Withholding of gratuity vide an undertaking

Payment of gratuity in India is regulated by the provisions of Payment of Gratuity Act, 1972 (“Act“). The Act is applicable to all factories, mine, oilfield, plantation, port, railway companies and also to every shop and establishment within the meaning of law in which ten (10) or more persons are employed, or were employed, on any day of the preceding twelve months.

Section 4 (6) of the Act permits an employer to forfeit gratuity payable to an employee in certain circumstances. As per the said provision:

The gratuity of an employee, whose services have been terminated 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 (i) 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 (ii) 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.

As regards the waiver of rights in employment agreements or any other form of an agreement it is permissible for an employee to waive off contractual rights to potential employment claims. However, an employee is not permitted to waive off statutory rights by way of a contractual agreement with an employer. There are specific provisions in the labour legislation in India which state that the provisions of the respective legislation shall supersede and have an overriding effect over anything contained in any instrument or contract which is inconsistent with provisions of such legislation

Section 14 of the Payment of Gratuity Act 1972 states that “the provisions of this Act or any rule made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any enactment other than this Act or in any instrument or contract to have an effect by virtue of any enactment other than this Act.” The judiciary also dealt with the said subject in Jaswant Singh Gill v. Bharat Cooking Coal Limited and Others [2007 (1) SCC 663], wherein it has observed that the rules framed under the Coal India Executives’ Conduct Discipline and Appeal Rules, 1978 (“Rules“) which provided a clause on forfeiture of gratuity were not statutory rules and thus the provisions of the Act must, therefore, prevail over the said Rules.

In Krishna Bahadur-vs.-M/s. Purna Theatre, in support of his submission that a statutory right can be waived by a party for whose benefit the statute has been enacted. In that case, the Hon’ble Apex Court clarified that a right can be waived by the party for whose benefit certain requirements or conditions have been provided by the statute subject to the condition that no public interest is involved therein. In that case, it was held that the requirement to comply with the provisions of Sec. 25F(b) of the Industrial Disputes Act, 1947 is mandatory before retrenchment of a workman is given effect to and such right/protection cannot be waived. In United Bank of India v. B B Haldar High Court At Calcutta CAN No. 8857 of 2017 the court while relying on the above-stated decision recorded that the Payment of Gratuity Act 1972 has been enacted in public interest and the right/protection granted to a retired employee by the said Act cannot be waived.

Supreme Court of India in R. Kapur v. Director of Inspection (Painting and Publication) Income Tax and Anr.1994] while dealing with forfeiture of gratuity on account of a pending civil dispute imposed a penalty of 18 (eighteen) percent on the employer and observed that death cum retirement gratuity cannot be withheld merely because the claim for damages is pending. In the said case damages were claimed by the employer for unauthorized occupation (by the employee) of official occupation.

In Radhey Shyam Gupta-vs.-Punjab National Bank, the Apex Court held that retiral benefits such as pension and gratuity even when received by the retiree, do not lose their character and continue to be covered by proviso (g) to Sec. 60 (1) of the CPC and continue to enjoy immunity against attachment.

In-State of Jharkhand-vs.-Jitendra Kumar Srivastava, the Apex Court reiterated that gratuity and pension are not bounties. An employee earns these benefits by dint of his long, continuous and faithful service. It is a hard-earned benefit that accrues to an employee and is in the nature of ‘property’. Such a right to property cannot be taken away without due process of law as per the provisions of Article 300A of the Constitution of India.

In the unreported judgment of a Division Bench of the Kerala High Court in WA 1628 of 2014 in WP (C) 923 of 2014 the employer Bank sought to adjust alleged dues from the deceased employee against the gratuity payable to his legal heirs. The Division Bench upheld the learned Single Judge’s order striking down such action on the part of the Bank holding that the gratuity due to an employee could not be withheld except under Sec. 4(6) of the 1972 Act.

