An orderly pursuit

Gratuity is a gratuitous payment made for an employee's long-term service. The Payment of Gratuity Act, 1972, governs gratuity and is applicable after five years of continuous service. The statute prescribes the calculation for the same as well as the cap up to which the amount has to be limited. However, better benefits, such as gratuity for fewer years of service or higher amounts than the cap, can always be given.

As per Section 4(6) of the Payment of Gratuity Act, 1972, the gratuity of an employee whose services have been terminated for any act, willful omission, or negligence causing damage, loss, or destruction of the employer’s property can be forfeited to the extent of the damage or loss. The gratuity payable to an employee may be wholly or partially forfeited if an employee's services are terminated for riotous or disorderly conduct, violence, or an act constituting an offence involving moral turpitude, provided the offence was committed in the course of employment.

Many conduct, discipline & appeal rules of public sector organisations and other entities contain provisions for withholding gratuity. These rules generally provide for withholding gratuity during the pendency of disciplinary proceedings and permit for directing the recovery from gratuity for any pecuniary loss caused to the organisation. The employer is required to follow the principles of natural justice, and determine the extent of damages or loss caused. There has to be a full-fledged inquiry. Without the same, no deduction can be done at the whims and fancies of the employer .

Complex issues with respect to withholding gratuity arise when an employee retires before the completion of a disciplinary inquiry. The Supreme Court has clarified that such inquiries can continue post-retirement if the rules permit. In Chairman-cum-Managing Director, Mahanadi Coalfields Ltd. vs. Sri Rabindranath Choubey (2020), the court held that several service benefits would depend on the outcome of the inquiry. It would be against public policy to allow an employee to escape after collecting benefits to which they are not entitled. The court said that the event of superannuation cannot come to employee’s rescue and would amount to condonation of guilt. The dicta is based on specific Conduct, Discipline & Appeal Rules of the organisation. In this particular case, the rule permitted the authority to continue the disciplinary proceedings, if instituted while the employee was in service, even after his final retirement.

It is, therefore, imperative for organisations to have proper rules in place to address specific situations. In Union Bank of India vs. CG Ajay Babu (2018), the Supreme Court dealt with a case where gratuity was forfeited for an alleged act amounting to moral turpitude. The court held that under Section 4(6)(b)(ii) of the Gratuity Act, 1972, forfeiture of gratuity is permissible only if the termination of the employee is for misconduct constituting an offence involving moral turpitude and if the employee is convicted by a court of competent jurisdiction. Thus, the courts have clarified that management's decisions regarding forfeiture must comply with the law and not be arbitrary. Even in cases of forfeiture due to financial loss, the same should be to the extent of loss caused.

Another relevant principle regarding gratuity is that if an employee is deputed from one organisation to another, or seconded from one entity to another, then his/her continuity is to be maintained for the purposes of gratuity. In cases of deputation or secondment, generally, employees do not lose the right for years spent. Alternatively, the employee can be paid full and final, and then work fresh in a new entity.

The new Labour Codes, 2020, mention the payment of gratuity to fixed-term employees upon quitting after merely one year of service, unlike regular employees, who are eligible after five years. These codes are yet to come into effect. Some amendments and clarifications with respect to entities lacking regulations for post-retirement situations and the arbitrary use of forfeiture would be helpful, saving both time and resources in litigation.

The writer is a practising Advocate in Supreme Court and High Court of Delhi. Views expressed are personal