Can I Withhold PF and Gratuity for an Employee's Misconduct? Seeking Advice

Hi, I'm a dealer for an automotive brand. One of the employees has allegedly incorporated a partnership firm with his wife and has been indulging in selling local spares to customers whom we serve for the past two years. We discovered this, and the employee has resigned. As I do not wish to pursue legal action, I want to withhold PF and Gratuity for the loss made to the firm due to his misconduct. Please clarify how to proceed with this.

Hi, you cannot withhold PF, and the employee has the option of either transferring or withdrawing through the UAN Portal. As an employer, you need to approve it through the Employer Login.

Employee Misconduct and Legal Considerations

Whether the employee sold local spares with your brand name or diverted your client for their business, what was the quantum of loss? What disciplinary or legal action was initiated by you as an employer? Was any show-cause notice issued to him?

As per your statement, the employee has resigned. So, with no proper legal documentation in place, how will you justify withholding Gratuity if the employee approaches a legal forum?

Gratuity Act and Conditions for Forfeiture

According to the Gratuity Act: "The gratuity of an employee whose services are being considered for termination on the accountability of an act of 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 or vandalization so caused."

The gratuity payable to an employee may be wholly or partially forfeited if the services of such an employee have been terminated for riotous or disorderly conduct or any other act of violence on his part, or if the services of such an employee have been terminated for any act that constitutes an offense involving debauchery, turpitude, degeneracy, or lewdness, provided that the offense was committed during the tenure of his employment.

Pre-requisites for Forfeiture of Gratuity

The damages suffered by the employer should be quantified, principles of natural justice must be adhered to, and the concerned employee must be given an opportunity to be heard. The employer must pass an order to forfeit the gratuity, whole or partial, following the law and its legal proceedings.

So, without any legal proceeding, it is not advisable to hold the gratuity as the employee may file a case with the Assistant Commissioner of Labour of your office jurisdiction.

Since the employee has resigned and it has been accepted, the precondition for the attachment of gratuity is not fulfilled. The condition states that the services of the employee have to be terminated for an act of willful omission/negligence causing any damage or loss to, or destruction of, property belonging to the employer. Please check whether the employee completes five years of continuous service to claim gratuity.

Hello, an employer cannot hold the PF and Gratuity benefit amount of anyone because, as per the act, the company is liable to pay gratuity to an employee who has worked for the organization for 5 years or more. PF is also under the social security act, and the employer has no authority to hold PF contributions.

If you withhold the Gratuity amount of the concerned employee, he can take legal action against you.

As informed and questioned, my replies are as follows:

vmlakshminarayanan:
- What was the quantum of loss?
Approximately 20 Lakhs.
- What disciplinary/legal action was initiated by you as an employer?
None, as he submitted a resignation letter on the day he was found guilty.
- Was any show-cause notice issued to him?
No.

As per your statement, the employee has resigned. So, without proper legal documentation in place, how will you justify withholding Gratuity if the employee approaches a legal forum? We have not pursued legal action as of now.

To: Alok-Singh1

He has been working for approximately 10 years.

Proof of Partnership in Parallel Business
Having said that, we have proof that he is indeed a partner in the company, engaging in parallel business similar to the company. Hence, we need advice.

Hi, As per your statement, that particular employee indulged in other business while working with your organization and had supplied spare parts to your client. So, the primary charge against the employee was engaging in other business while in full-time employment with your company. The nature of misconduct is limited to this only.

Your statement of Rupees Twenty Lakhs loss to your organization is just a projection that needs to be proved before the judicial system. My assumption is that your ex-employee might have formed the company in the name of his wife only, and any individual has the right to form a company and to enter into a business relationship with any potential client. Even if you proceed legally, the employee will defend that the company is managed by his wife and he is in no way connected with that business. You cannot prohibit a third party from doing business that is similar to your business.

As long as the employee is not demanding gratuity, you may hold it. But if he makes a legal representation, then your side is weak (in the absence of any legal proceedings from your end) as per my assessment.

Sir, thank you very much for your advice. To clarify your reply, "My assumption is that your ex-employee might have formed the company in the name of his wife only." Answer: NO, he's also one of the partners along with his wife in the company, which has been verified from the GST Portal. Your advice and guidance on this will be of immense help to our company.