Forfeiture of gratuity not automatic on dismissal from service -Supreme Court

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 Act must prevail over the Rules framed by the employer – Supreme Court

ABCAUS Case Law Citation:
ABCAUS 2467 (2018) 08 SC

The respondent was an employee of the appellant. While in service, disciplinary proceedings were initiated against him on the charges of failure to take all steps to ensure and protect the interest of the employer, failure to discharge his duties with utmost devotion, diligence, honesty and integrity and doing acts unbecoming of an Officer Employee.

The charges were duly established and the respondent was dismissed from service. The order of dismissal had attained finality.

In the meanwhile, the respondent was issued a show-cause notice as to why the gratuity should not be forfeited on account of proved misconduct involving moral turpitude. Subsequently, the explanation of the respondent employee was rejected and the gratuity was forfeited.

The respondent employee agitated the matter before the High Court who did not interfere with the dismissal; however, it was held that the respondent was entitled to gratuity as there was no financial loss caused to the Bank. It was also held that as per the bipartite settlement, forfeiture of gratuity is permissible only in case the misconduct leading to the dismissal had caused financial loss to the employer and only to that extent.

The Division Bench of the High Court took the view that Section 4(6)(a) and (b) have to be read together and only if there is any loss to the employer on account of the misconduct, then alone, the forfeiture was permissible to the extent of loss.

Aggrieved by the order of the High Court, the employer (appellant) was before the Hon’ble Supreme Court.

Forfeiture of gratuity is not automatic on dismissal from service

The Hon’ble Supreme Court observed that the subtle distinction between sub-Section (5) and sub Section (6) of the Payment of Gratuity Act, 1972 is that the former is a non-obstante clause of the entire Section whereas the latter is only in respect of sub-Section (1). In other words, sub-Section (5) has an overriding effect on all other sub-Sections under Section 4 of the Act. Thus, notwithstanding anything contained under Section 4 of the Act, an employee is entitled to receive better terms of gratuity under any award or agreement or contract with the employer.

It was observed that there was a bipartite settlement prevailing in the Bank and the clause dealing with the forfeiture of gratuity provided that 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 Hon’ble Supreme Court rejected contention of the employer that sub Section (5) of Section 4, “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 Court opined that 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.

The Hon’ble Supreme Court observed that it had also been held that the expression ‘terms’ as appearing under sub-Section (5) of Section 4 of the Act must ordinarily mean all terms to the contract and that the employee is not entitled to best terms of both the statute and the contract.

It was further observed that the bipartite settlement provided for forfeiture only if there was a loss caused on account of misconduct leading to dismissal. It was no case that the misconduct of the respondent-employee had caused any financial loss and therefore, forfeiture, taking recourse to sub Section (6) of Section 4 of the Act, cannot be resorted to.

It was observed that under sub-Section (6)(a), also the gratuity can be forfeited to only to the extent of damage or loss caused. In case, the termination of the employee is for any act or wilful omission or negligence causing any damage or loss to the employer or destruction of property belonging to the employer, the loss can be recovered from the gratuity by way of forfeiture. Whereas under sub-Clause (b) of sub-Section (6), the forfeiture of gratuity, either wholly or partially, is permissible under two situations– (i) in case the termination of an employee is on account of riotous or disorderly conduct or any other act of violence on his part, (ii) if the termination is for any act which constitutes an offence involving moral turpitude and the offence is committed by the employee in the course of his employment. Thus, sub-Clause (a) and sub-Clause (b) of sub-Section (6) of Section 4 of the Act operate in different fields and in different circumstances. Under sub-Clause (a), the forfeiture is to the extent of damage or loss caused on account of the misconduct of the employee whereas under sub-Clause (b), forfeiture is permissible either wholly or partially in totally different circumstances. Sub-Clause (b) operates either when the termination is on account of- (i) riotous or (ii) disorderly or (iii) any other act of violence on the part of the employee, and under Sub-Clause (ii) of sub-Section (6)(b) when the termination is on account any act which constitutes an offence involving moral turpitude committed during the course of employment.

Regarding the contention that the conduct of the respondent-employee, which lead to the framing of charges in the departmental proceedings involved moral turpitude, the Hon’ble Supreme Court rejected it. The Court opined that 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 was not for the employee to decide whether an offence has been committed. It is for the court. Apart from the disciplinary proceedings initiated by the appellant, it had 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 was 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 Hon’ble Supreme Court observed that it has been held that forfeiture of gratuity either wholly or partially is permissible under sub-Section (6)(b)(ii) only in the event that the termination is on account of riotous or disorderly conduct or any other act of violence or on account of an act constituting an offence involving moral turpitude when he is convicted.

The Hon’ble Supreme Court further observed that there was no conviction of the respondent for the misconduct which according to the employer was an offence involving moral turpitude. Hence, there was no justification for the forfeiture of gratuity on the ground stated in the order that the misconduct proved against him amounted to acts involving moral turpitude.

The Hon’ble Supreme Court reiterated that the requirement of the statute is not the proof of misconduct of acts involving moral turpitude but the acts should constitute an offence involving moral turpitude and such offence should be duly established in a court of law.

The Hon’ble Apex Court opined that the Act must prevail over the Rules on Payment of Gratuity framed by the employer is also a settled position as per the judgment. Therefore, the appellant cannot take recourse to its own Rules, ignoring the Act, for denying gratuity.

This the Hon’ble Supreme Court held that the 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. Accordingly the appeal was dismissed.

Download Full Judgment Click Here >>