Can I Adjust an Employee's Outstanding Loan Against Their Terminal Benefits? Seeking Legal Insights

I am writing to seek clarification regarding a matter involving the adjustment of an outstanding loan amount owed by an employee at my establishment, which has recently been permanently closed. As we prepare to settle all terminal benefits, including gratuity, bonus, notice pay, and retrenchment compensation, I would like to know whether it is permissible to adjust the outstanding loan against these terminal benefits.

The Controlling Authority has indicated that adjustments against gratuity are not allowed. However, I would appreciate any guidance or advice on this matter, including any legal citations or precedents that support the possibility of such adjustments. The alternative of pursuing a civil case for the recovery of the outstanding loan is not ideal due to the associated costs and time commitment, especially as I plan to relocate from the city.

Thank you for your assistance. I look forward to your insights on this issue.

Adjustment of Gratuity Against Company Losses

Gratuity amount can be forfeited or adjusted against the loss incurred by the company as per Section 4(6) of the Payment of Gratuity Act. This can only be done after conducting an inquiry and quantifying the loss to the company.

Gratuity Deductions and Employee Termination

Gratuity can be deducted against damages, loss, or destruction of property belonging to the employer only if the employee is terminated for any act, willful omission, or negligence causing such losses. Due procedure shall be completed before doing that.

In your case, it is the closure of the establishment, not the termination of the employee for any action mentioned above.

The version of the Controlling Authority is correct. You can adjust the outstanding amount from the other payables, excluding the gratuity. Otherwise, ask the employee to issue a check in favor of the company to settle the outstanding balance.

Adjustment of Gratuity Against Outstanding Loan

Forfeiture does not mean adjustment, and you can adjust the gratuity against the outstanding loan subject to the provisions of the loan agreement. In a judgment decided by the Allahabad HC, an employee took a loan from the petitioner bank by executing a loan agreement that included a clause allowing the loan amount to be adjusted against the gratuity amount. He was discharged from services due to disciplinary proceedings, and his gratuity was adjusted against the loan amount. He claimed gratuity by filing an application before the controlling authority, which was allowed. An appeal against the order of the controlling authority was dismissed. The bank filed a writ before the Allahabad HC. It was held that the amount of gratuity had been adjusted towards the housing loan. It was neither forfeited nor withheld. The adjustment can be made against the loan if the loan agreement so provides, and it is not barred by the provisions of Section 4(6) of the Payment of Gratuity Act, 1972.

State Bank of Bikaner & Jaipur Vs Appellate Authority & Others, 2013 LLR 637

Regards, Dr. Kamlesh Agrawal Mumbai

The reply of the authority is right. You cannot deduct the loan amount from the gratuity or PF, but you can adjust it against the bonus and other dues, including salary due to the employee and retrenchment compensation.

If the loan amount is large (details not provided), then salary, bonus, and other dues will not be adequate. Since you cannot adjust against gratuity, ask the employee to pay off the amount when they receive the gratuity (or before). If they refuse, you have no option but to file a civil suit for recovery.

I would like to cite a practical step taken in such a situation despite the legal provision stated above.

The employer issues a letter listing the payment of various dues to the employee along with the amount recoverable from him. The employee replies back asking the employer to deduct the recoveries from the gratuity payable. The employee gives a pre-receipt indicating that he has received the gratuity amount in full. The employer remits the balance amount to the employee.

This process was adopted, and luckily, nobody challenged the action.