Is It Fair to Withhold Gratuity from an Employee Terminated After 5 Years?

Gratuity Payment Query

Can we hold the gratuity amount of an employee who has completed 5 years of tenure and has been terminated 2 days after completing this period? Management has decided not to pay him the gratuity amount. Is this fair?

Please note the required details:
Date of joining - 19th July 2013
Date of termination - 20th July 2018
Total tenure period - 5 years
Reason for termination - performance not up to the mark
Designation - AVP-B.D

Management has decided not to pay the gratuity amount to this employee during his full and final settlement. Is this fair?

Payment of Gratuity

Gratuity shall be payable to an employee upon the termination of their employment after they have rendered continuous service for not less than five years. Notwithstanding anything contained in sub-section (1):

(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 shall be wholly forfeited:

(i) If the services of such employee have been terminated for riotous or disorderly conduct or any other act of violence on their 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 them in the course of their employment.

Comment: "The right to gratuity is also a statutory right. The appellant was not charged with nor was given an opportunity that his gratuity would be withheld as a measure of punishment. No provision of law has been brought to our notice under which the President is empowered to withhold gratuity as well, after his retirement as a measure of punishment. Therefore, the order to withhold the gratuity as a measure of penalty is obviously illegal and is devoid of jurisdiction." - D.V. Kapoor v. Union of India AIR 1990 SUPREME COURT 1923

This is the extract of the Bare Act. The company cannot deny gratuity to him.

Management cannot withhold the gratuity payable under the Payment of Gratuity Act after an employee has completed 5 years of continuous service, on the grounds that their service was terminated due to performance not meeting expectations. The decision of the management is not maintainable or sustainable under the law.

Kindly approach the Labor Inspector/Labor Commissioner's Office available in the district where you were working. Take the proof of employment with the date of joining and leaving along with your latest salary slip. They will guide/help you on how to apply for and receive the gratuity.

Dear Bhaskar ji (Boss2966),

Greetings. I'm getting an opportunity to interact with you after a long time, sir. The query is raised by and on behalf of management and not by an employee. Your advice is good for employees. It seems you made a mistake while responding to the query. I have drawn your attention only with the intention to correct yourself.

Thank you, Keshav Saheb. I was thinking that the query was raised by an employee. It is the basic responsibility of the HR available in the organization to guide the management about the statutory compliance. Even if the employee is terminated on disciplinary grounds or due to unsatisfactory performance, the Gratuity must be paid.

Dear Richa,

The query has been answered very well by Shri Nathrao Ji. Ask your management to go through "The Payment of Gratuity Act 1972," especially Section 4, and pay the gratuity payable. This will help you save some litigation costs :)

Regards,
Rahul Chhabra

It is an ill-advised decision of the management, and there seems to be more than meets the eye in stopping the gratuity of the employee who has put in 5 years of employment. They cannot fight the case if it goes to such an extent, and it might only spoil the goodwill of the company if it is dragged to the labor court.

As already pointed out by one of our esteemed members through the Bare Act, it is a pretty clear and straightforward case of not adhering to the rules if the management continues to stick to their illogical conclusion.

Thanks and Regards

Dear All, I appreciate all the answers mentioned in response to my query. I would be obliged if you consider one more similar case. The only change is that the employee was terminated due to his wrongdoing. The employee had already completed 5 years with the company and was terminated the very next day. He shared the company's confidential data with a competitor company and transferred the sales/client confidential data to his personal email against company policy.

So, in this case, can the management hold the gratuity of that employee?

Regards, Richa

Dear Richa,

All the employees of your establishment are facing termination by management on the very next day of their 5 years of service tenure! This situation could lead to misunderstanding or may simply be a coincidence.

In my opinion, they should not be paid a single penny, unless they are proven guilty of misconduct according to your company's standing orders and are terminated following due process as per the norms of the ID Act. The senior and knowledgeable members have provided very accurate opinions on the matter.

Dear Richa ji, you mentioned that the employee had been terminated because of his wrongdoing. As an HR Executive, it would not be appropriate to ask you what you mean by "termination." Has this termination followed due process as per the law? Have you proven the wrongdoing? It is your allegation against the employee that he is engaged in wrongdoing. You need to prove it by applying the principle of natural justice.

Furthermore, as per a recent judgment of the HC Mumbai (WP No. 2749 OF 2004 in Nanubhai Nichabhai Desai vs The Dy. General Manager, Uco Bank), gratuity cannot be forfeited without a proper show cause notice and proof of loss to the employer. Other HCs have also issued similar judgments. According to the Karnataka HC (LLR Karn. HC 48) and many other HCs, forfeiture of gratuity is only applicable when dismissal is for prescribed misconduct under the Act.

Withholding Gratuity: A Wrong Decision

Yes. The thought of withholding gratuity from an employee who has fulfilled the primary condition of completing 5 years is itself a wrong decision by the employer.

The reason for the employee's dismissal appears to be a lame excuse. Whatever the rationale for no longer wanting to retain the employee based on performance, we won't comment on that. However, denying the payment of gratuity is challengeable. By doing so, you are inviting trouble, as the worker could challenge not only his unlawful removal but also the non-payment of gratuity benefits. Merely poor performance cannot justify the denial of gratuity.

There was not a single incident of misconduct or loss of charisma that could tarnish your company's reputation. Therefore, you are obligated to pay the gratuity and other removal benefits unconditionally.

In invitation to the query, we cannot forfeit the Gratuity if the tenure of 5 years is completed. Again, if the employees face any constraints, they may seek advice as per the I.D. Act either from the Labour Court or file a Civil suit, depending on the category of the employee.

Dear Mr. Richa,

I agree with all the members who have advised not to hold the Gratuity amount. Since the employee has already worked long-term, his performance cannot be considered by measuring 5-6 months of work. The employee has contributed for a long time.

Regards,
Asif Mulla

Dear Team,

We should not hold the Gratuity amount; it's a legal issue. If you need to make any settlement, you can hold any amount except Gratuity. If you are not able to pay the employee, then you need to pay along with interest to the employee as per the Labor Law.

Thank you.

Dear Member,

The forfeiture of gratuity can be done as per the provisions of the Gratuity Act. The contract of employment should also be considered and should be very specific; when an employee violates the terms and conditions of employment, to what extent the damages claimed from his future dues, and the proper inquiry should be made by following the principles of natural justice.

Gratuity Act and Disclosure of Information

The Gratuity Act does not permit the forfeiture of gratuity for disclosing any trade or business information to competitors or others unless the disclosure of information results in significant loss to the business. The action of an employee resulting in a setback of the business should be proved; otherwise, the forfeiture will become an act of victimization.

Claims Before ACL-Gratuity

If an employee makes a claim before ACL-Gratuity, the authority will direct to pay the amount along with simple interest.