CAN EMPLOYERS RECOVER GRATUITY AMOUNT PAID OVER AND ABOVE THE STATUTORY CEILING FROM THEIR EMPLOYEES?
Despite this issue being marred by controversy and contradicting judicial precedents, employers running private establishments would have a good case for recovering any excess gratuity (over and above the upper cap provided under the Payment of Gratuity Act, 1972) paid to their employees, provided that the recovery is not initiated belatedly i.e. after an year of the overpayment.
Statutory gratuity under the provisions of the Payment of Gratuity Act, 1972 (“PGAct, 1972”, hereinafter) is payable in accordance with the calculation methodology provided therein. While the calculated amount, in case of executive level employees drawing handsome salaries with long-standing service, can turn out to be exorbitantly high, the actual payment is subject to the rider provided under section 4(3) of the PG Act, 1972, which lays down that the statutory gratuity payable to any employee is to not exceed such amount as is declared by the Central Government from time to time. Currently, the upper-cap/limit for payment of gratuity under the PG Act, 1972 is Rs.20,00,000/-. This is further subject to sub-section (5) of section 4 of the PG Act, 1972 which allows payment of gratuity over and above the statutory ceiling limit in case of any award or agreement or contract with the employer.
In the past, several employers and establishments have encountered situations wherein due to some administrative/clerical oversight, excess gratuity amount surpassing the ceiling limit provided under PG Act, 1972 is paid to the employees. Such cases leave the employers high and dry making them wonder as to whether the excess gratuity amount, legally, can be recovered from the employees.
One may, at the very outset, observe that there is no provision under the PG Act, 1972 providing or allowing employer to deduct any gratuity amount except as per the procedure prescribed under section 4(6), which can be invoked only when the employee’s services are terminated for any act, wilful omission or negligence causing any damage or loss or destruction of property belonging to the employer. This point at issue came up before the Delhi High Court in State Farms Corporation of India Ltd. v. Regional Labour Commissioner,[1] wherein it was held that excess payment of gratuity can be adjusted against the dues payable to an employee. As per the Delhi High Court, if, at the time of retirement some excess amount has been paid against one head, the same can always be deducted out of balance payable. In this regard, it may be noted that section 13 of the PG Act provides that gratuity payable to an employee under the PG Act, 1972, is not liable to attachment in execution of any decree or order of any Civil Court, Revenue Court or Criminal Court. However, as per the Delhi High Court, attachment of gratuity in execution of a decree or order is not the same thing as deduction of an excess payment made by the employer. According to the High Court, such retention of excess payment would be unjust enrichment on the part of the employee. In holding so, the Delhi High Court had placed reliance upon judgment of the Supreme Court in Secretary, ONGC v. V.U. Worrier,[2] where the recovery of dues of rent accommodation not vacated by the employee out of gratuity amount was upheld. The said judgment was also relied upon by the Supreme Court in M/s Steel Authority of India Ltd. v. Raghabendra Singh & Ors. [3]
However, a Single Bench of the Kerala High Court in State Farms Corporation of India v. P.D. Mathai[4] (“State Farms”, hereinafter), has disagreed with the Delhi HC in State Farms (supra) and held that unilateral deduction from gratuity cannot be made by the employer. The Kerala High Court emphasised upon the benevolent nature of the PG Act, 1972 and fortified the view that no deduction whatsoever can be made by the employer from gratuity due to an employee, except as specifically provided for in PG Act, 1972 in Section 4(6). The Single Bench judgment came to be approved by the Division Bench of the Kerala High Court in The State Farms Corporation of India Petitioner v. P.D. Mathai, Puthenpurackal House.[5] A Special Leave Petition was preferred by the management before the Supreme Court, which came to be dismissed but the question of law was kept open.[6]
In more recent times, the Gujarat High Court also came to be confronted by this very issue in The Chairman, Gujarat Water Supply and Sewerage Board & Ors. v. N.N. Patel & Ors.[7] (“Gujarat Water Supply”, hereinafter). The facts of this case were such that the Corporation involved therein had mistakenly paid an increased amount of gratuity to its retired employees and then sought to realize the same. The Gujarat High Court negatived the recovery action sought to be initiated by the management by relying upon the judgment of the Supreme Court in State of Punjab v Rafiq Masih[8] (“Rafiq Masih”, hereinafter). In Rafiq Masih (supra), the Supreme Court had laid down that employers would not be entitled to recover payments made mistakenly from the employees in situations of hardship. One of such situations involved recovery from retired employees, or employees who are due to retire within one year, from the order of recovery. The Gujarat High Court came to the conclusion that such recovery would lead to extreme hardship to the retired employees and therefore no recovery should be permitted. A Special Leave Petition was preferred against this judgment of the Gujarat High Court as well, which was dismissed but the question of law was again left open.[9]
While the Supreme Court chose not to interfere with Gujarat Water Supply (supra) on its facts, whether it constitutes a binding position of law with respect to recovery of excess gratuity is doubtful. This is so because firstly, the judgment of Rafiq Masih (supra) on which the Gujarat High Court placed reliance, involved excess payment made to the employees on account of wrongful fixation of salary consequent upon upward revision of pay scales or payment of allowances for which employees were not authorized. No question relating to recovery of the pertaining to the arrears of gratuity was dealt with. Secondly, the Supreme Court in Rafiq Masih (supra) was primarily concerned with resolving the conflict between the earlier judgments of Shyam Babu Verma v. Union of India;[10] Sahib Ram v. State of Haryana [11] on one hand and Chandi Prasad Unyal v. State of Uttarakhand [12] (“Chandi Prasad”, hereinafter) on the other, had sought to deal with them in accordance with Article 142 of the Constitution, which allows the Supreme Court to pass such orders so as to ensure complete justice. Such directions issued under Article 142 of the Constitution of India, as is well settled, do not constitute a binding precedent unlike Article 141 of the Constitution in the case of Ram Pravesh Singh and Others v. State of Bihar and Others.[13] On the other hand, the judgment in Chandi Prasad (supra), which is a binding judgment, laid down that any amount paid/received without the authority of law can always be recovered barring few exceptions of extreme hardships but not as a matter of right, in such situations, law implies an obligation on the payee to repay the money, otherwise it would amount to unjust enrichment.
