Court Order: Bank Cannot Withhold Gratuity to Recover Loan from Retired Employee

A Division Bench of the Orissa High Court, comprising Chief Justice Harish Tandon and Justice Murahari Sri Raman, ruled that gratuity cannot be withheld or forfeited to recover a loan default, even if the retired employee acted as a guarantor. Gratuity can only be withheld if the employee was terminated for misconduct as mentioned under Section 4(6) of the Payment of Gratuity Act, 1972.

The respondent had worked as a Deputy Manager in Cuttack Central Co-operative Bank. She retired on 31 July 2010 after reaching the age of superannuation. Her service record was clean, and no disciplinary proceedings were pending or initiated against her during her service. However, the Bank withheld her gratuity payment after retirement.

The respondent then approached the Authority under the Payment of Gratuity Act, 1972, seeking release of her gratuity. The Bank argued that she had stood as a guarantor for a loan given to a borrower who later defaulted on repayment. Since the guarantor also shares liability for the unpaid amount, the Bank withheld her gratuity to recover the dues.

The Authority rejected the Bank’s argument and ordered payment of gratuity. The Bank appealed before the Appellate Authority under the Act, but the appeal was dismissed. The Bank then filed a writ petition challenging the Appellate Authority’s order, which was also dismissed. Aggrieved by that decision, the Bank filed a writ appeal before the Division Bench.

In the appeal, the Bank again argued that since the respondent was a guarantor for the defaulted loan, her gratuity could be withheld until the loan was repaid. The respondent contended that her lawful retirement benefits were wrongly withheld despite her unblemished record.

The Court observed that an employer’s power to forfeit gratuity is strictly limited to the conditions mentioned in the Payment of Gratuity Act, 1972. Referring to Section 4(6), the Court noted that gratuity can be forfeited only when an employee’s services are terminated due to willful misconduct, negligence, or acts that cause loss or damage to the employer’s property.

The Court emphasized that gratuity is not a gift or favor from the employer but a deferred payment earned by the employee for long and faithful service. It cannot be denied unless the Act specifically allows it.

Since the respondent retired normally and was not terminated for misconduct, the Court held that her gratuity could not be withheld. The Bank’s action to recover the loan by withholding gratuity was found to be illegal and beyond its authority.

The Court further noted that both the original and appellate authorities had correctly held the Bank’s action to be unlawful, and the Single Judge was right in dismissing the writ petition. Finding no reason to interfere, the Division Bench dismissed the Bank’s appeal.

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