The contrary stand taken by courts

In Secretary, O.N.G.C. Ltd. & Anr. v. V.U. Warrier (2005) 5 SCC 245, the Hon’ble Supreme Court sanctioned the action of the employer appropriating Rs. 53,632/- from the gratuity amount payable to the employee on account of unauthorized occupation charges of official accommodation mainly for the reason that the ONGC has framed the Oil and Natural Gas Commission (Death Retirement and Terminal Gratuity) Regulations, 1969, and the regulations framed by the ONGC were statutory in nature

In the said case it was held by the court that “it is no doubt true that pensionary benefits, such as gratuity, cannot be said to be ‘bounty’. Ordinarily, payment of benefit of gratuity cannot be withheld by an employer. In the instant case, however, it is the specific case of the ONGC that the ONGC is having a statutory status. In exercise of statutory powers under Section 32(1) of the Oil and Natural Gas Commission Act ,1959 regulations known as the Oil and Natural Gas Commission (Death. Retirement and Terminal Gratuity) Regulations, 1969 have been framed by the ONGC. In Sukhdev Singh v. Bhagatram Sardar Singh Raghuvanshi and Anr. (1975)ILLJ399SC the Constitution Bench of this Court held that regulations framed by the ONGC under Section 32 of the Oil and Natural Gas Commission Act ,1959 are statutory in nature and they are enforceable in a court of law.”

The case discussed the ratio of R. Kapoor v. Director of Inspection (Painting and Publication) Income and held the same as not applicable, as in that case, the claim for damages for unauthorized occupation against the appellant-retired employee was “pending” and the proceedings were not finally disposed of. In the present case, the facts clearly reveal that the last day of lawful occupation of quarter by the respondent was June 30, 1990, and before that date, the appellant Commission had informed the respondent that his prayer for extension or retention of quarter had not been accepted and he should vacate by June 30, 1990. If he would not vacate the quarter, penal rent would be recovered from him. He did not challenge the action of not extending the period nor the recovery of penal rent. He, therefore, cannot make a grievance against the action of the Commission. In the line with the above-stated case laws, and legal provisions it is opined that “payment of gratuity”, can be forfeited only in accordance with Section 4(6) of the Payment of Gratuity Act 1972. Also since it is a right involving public interest it cannot be waived through an undertaking it is opined that such an undertaking shall not be valid in law. The only exception was found in Secretary, O.N.G.C. Ltd. & Anr. v. V.U. Warrier, where the action is taken, was in accordance with certain regulations and the regulations had statutory backing.

— Advocate Ravindra Vikram, Ph: +91-94100-22521

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Withholding of gratuity of an employee, after superannuation from service, pending disciplinary proceedings

Section 4 of the Payment of Gratuity Act 1972 entitles an employee to gratuity after he has rendered continuous service for not less than five years inter alia on his superannuation. Sub- Section (6) of Section 4 contains a non-obstante clause stating:

(a) the gratuity of an employee, whose services have been terminated 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;

(b) the gratuity payable to an employee may be wholly or partially forfeited

(i) 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

(ii) if the services of such employees have been terminated for any act which constitutes an offense involving moral turpitude, provided that such offense is committed by him in the course of his employment.

MARCH OF LAW

  1. In Jaswant Singh Gill vs. Bharat Coking Coal Ltd. & Ors. (2007) 1 SCC 663. The case pertained to ECDA rules of Coal India Ltd. The High Court held that the power to withhold payment of gratuity as contained in Rule 34(3) of the Rules of Coal India 1978 shall be subject to the provisions of the Payment of Gratuity Act, 1972 and the statutory right accrued to the employee to get gratuity cannot be impaired by reason of the Rules framed by the Coal India Ltd. which do not have the force of a statute.

The principles which are laid down in the aforesaid judgment are recapitulated below:-

(i) Rule 34.2 of CDA Rules provides for continuation of disciplinary proceedings despite the retirement of an employee if the same was initiated before his retirement, However, after his retirement, a major penalty in terms of Rule 27 cannot be imposed. Major penalties that are prescribed under Rule 27 are a reduction to a lower grade, compulsory retirement, removal from service and dismissal. The Court thus, held that these major penalties cannot be imposed upon a retired employee.

