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India: Forfeiture of Gratuity is not Automatic upon an Employee’s Dismissal from Service

Authors: Avik Biswas, Ivana Chatterjee, Vinduja Menon

 

In the case of Siyaram Basanti v/s Chattisgarh Rajya Gramin Bank and Ors. (Writ Petition 503 of 2020), a dispute arose between the petitioner (former employee) and the respondent (employer) with respect to the payment of gratuity amount, amongst other payments, on account of the petitioner’s termination from services. Gratuity is a social security payment made to employees who have completed the tenure prescribed under the provisions of the Payment of Gratuity Act, 1972 (“Gratuity Act”).

In the instant case, the petitioner was appointed as a branch manager in the respondent bank on October 7, 1982 and was dismissed from service on May 5, 2015. The dismissal from service was based on a departmental inquiry. The petitioner filed multiple applications before the respondent for releasing gratuity, but no decision was taken by the respondent. Thereafter, the respondent approached the High Court and prayed for the grant of due gratuity, amongst other payments. The petitioner asserted that the respondent cannot forfeit the gratuity, except on dismissal on account of misconduct causing any financial loss to the respondent bank, in accordance with the Gratuity Act and Chhattisgarh Rajya Gramin Bank (Officers and Employees) Service Regulations, 2013 (“Regulations”). The Regulations set out additional service conditions for the employees of the respondent. The petitioner also challenged the termination of services by the respondent and separate proceedings are pending in this regard.

The respondent filed their response in which they contended that as per the Gratuity Act and the Regulations, the respondent is not entitled to gratuity. The reasoning provided was that the petitioner’s service was dismissed by way of punishment.

The High Court determined that an employee’s gratuity can be forfeited only on account of the limited circumstances mentioned (such as moral turpitude) under the Gratuity Act. The High Court also agreed with the petitioner’s contention that forfeiture of gratuity under the Regulations can only be done for the specified reason that the dismissal was on account of misconduct causing a financial loss to the respondent bank. However, that was not the stand taken by the respondent in this case. Further, forfeiture of gratuity is not automatic on dismissal from service, and it would be unlawful to forfeit the gratuity without issuing a show cause notice to the employee. The employer is also required to follow the principles of natural justice and determine the extent of damages or loss caused to the employer. The Court held that the respondent’s action of not releasing due gratuity to the petitioner is arbitrary.

In light of the foregoing, the Court directed the respondent to release the gratuity of the petitioner within 1 month from the date of receipt of a copy of the order passed by the Court. The Court further stated that if the respondent fails to do so, the gratuity amount will attract an interest of 10% from the date of receipt of the copy of the order till the payment is actually made by the respondent.

Key Action Points for Human Resources and In-house Counsel:

As stipulated under the Gratuity Act, gratuity can only be forfeited in limited circumstances. Gratuity can be forfeited when an employee’s services have been terminated on account of any act causing any damage or loss to or destruction of property belonging to the employer. The forfeiture shall be to the extent of the loss or damage. Further, gratuity may be wholly or partially forfeited if the services of the employee have been terminated for riotous or disorderly conduct, any act of violence, or offenses involving moral turpitude during the course of employment. In any case, it would be unlawful to forfeit the amount of gratuity without allowing the employee to show cause and without determining the extent of loss or damage caused.