Deduction from gratuity at the time of Full & Final settlement

Is it permissible for an employer to withhold a portion of the gratuity if an employee does not fulfill the three-month notice period upon resignation?

Hi,

No. It has no legal validity.

As stipulated under the Gratuity Act, gratuity can only be forfeited in limited circumstances. Gratuity can be forfeited when an employee’s services have been terminated on account of any act causing any damage or loss to or destruction of property belonging to the employer. The forfeiture shall be to the extent of the loss or damage. Further, gratuity may be wholly or partially forfeited if the services of the employee have been terminated for riotous or disorderly conduct, any act of violence, or offenses involving moral turpitude during the course of employment. In any case, it would be unlawful to forfeit the amount of gratuity without allowing the employee to show cause and without determining the extent of loss or damage caused.

No, you can't deduct any notice pay amount from the amount of Gratuity Payment to the employee. It is illegal. The act has provisions for forfeiting of Gratuity on certain misconducts. But not for recovery of the notice period.

The Payment of Gratuity Act 1972 does not allow for any deduction from the gratuity payable as per the Act, indeed the act specifies the penalty for the employer and the officials responsible for complying with the Act which includes imprisonment or fine or both. That is the clear-cut position. Yet, I had worked out a via media to overcome the statutory requirement at the same time the recovery is effected. This is by getting a pre-receipt for the whole amount of gratuity whereas the employee is actually given only the deducted amount. This has worked out where the employee also agreed to the above formula and fortunately there have been no issues later.

True. But when it is deducted for recovery of Notice Pay which is again an illegal deduction or recovery from an employee, it will be difficult to defend. Notice pay means an amount payable by an employer in order to terminate an employee. In the case of managers, employees having functional responsibilities of a manager, you can have notice period of one or three months, but in respect of others you cannot have any notice period in the contract of employment. If there is any notice period mentioned in the contract of employment, that will not be legally enforceable because the law does not say that in order to leave an employer, an employee should give notice or pay in lieu of notice though there is specific provision under the law which says that in order to terminate an employer the employer should give notice or pay salary in lieu of it. The notice required is one month and only when the establishment is a factory, mine or a plantation employing 100 or more employees then the notice period can be three months. Therefore, it is better not to go for recovery.

Certainly a big NO. You can not deduct any amount from the gratuity amount which is payable to an employee. As an employer, you can make such adjustments from the salaries/F&F amount, but should not adjust from gratuity or provident fund amount payable to an employee.