One may also take into account another crucial aspect. The judgment of Rafiq Masih (supra) was majorly dealing with the realm of public employment law. The employer involved therein was a government entity and not a private establishment. Nothing was also stated by the Supreme Court in that judgment which would lead to a presumption that the directions were omnibus in nature so as to apply to both public and private employment alike. It is well settled law that principles applicable in public law domain do not apply with respect to employees in private employment as held by Delhi High Court in Satya Narain Garg Through His Legal Heirs v. DCM Ltd. & Others.[14] Thus, even if the judgment of Rafiq Masih (supra) is to be considered as a binding precedent, it still cannot be contended that it will govern matters involving recovery of excess amount with respect to private employment, much less gratuity.
Furthermore, all establishments are usually either covered under the Payment of Wages Act, 1936 (“PoW Act”, hereinafter) or the Shops and Establishments Act of the State where it is situated. Section 7(2)(f) empowers employers to deduct amounts from the wages of an employee for adjustment of over-payment of wages. The definition of ‘wages’ under section 2(vi) of the PoW Act excludes gratuity payable on the termination of employment except in cases when it is payable under any law. The Madras High Court in Ms. Madras Fertilisers Limited v. The Controlling Authority,[15] considered whether gratuity is excluded from the definition of wages under clause (vi) of Section 2 of the PoW Act by reason of the exclusion contained in sub-clause (6) thereof. It was held that the plain meaning of the clause would be that where any sum was payable on termination of employment of the person under any law (in this case, the PG Act, 1972), it would be covered under sub-clause (d), and therefore, excluded from the operation of sub-clause (6) and would amount to “wages”. Thus, the PoW Act itself provides deduction of overpayments from ‘wages’ of an employee, which includes gratuity under its ambit. Even otherwise, gratuity amount paid over and above the upper-cap provided under the PG Act, 1972 is itself not gratuity unless it has been paid out of an award or contract or agreement (see Independent Schools’ Federation of India (Regd.) v. Union of India and Another)[16]. The limitations imposed by virtue of any social security law, will therefore, not apply. Even if the establishment is not covered under PoW Act, the Shops and Establishments Acts of majority states contain provisions for deduction of wages pari materia to that of the PoW Act; the definition of ‘wages’ in majority of them is also akin to that of the PoW Act. Even otherwise, since excess gratuity payment is not technically gratuity under the PG Act, 1972, it will invariably form part of wages as it would retain the character of an emolument or remuneration.
Gaurav Kumar,
Advocate,
Supreme Court of India
Editor : Labour Law Reporter
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1. 2007 LLR 58 (Del. HC).
2. 2005 SCC (L&S) 676 (SC).
3. Appeal (C) No. 11025/2020 dated 15.12.2020 (SC).
4. 2008 LLR 458 (Ker. HC).
5. W.A No. 1021 of 2008 dated 07.08.2009 (Ker. HC).
6. State Farms Corp. of India Ltd. v. P.D. Mathai & Ors., SLP(C) No. 002840/2010 dated 18.01.2010 (SC).
7. LPA No. 99 of 2024 dated 30.07.2024 (Guj. HC).
8. (2015) 4 SCC 354 (SC).
9. Special Leave Petition (Civil) Diary No(s). 44458/2024.
10. 1994 (2) SCC 521 (SC).
11. 1995 Supp. 1 SCC 18 (SC).
12. 2012 (8) SCC 417 (SC).
13. 2007 LLR (SN) 667 (SC).
14. 2011 SCC ONLINE DEL 5205 (Del. HC).
15. WP No.7545/1995 dated 01.11.2002 (Mad. HC).
16. CA No.8162/2012 dated 29.08.2022 (SC)
