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In the recent case of , the Supreme Court held that employers may forfeit the gratuity of employees whose services are terminated after disciplinary proceedings find them guilty of misconduct constituting an offence of moral turpitude in the course of their employment. The employer does not have to await conviction by a court or even the initiation of criminal proceedings.

Section 4 of (act), provides that an employer must pay gratuity at the end of their employment to employees who have completed no fewer than five years of continuous service. The act further provides a small number of exceptions. One such, in section 4(6)(b)(ii), is where the employment is ended following an act committed in the course of the employment that constitutes an offence involving moral turpitude.

Courts have held a gratuity to be a benefit that was earned by an employee for long and meritorious service and was not paid gratuitously or as a “boon”. Courts have applied this interpretation strictly in cases where employers were claiming the right to forfeit or withhold gratuities. This approach culminated in the case of , in which the Supreme Court held that the offence involving moral turpitude had to be “duly established in a court of law”.

Because criminal trials often take a long time to conclude and conviction rates are not high, the effect of Ajay Babu was that an employer could not effectively forfeit or withhold a gratuity. This was so, even if the employment had been ended for a misconduct that constituted an offence involving moral turpitude.

In Westen Coal Fields, the Supreme Court dissented from Ajay Babu, holding that section 4(6)(b)(ii) of the act did not require conviction by a court for an offence involving moral turpitude to be a prerequisite for the forfeiture of a gratuity. It rather provided for forfeiture where the employee was terminated for misconduct constituting an offence involving moral turpitude.

The court held that an offence as defined in the General Clauses Act, 1897, meant “any act or omission made punishable by any law for the time being” and did not require a conviction. The court pointed out that the standard of proof required for conviction in a criminal trial differs from that required in disciplinary proceedings. A conviction in a criminal trial has to be proved beyond a reasonable doubt, while a finding in disciplinary proceedings only requires proof on a “preponderance of probabilities”.

The Supreme Court held that for section 4(6)(b)(ii) of the act to be engaged, the only requirement was for there to be a finding in the disciplinary proceedings that the misconduct could, in normal circumstances, constitute an offence involving moral turpitude. Thereafter, the employer had to decide whether the forfeiture should be of the whole or only a part of the gratuity payable. This will depend on the gravity of the misconduct. The court emphasised that the employee had to be given notice and his representations had to be considered in regard to both aspects, that is whether the misconduct alleged constituted an offence involving moral turpitude, and the extent to which the gratuity should be forfeited.

Applying its analysis to the circumstances of the employees concerned, the Supreme Court allowed the employer to forfeit the entire gratuity of the employee who had obtained employment based on a forged certificate showing an incorrect date of birth. In the cases of other employees, the court found that even if they had misappropriated minimal amounts, this would constitute misconduct warranting termination. However, such misconduct did not call for forfeiture of the entire gratuity, 25% being an appropriate proportion.

The key takeaway for employers is that they ensure the notice or charge sheet issued in disciplinary proceedings makes it clear that the employer proposes to treat the misconduct as constituting an offence involving moral turpitude. If the disciplinary proceedings prove the misconduct and find that it constitutes an offence involving moral turpitude, the employee must be given notice that the employer is considering the extent to which the gratuity should be forfeited. Such forfeiture must not be disproportionate to the gravity of the misconduct proved.

Chandrashekhar Mulherkar is a partner at Wadhwa Law Offices