Protecting company’s interests: Forfeiture of gratuity for misconduct without criminal conviction
Introduction
Recently, in February 2025, in the case of Western Coal Fields Ltd. v. Manohar Govinda Fulzele1 (“WCF Case”) the Hon’ble Supreme Court (“SC”) addressed the issue of whether forfeiture of gratuity under the Payment of Gratuity Act, 1972 (“Gratuity Act”) is permissible in the event of termination of service for misconduct, which can be categorised as an act constituting an offence involving moral turpitude; without there being any conviction in a criminal case or even a criminal proceeding having been initiated. (To read more about labour laws in India, click here to access our ‘FAQ on Labour & Employment Laws in India’).
Brief Facts of the matter
The Western Coal Fields Ltd., (“WCF”) a public sector unit and Maharashtra State Road Transport Corporation (“MSRTC”), inter alia, had filed appeals against judgements which held that forfeiture of gratuity was impermissible under the Gratuity Act.
In the WCF case, an employee who was employed for 22 (twenty-two) years was subjected to disciplinary proceedings for misconduct specifically, producing a fraudulent date-of-birth certificate to obtain employment. As part of the departmental inquiry, it was held that the date of birth was misrepresented as 1960 instead of 1953 to secure the appointment. Accordingly, his employment was terminated, and his gratuity was forfeited. The employee in the said case relied on the Union Bank of India and Ors. v. C.G. Ajay Babu2 (“Ajay Babu Case”), wherein the SC held that the forfeiture of gratuity of an employee due to an offence involving moral turpitude is valid only if such offence is duly established in a court of law.
Further, in the case of MSRTC, the employees in question were conductors on the stage carriages operated by MSRTC. These employees were found to have engaged in misappropriation of fares collected from passengers. As a result, MSRTC forfeited their gratuity.
Court’s Order
The SC referred to the Ajay Babu Case while interpreting Section 4(6)(b)(ii) of the Gratuity Act. Section 4(6)(b)(ii) of the Gratuity Act permits forfeiture of gratuity either fully or partly if the employee’s services are terminated due to any act which constitutes an offence involving moral turpitude; provided that such offence is committed by him in the course of his employment.
In the Ajay Babu Case, it was held that forfeiture under Section 4(6)(b)(ii) of the Gratuity Act is allowed only when termination is based on such conduct or offence and there is an actual conviction for an offence involving moral turpitude. Therefore, gratuity cannot be forfeited automatically upon dismissal from service and it must comply with the requirements of Section 4 (6) of the Gratuity Act.
In addition to the above, the Ajay Babu Case reiterated that, “requirement of the statute is not the proof of misconduct of acts involving moral turpitude but the act should constitute an offence involving moral turpitude and such offence should be duly established in the court of law.”
However, the SC in the WCF case took a contrary view from the Ajay Babu Case and clarified that the interpretation adopted in the Ajay Babu Case does not flow from the plain language of Section 4(6)(b)(ii) of the Gratuity Act. SC noted that the statute does not require that misconduct though amounting to an offence involving moral turpitude must also be established through a conviction in a court of law. The phrase “duly established in a Court of Law” cannot be read into the provision. Therefore, the SC remarked that the interpretation of Section 4(6)(b)(ii) of the Gratuity Act in the Ajay Babu Case was unnecessary and unwarranted.
In light of the above, in the case of WCF, the SC held that, WCF’s failure to initiate criminal proceedings for the fraudulent act namely, the submission of a forged or fabricated birth certificate to obtain employment does not invalidate the forfeiture of gratuity. As is evident from the relevant legal provisions, a criminal conviction is not mandatory if the misconduct, as alleged and proven, amounts to an offence involving moral turpitude. Accordingly, SC held that since the appointment itself was invalid for a reason of suppression of the actual date of birth and production of a forged certificate, thus the decision of WCF of forfeiting entire gratuity is correct.
Similarly, in the case of MSRTC, the SC held that, there was indeed misappropriation of meagre amounts and that it constitutes misconduct warranting termination. However, regarding gratuity forfeiture, a more sympathetic approach should be adopted and the forfeiture to be limited to 25% (twenty five percent), with the balance amount released to the employees of MSRTC.
Our thoughts
The SC provided the clarity on the interpretation of Section 4(6)(b)(ii) of the Gratuity Act affirming that gratuity forfeiture is justified in cases involving moral turpitude does not always await a criminal conviction and the extent of forfeiture must be guided by proportionality and equity.
(To read about Gratuity Act and its intersection with inquiry under Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 click here)
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