Employees play a major role in growth of any organization. Payment of gratuity by an employer is a mechanism devised to recognize the efforts of employees who remain associated with the organizations for a long period of time and also, serves as an instrument of social security to such employees in the event of termination, resignation, retirement, superannuation, death.

'Gratuity' may be crudely defined as a payment made by an employer to his employees for the services rendered by him over a specific period of time. The term is derived from the word 'gratuitous', which means 'gift' or 'present'. Having being enacted as a statutory social benefit, it ceases to retain the concept of a gift and it has to be seen as a social obligation by an employer towards his employee. Payment of gratuity in India is regulated by the provisions of Payment of Gratuity Act, 1972 ("Act"). The Act is applicable to all factories, mine, oilfield, plantation, port, railway companies and also to every shop and establishment within the meaning of law in which ten (10) or more persons are employed, or were employed, on any day of the preceding twelve months. Once the Act becomes applicable to an establishment, it would continue to apply even after the number of employees gets reduced below the minimum limit i.e. ten (10) employees.


The Act by recognizing the right of an employee to claim gratuity, leaves no discretion with an employer to make payment of gratuity dues to an employee at his own sweet will, which has to be mandatorily paid, provided the Act is applicable on the concerned employer. Any failure to make payment of gratuity dues, is punishable with imprisonment for not less than six (6) month and which may further be extended to two (2) years.

Continuous Service

According to Section 4 (1) of the Act, gratuity is payable to an employee on the termination of his employment after he has rendered continuous service for not less than five (5) years on his superannuation or on his retirement or resignation or on his death or disablement due to accident or disease. Section 2-A (1) of Act defines the term 'continuous service'. The courts in India have time and again observed that the definition of 'continuous service' has to be interpreted liberally. Further, the said provision clearly indicates that cessation of work not due to any fault of the employee is not to be treated as creating any interruptions in course of continuous service. Section 2-A (2) of the Act, further stipulates that an employee shall deemed to be in continuous service for a period of one (1) year if during that period of one year he has actually worked under the employer for a period of 190 days (if the establishment works for less than six days in a week and 240 days (in any other case).

Payment of Gratuity in cases of mergers and transfers

In the era of cross border mergers and transfers, one of the biggest confusion faced by transferee entities is towards the payment of gratuity to its employees who have completed five (5) years of service with the transferor entity or the merged entity. The issue was clarified in the matter of Bombay Garage Ltd. v. Industrial Tribunal [(1953) 1 Lab LJ 14 (Bombay)], the court held that an employer cannot deprive his employees of the benefits that have accrued to them by reason of past services merely by transferring his business to another person or to another limited company; for the work done by the employees is primarily is for the benefit of the concern although the owner also derives benefit therefrom; that, therefore, a new employer is bound to take into account the services rendered by them to their predecessor-in-title.


Section 4 (6) of the Act permits an employer to forfeit gratuity payable to an employee in the certain circumstances. As per the said provision:

The gratuity of an employee, whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer' shall be forfeited to the extent of the damage or loss so caused;
The gratuity payable to an employee may be wholly or partially forfeited (i) if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or (ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.

Internal Rules/ Policies versus the Act

Section 14 of the Act provides that the provision of the Act or any rules made under the Act will have effect, notwithstanding anything inconsistent therewith contained in any enactment other than the Act or in any instrument or contract having effect by virtue of any enactment other than the Act. The judiciary also dealt with the said subject in Jaswant Singh Gill v. Bharat Cooking Coal Limited and Others [2007 (1) SCC 663], wherein it has observed that the rules framed under the Coal India Executives' Conduct Discipline and Appeal Rules, 1978 ("Rules") which provided a clause on forfeiture of gratuity were not statutory rules and thus the provisions of the Act must therefore prevail over the said Rules.