(ii) Gratuity Act gives the right to an employee to receive gratuity on the rendition of 5 years of continuous service. Gratuity becomes payable as soon as the employee retires. This statutory right which accrues to an employee cannot be impaired by reason of a rule which does not have the force of a statute. Therefore, Rule 34.3 of the CDA Rules, which is nonstatutory in nature, is contrary to the provisions of the Gratuity Act. As such, gratuity cannot be withheld on the retirement of an employee even if departmental proceedings were initiated against him before his retirement and are pending at the time of retirement.

  • However in State Bank of India vs. Ram lal Bhaskar and Anr, 2011(10)SCC249. the issue raised was whether inquiry could continue after the retirement of the respondent from service. This question was answered in the affirmative having regard to Rule 19(3) of the SBI Officers Service Rules. In that case, the chargesheet was served upon the respondent before his retirement. The proceedings continued after his retirement and were conducted in accordance with relevant rules wherein charges were proved. On that basis punishment of dismissal was imposed. 
  • The Madras High Court Special Officer, in Suthamalli Primary Agriculture Co-op Bank Limited v. Joint Commissioner of Labour & Ors Under Section 4(6), if any order is passed and contingency for payment of gratuity under Section 4(1) arises, it is necessary that the employer will have to pay gratuity. It is not as if the employer has no remedy in recovering the amount from the employee. They can always file a civil suit claiming the amount misappropriated by him. There is no legal bar in recovering the amount in case the petitioner proves that there was actual embezzlement. But, having allowed the employee to retire, the petitioner was bound to pay gratuity. And order of forfeiture will also have to be passed along with order of termination for withholding gratuity.
  • However in Ch. cum Man. Director Mahanadi Coalfield Ltd. v. Rabindranath Choubey, SLP No. 31583 OF 2013 a two-judge bench has interpreted the above case and stated that the matter primarily answers whether the inquiry would continue after the retirement of the respondent from service, which was answered in affirmative by the court. The court states however as an inference, one can deduce the principle that when the Rules, by creating fiction, treat the officer still in service, albeit for the limited purpose of the continuance and conclusion of such proceedings, then any of the prescribed penalties, including dismissal, can be imposed.
  • The court has recorded that such a supposition, however, goes against the dicta laid down in Jaswant Singh Gill.

On the issue of, whether in the scheme of Gratuity Act, gratuity has to be necessarily released to the concerned employee on his retirement even if departmental proceedings are pending against him the court has opined that Jaswant Singh Gill’s case directly answers this question, but the said judgment proceeds on the premise that after the retirement of an employee, penalty of dismissal cannot be imposed upon the retired employee., which if is not right stand and the imposition of penalty of dismissal is still  permissible, employer will get the right to forfeit the gratuity of such an employee in the eventualities provided under Sections 4(1) & 4 (6).

For invoking Clause (a) or (b) of sub-section 6 of Section 4 necessary pre-condition is the termination of service on the basis of departmental inquiry or conviction in a criminal case.

The court in Ch. cum Man. Director Mahanadi Coalfield Ltd. v. Rabindranath Choubey has stated that owing to the conflict between the cases of State Bank of India v. Ram lal Bhaskar and Anr and Jaswant Singh Gill vs. Bharat Coking Coal Ltd. & Ors, the bench, in this case, has referred the matter to larger bench of three judges to decide this issue.

In State of Jharkhand & Ors v. Jitendra Kumar Shrivastav and Ors. Interpreting Rule 43(b) (Bihar Pension Rules) The SC held that even after the conclusion of the departmental inquiry, it is permissible for the Government to withhold pension etc. ONLY when a finding is recorded either in departmental inquiry or judicial proceedings that the employee had committed grave misconduct in the discharge of his duty while in his office. There is no provision in the rules for withholding of the pension/ gratuity when such departmental proceedings or judicial proceedings are still pending. The honorable court also held that other that the Rules framed under law, no other administrative order of the employer can withhold the pension, gratuity and Provident fund.

— Advocate Ravindra Vikram, Ph: +91-94100-22521

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