FORFEITURE OF GRATUITY ON DISMISSAL FROM SERVICE

[Mr. M. GOVINDARAJAN]

Gratuity

Section 4 of the Payment of 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,-

• on his superannuation, or
• on his retirement or resignation, or
• on his death or disablement due to accident or disease.

Nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer.

Forfeiture of gratuity

• the gratuity of an employee, whose services have beenterminated 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;
• the gratuity payable to an employee may be wholly or partially forfeited-

• 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
• 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.

Thus an employee is entitled to receive better terms of gratuity under any award or agreement or contract with the employer.

Gratuity payment on dismissal of service

As per the provisions of the Act if a person is dismissed from service he will not be entitled to receive any gratuity.   Forfeiture of gratuity on dismissal of service is not automatic.  If better terms are agreed to both by the employer and the employee then gratuity is payable to the employee.  Under which condition?  The Supreme Court gives an answer to this in the case ‘Union Bank of India and others v. C.G.Ajay Babu and another’ [ 2018 (8) TMI 934 - SUPREME COURT ]– Civil Appeal No. 8251/2018 – decided on 14.08.2018.

The respondent was an employee of the appellant-Bank. While serving as a Branch Manager, disciplinary proceedings were initiated against him on the following charges:

• Failure to take all steps to ensure and protect the interest of the Bank;
• Failure to discharge his duties with utmost devotion, diligence, honesty and integrity;
• Doing acts unbecoming of an Officer Employee.

On the charges being duly established, the respondent was dismissed from service on 03.06.2004. The order of dismissal has attained finality.

However the bank issued a show cause notice to the respondent as to why the gratuity should not be forfeited on account of proved misconduct involving moral turpitude.  The respondent submitted his explanation to the show cause notice.  The bank authorities did not accept the contentions of the respondent and issued the order for forfeiture of gratuity.  The Authorities held that the misconduct proved against the respondent amounts to acts involving moral turpitude. In this regards, the explanation submitted by the respondent in terms of his reply is not satisfactory and therefore not acceptable to the bank.   Therefore, in accordance of the provisions of section 4, subsection 6(b)(ii) of the Gratuity Act, 1972 and clause 3 to Schedule “A” of the Banks Gratuity Rules, the Bank has decided to forfeit an amount of ₹ 1,77,900/- from the Gratuity amount payable to the respondent.

The respondent filed a writ petition before the High Court.  The High Court upheld the dismissal order of the respondent by the Bank.  But the High Court allowed the claim of the respondent for the payment of gratuity to him.  The High Court held that there was no financial loss caused to the bank on the dismissal of service of the respondent.  As per the bipartite settlement, forfeiture of gratuity is permissible only in case the misconduct leading to the dismissal has caused financial loss to the Bank and only to that extent.     

An appeal was filed before the Division Bench by the Bank.  The Division Bench upheld the order of Single Judge. As such the Bank approached the Supreme Court for remedy.    The appellant bank contended before the Supreme Court that Section 4(5) of the Act provides that the phase  “while providing for better terms of gratuity under any award or agreement or contract” deals only with the quantum of the gratuity and not with the entitlement under any award or agreement or contract as such.

The Supreme Court analyzed the provisions of the Act in respect of payment and forfeiture of gratuity payable to its employees by the employer.  The Supreme Court observed that there was a bipartite settlement dated 19.08.1966 prevailing in the Bank and the clause dealing with the forfeiture of gratuity.  According to this settlement there will be no forfeiture of gratuity for dismissal on account of misconduct except in cases where such misconduct causes financial loss to the bank and in that case to that extent only.

The Supreme Court did not accept the contentions of the Bank.  The statute provides for better terms of gratuity under any award or agreement or contract which means all terms of the contract. The choice is between the award or agreement or contract and the statute, but not partially of either.  There is a bipartite settlement in the appellant-Bank is not in dispute. That the settlement provides for forfeiture only if there is a loss caused on account of misconduct leading to dismissal, is also not in dispute. There is no case for the Bank that the  misconduct of the respondent-employee has caused any financial loss to the Bank, and therefore, forfeiture, taking recourse to sub-Section (6) of Section 4 of the Act, cannot be resorted to.  The Supreme Court is in agreement with the findings of the High Court that the respondent is entitled for the payment of gratuity.

 The appellant-Bank has contended that the conduct of the respondent-employee, which leads to the framing of charges in the departmental proceedings involves moral turpitude, we are afraid the contention cannot be appreciated. It is not the conduct of a person involving moral turpitude that is required for forfeiture of gratuity but the conduct or the act should constitute an offence involving moral turpitude. To be an offence, the act should be made punishable under law. That is absolutely in the realm of criminal law. It is not for the Bank to decide whether an offence has been committed. It is for the court. Apart from the disciplinary proceedings initiated by the appellant Bank, the Bank has not set the criminal law in motion either by registering an FIR or by filing a criminal complaint so as to establish that the misconduct leading to dismissal is an offence involving moral turpitude. Under sub-Section (6)(b)(ii) of the Act, forfeiture of gratuity is permissible only if the termination of an employee is for any misconduct which constitutes an offence involving moral turpitude, and convicted accordingly by a court of competent jurisdiction.

The Supreme Court observed that in the present case, there is no conviction of the respondent for the misconduct which according to the Bank is an offence involving moral turpitude. Hence, there is no justification for the forfeiture of gratuity on the ground stated in the order dated 20.04.2004 that the “misconduct proved against you amounts to acts involving moral turpitude”.

The Supreme Court held that forfeiture of gratuity is not automatic on dismissal from service; it is subject to sub-Sections (5) and (6) of Section 4 of The Payment of Gratuity Act, 1972.  The Supreme Court dismissed the appeal filed by the Bank.

Discussions to this article

[Ramesh Kothari]

Is gratuity eligible in case of employer terminated the services of employee before completion of 5 years of services as per act

Any judgment in favour of emplieem

[email protected]

[DR.MARIAPPAN GOVINDARAJAN]

No, because the eligibility to receive gratuity arises only after rendering 5 years of service.