Can Employers Withhold Gratuity if Employee caused Financial Loss?

In a significant ruling that could impact how companies deal with disciplinary cases after retirement, the Calcutta High Court has held that employers can withhold or recover gratuity if an employee causes financial loss due to negligence or misconduct.

A Division Bench of Justice Lanusungkum Jamir and Justice Rai Chattopadhyay ruled that the Payment of Gratuity Act, 1972 does not automatically override an organisation’s disciplinary rules. If service rules allow recovery of losses from gratuity, those rules will prevail.

The case involved a former Chairman and Managing Director of MSTC Limited, who was appointed to the company’s Board by the President of India. A disciplinary inquiry was started against him just before his retirement. Because the case was still pending, MSTC withheld his gratuity.

After the inquiry was completed, the disciplinary authority ordered recovery of ₹10 lakh from his gratuity, stating that the loss was caused to the company due to his negligence. His request for review was later rejected.

The former CMD then approached the statutory authority under the Gratuity Act, seeking release of his gratuity. While the Controlling Authority rejected his claim, the Appellate Authority ordered MSTC to pay the gratuity along with interest. This decision was later upheld by a Single Judge of the Calcutta High Court.

Challenging these orders, MSTC Limited moved an intra-court appeal. The company argued that the Gratuity Act was wrongly applied to a senior managerial employee and that its Conduct, Discipline and Appeal (CDA) Rules clearly allowed withholding of gratuity and recovery of financial losses caused by misconduct.

MSTC relied on a Supreme Court judgment in Mahanadi Coalfields Ltd. v. Rabindranath Choubey, which held that service rules allowing disciplinary action and recovery from gratuity are not restricted by the Gratuity Act.

The employee, however, argued that his right to gratuity had accrued on retirement and that the disciplinary action was based on old allegations. He also claimed that the forfeiture was unfair, biased, and disproportionate, especially since other officers involved in the same decision were later paid their gratuity.

After examining the matter, the Division Bench observed that MSTC’s rules applied in two situations: cases covered under the Gratuity Act and cases involving any negligence or misconduct causing financial loss to the company. The court held that these rules give the employer an independent right to recover proven losses from gratuity.

The court also noted that the disciplinary order, which quantified the loss and ordered recovery, had already become final. Therefore, the employee’s claim for gratuity was not maintainable.

Setting aside the orders of the Appellate Authority and the Single Judge, the Calcutta High Court upheld the decision of the Controlling Authority that had denied the gratuity claim. The appeal filed by MSTC Limited was accordingly allowed.

This judgment clearly reinforces that disciplinary rules can prevail over the Gratuity Act when financial loss to the employer is proved.