Karnataka High Court rules employer can't forfeit gratuity without recovery proceedings

The Karnataka High Court has determined that an employer must initiate recovery proceedings before withholding gratuity from a dismissed employee.

The Karnataka High Court has ruled that an employer cannot withhold or forfeit the gratuity of a dismissed employee unless proceedings for the recovery of alleged losses have been initiated against them.

Karnataka High Court (Wikimedia Commons)(HT_PRINT)

Justice Suraj Govindaraj made this observation in a recent order while rejecting a plea by the Central Warehousing Corporation, which had challenged an order passed by the Controlling Authority.

The authority had directed the corporation to pay ₹7,88,165 as a gratuity to former employee G C Bhat, along with 10 per cent interest from December 12, 2013, until the actual payment date.

The corporation argued that Bhat’s dismissal was due to serious charges of misappropriation, which allegedly resulted in a loss of ₹1.71 crore to the company.

It claimed the right to withhold his gratuity and adjust the amount against the losses incurred. Additionally, the corporation raised concerns about the delay in filing the application, as Bhat had approached the Controlling Authority seven years after his dismissal.

After reviewing the records, the court noted that while the corporation had forfeited the amount due to Bhat, it had not initiated any proceedings to recover the alleged losses.

The bench emphasised that employers have the option to recover losses by initiating legal proceedings against employees accused of misappropriation. However, merely suspending or dismissing an employee does not compensate for the financial damage caused to the employer.

The judgment clarified that dismissal is a punitive action taken against an employee following due process but does not automatically entitle the employer to retain dues.

The court stated, "It was for the employer to have initiated proceedings for the recovery of the losses caused, and during those proceedings, to forfeit or adjust the monies due to the delinquent employee, after holding necessary proceedings and providing an opportunity to the delinquent employee to contest those proceedings."

The court also pointed out that the corporation’s failure to initiate recovery proceedings indicated negligence on the part of its officials. It ruled that without such proceedings, the corporation’s claim of losses remained unsubstantiated.

"No proceedings having been initiated against respondent No 1 for recovery of the alleged losses, the question of the employer retaining the gratuity amount and forfeiting the same would not arise."

The court extended the deadline for the corporation to pay Bhat’s gratuity until January 31, 2025.

Additionally, it advised the corporation’s management to ensure that, in future cases of employee dismissal over financial misconduct, recovery proceedings should be initiated before attempting to forfeit gratuity.