Connect@ADP

Partnering with a more human resource

Forfeiture of Gratuity – When and How an Employer can Forfeit Gratuity payable to an Employee

Posted by: The ADP Team on 12 September 2019 in Compliance

(Coffee Break Compliance Guide – Volume 55, by Subramaniam Anandan)

Payment of Gratuity under the Payment of Gratuity Act, 1972 for eligible employees is mandatory and to be disbursed within 30 days of separation of such employees.  It is a piece of social security legislation which cannot be denied for eligible employees and it shall be automatic upon any such separation.  Forfeiture clause shall always be used cautiously by any employer.

Provisions under the Act to forfeit Gratuity:

As per the section 4(6) of The Payment of Gratuity Act the forfeiture of gratuity is possible fully or to the extent of amount as misappropriated.

Section 4 (6) – Notwithstanding anything contained in sub-section (i),

  1. the gratuity of an employee, whose services have been terminated for any act, wilful 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.
  2. the gratuity payable to an employee may be wholly or partially forfeited
    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 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.

Adding to the above, another provision in the Act specifically protects payment of Gratuity.

Section 13 of the Act – Protection of gratuity – No gratuity payable under this Act [and no gratuity payable to an employee employed in any establishment, factory, mine, oilfield, plantation, port, railway company or shop exempted under section 5] shall be liable to attachment in execution of any decree or order of any civil, revenue or criminal court.

From the above, it is understood that the Gratuity is protected against attachment or forfeiture except only under certain circumstances like dismissal of an employee for moral turpitude, misappropriation, theft, violence or misbehavior and not otherwise.

Right to forfeit gratuity of employee by the employer not absolute but only when the employee has been dismissed for the misconduct as specified in section 4(6) of the payment of Gratuity Act.  Even such forfeiture can be taken-up only after giving an opportunity to the concerned employee, issuing a show-cause notice.

Subsequent to the reply to such notice, a specific order is to be issued in respect of forfeiture of amount of gratuity.

Further, the forfeiture of gratuity of an employee for misappropriation can be to the extent of amount as misappropriated.

Besides, Gratuity payable to an separated employee, cannot be adjusted with any

  • Loan taken was pending with some instalments
  • Advance taken and still to be closed
  • Notice pay
  • Loss of pay in the previous months to which wages were paid due to pre-attendance closure
  • Charges towards any facility / amenity provided by the employer
  • Or, any others

Following excerpts from the Hon’ble Apex court of India, shows that the Gratuity under the Payment of Gratuity Act is one of the safeguarded social security benefit available to any eligible employee.

  1. The Hon’ble the Supreme Court of India in the case of Ahmedabad Pvt. Primary Teachers’ Association vs. Administrative Officer reported in AIR 2004 SC 1426. Para: 6 of the said decision read as under,

“The Act (Payment of Gratuity Act, 1972) is a piece of social welfare legislation and deals with the payment of gratuity which is a kind of retiral benefit like pension, provident fund etc. As has been explained in the concurring opinion of one of the learned Judges of the High Court “gratuity in its etymological sense is a gift, especially for services rendered, or returns for favours received”. It has now been universally recognized that all persons in society need protection against loss of income due to unemployment arising out of incapacity to work due to invalidity, old age etc. For the wage-earning population, security of income, when the worker becomes old or infirm, is of consequential importance. The provisions contained in the Act are in the nature of social-security measures like employment, insurance, provident fund and pension. The Act accepts, in principle, compulsory payment of gratuity as a social-security measure to wage-earning population in industries, factories and establishments.”

  1. It has been held by Hon’ble Supreme Court of India, in Balbir Kaur vs.Steel Authority of India Ltd., Appeal (civil) 11881 of 1996 and Appeal (civil) 11882 of 1996, by Supreme Court Bench comprising of Hon’ble Justice Mr.U.C.Banerjee and Hon’ble Justice Mr.S.B.Majumdar, as under (Paragraph 3) :

As regards the provisions of the Payment of Gratuity Act, 1972 (as amended from time to time) it is no longer in the realm of charity but a statutory right provided in favour of the employee”.

Hence, it suggested that any gratuity which is due to an employee as per the provisions of the Act, needs to be disbursed within the due date, which is a right of an employee.  Forfeiture which does not have any backing documentation or record may lead to unnecessary legal trial.

(Visited 139 times, 3 visits today)

TAGS: compliance Forfeiture of Gratuity Payment of Gratuity

Post a response

Leave a Reply

Your email address will not be published. Required fields are marked *