Judicial Approach towards forfeiture: Limiting the Right of Employers

Time and again the judiciary has observed that the withholding / forfeiture of gratuity should be strictly within the prescribed limits of Section 4 (6) of the Act. Supreme Court of India, in the matter of D.S. Nakara v. Union of India, [MANU/SC/0237/1982] observed that gratuity is a tool of social welfare to provide economic security in the fall of life when the aging process effects the physical and mental capacity and one falls, back on savings.  Such payment cannot be withheld unless specifically permitted by any statutory provision.

Pre-conditions for forfeiture

In the matter of Jaswant Singh Gill v. Bharat Cooking Coal Limited and Others [2007 (1) SCC 663], the Supreme Court of India laid down the test for the forfeiture of gratuity. The bench observed that for forfeiting any amount from the gratuity two things are imperative, namely, (i) termination of services for any of the causes enumerated in sub-section (6) of Section 4 of the Act and (ii) pecuniary loss. The courts in India have time and again clarified that gratuity of an employee can be withheld only in case of his dismissal and not otherwise [K.C. Mathew v. Plantation Corporation of Kerala Limited (2000) LIC 1519].

Additionally, the courts in India while dealing with the subject of forfeiture of gratuity [under Section 4 (6) of the Act] have laid down a few pre-conditions for the employers which should be satisfied prior to the employer exercising the rights granted under the said provision, namely – (i) the damages suffered by the employer should be quantified and proved [Permali Wallance Ltd. v. State of M.P., (1996 MPLJ 262)]; (ii) principles of natural justice must be adhered to and the concerned employee must be given an opportunity of being heard [Permali Wallance Ltd. v. State of M.P., (1996 MPLJ 262)]; and (iii) the employer must pass an order to forfeit the gratuity (or any part thereof) pursuant to the proceedings carried out [Dhanalakshmi Bank Limited v. Ramachandran – 2012-IV-LLJ-235 (Kar.)].

Imposition of Penalty for wrongfully withholding/ forfeiture of gratuity

Supreme Court of India in R. Kapur v. Director of Inspection (Painting and Publication) Income Tax and Anr. [MANU/SC/0873/1994] while dealing with forfeiture of gratuity on account of a pending civil dispute imposed a penalty of 18 (eighteen) percent on the employer and observed that death cum retirement gratuity cannot be withheld merely because the claim for damages is pending. In the said case damages were claimed by the employer for unauthorized occupation (by the employee) of official occupation.

Forfeiture in course of / on account of judicial proceedings

Generally, the courts in India while examining the issue in hand have observed that mere pendency of the criminal or judicial proceedings would not authorize the employer to withhold gratuity. However, Allahabad High Court in one of the recent cases, while dismissing the writ petition of the petitioner employee held that gratuity can be withheld in a case where judicial proceedings are pending on the serious charges against employee. The court in the said case also observed that 'having considered the legal position relating to withholding of gratuity, it is clear that the said exercise of power cannot be mechanical but has to be utilized looking to the nature of offence alleged against the employee'. Thus, it may be concluded that forfeiture of gratuity on account of and during pendency of any judicial proceeding may generally not beheld as lawful exercise of employer's authority. However, the said legal position may vary on a case to case basis depending upon the facts and background attached to the respective case.


From the foregoing discussions and legislative approach backed up by the judicial pronouncements, the picture being conspicuously depicted is that the employers can forfeit the gratuity of its employees only after due deliberation and compliance of the provisions of the Act and any non-compliance or derogation whereof may attract penalty on the employers. It should not be, at any point of time, attempted to be circumvented by the employers owing to the fact that the Act is a welfare mechanism enacted in the interest of the greater public policy to secure social and economic justice to the employees. The Act on one hand has recognized the employer's right to forfeit the gratuity payments but on the other hand it attempts to strike a balance by controlling and limiting the power of the employer to avoid the abuse of the relevant provisions of the Act in that regard which confer such powers on the employer. To sum up, it is therefore advised to the employers that to avoid any dispute on forfeiture of gratuity by the employees, the law must strictly be adhered to as a prerequisite.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.