Introduction
Statutory gratuity is a mandatory financial benefit granted to eligible employees following the cessation of their employment, thereby serving as a recognition for their long-term service and valuable contributions. The Payment of Gratuity Act, 1972 ("Gratuity Act") plays a crucial role in safeguarding employees' financial well-being when they retire, resign, or leave after years of service. The Gratuity Act outlines the procedures for calculating and paying gratuity, offering employees a financial safety net. In doing so, it not only rewards the dedication of employees but also highlights the commitment of organisations to value and honour the contributions of their employees.
The Gratuity Act also grants employers the authority to withhold gratuity payments under certain conditions, such as in cases of employee misconduct involving moral turpitude. However, the circumstances under which this right can be exercised have been a topic of ongoing debate. A key issue is whether a criminal conviction is necessary, or if the completion of internal inquiry proceedings alone is sufficient for employers to enforce the forfeiture of gratuity provision under the Gratuity Act.
The aforementioned issue was recently addressed by the Supreme Court in Western Coal fields v Manohar Govinda Fulzele1, wherein the Apex Court took a stance which is contrary to the long standing view taken on the subject matter in judicial precedents.
Background
The employee ("Respondent") was terminated from employment with Western Coal Fields ("Appellant") after it was discovered that he had fraudulently misrepresented his date of birth on the birth certificate submitted to the Appellant to secure the job. An internal inquiry was conducted by the Appellant, which concluded that the Respondent was guilty of misconduct. As a result, the Appellant terminated the Respondent's employment and forfeited his gratuity payment.
The Respondent later contested the Appellant's decision to withhold his gratuity, arguing that he had nearly completed 22 years of service, during which his record was otherwise clean. He claimed that gratuity, being a statutory right under the Gratuity Act, should not be denied upon termination.
Point of contention
Can an employer forfeit gratuity without a criminal conviction under the Gratuity Act?
Judgement
The Supreme Court held that criminal conviction is not a pre requirement for forfeiting gratuity payment on account of an offence committed by an employee involving moral turpitude. The Apex Court clarified that an employer can take such actions once it is determined, through a departmental inquiry, that the act of the delinquent employee constitutes an offence involving moral turpitude.
In this regard, the Supreme Court disagreed with the interpretation of section 4(6)(2)(b) provided by the division bench of the Supreme Court in the case of Union Bank of India & Ors. v. C.G. Ajay Babu,2 wherein it was held that an employer could only forfeit gratuity after a court of law has determined that the misconduct of the employee constitutes an offence involving moral turpitude.
The Supreme Court in this case held that the judgment in Ajay Babu goes beyond the text of the statute, as the legislation does not require a criminal conviction before an employer can forfeit gratuity. Instead, the court held that the only requirement before forfeiture of gratuity is for a disciplinary authority or the appointing authority to determine whether the misconduct of the employee constitutes an offence involving moral turpitude.
In the present case the Apex Court held that misrepresentation of date of birth is a serious misconduct involving suppression of material information and hence it constitutes an offence involving moral turpitude and justifies the forfeiture of the entire gratuity, which was rightly determined by the disciplinary authority of the Appellant.
Key Implications of the judgment for organisations
- Forfeiture of Gratuity: Employers can forfeit the gratuity of employees terminated for misconduct involving moral turpitude, without the need for a criminal conviction.
- Watertight Disciplinary Processes: Employees can challenge the fairness of disciplinary proceedings in court, emphasising the need for a watertight disciplinary process.
- Lower Burden of Proof: The standard of proof in disciplinary proceedings is lower than in criminal cases, easing the burden on employers to prove moral turpitude.
- Discretion in Forfeiture: The disciplinary authority investigating the misconduct has the discretion to decide the extent of gratuity forfeiture based on the seriousness of the misconduct.
Conclusion
The judgment not only permits employers to forfeit gratuity without a criminal conviction but also highlights the importance of conducting the disciplinary process fairly and reasonably, with proper consideration of the actions taken.
- Western Coal fields v Manohar Govinda Fulzele, 2025 INSC 233.
- Union Bank of India & Ors. v. C.G. Ajay Babu, (2018) 9 SCC 529.
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