of gratuity on the ground of ‘moral turpitude’ and no inquiry had been conducted on that count. Also, the petitioner-Bank had admittedly not initiated any penal action with a view to forfeit the gratuity amount. Thus, in the absence of a proper order by the employer, the Court held the forfeiture of gratuity of the employee to be not sustainable.

CONCLUSION

From the above discussion it is clear that once gratuity is eligible it is the right of the employee to receive the same.   Any recovery shall not be made from gratuity. Forfeiture of gratuity shall be done only in accordance with Section 4(6) of the Act. The forfeiture shall be confirmed by the employer only by means of a specific order, quantifying the forfeiture amount after giving a reasonable opportunity given to the employee.