
Whether Employees Terminated for Misconduct Entitled to Payment of Statutory Dues
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Whether Employees Terminated for Misconduct Entitled to Payment of Statutory Dues
In this day and age of hire and fire, employers usually assume that statutory dues of a managerial employee
terminated for misconduct can be legitimately forfeited. This assumption may be far from the established principles
of applicable laws. Some of the post termination entitlements of a managerial employee dismissed for misconduct
are discussed below:
(i) Salary: Post termination obligations and rights of managerial employees are governed by their contracts and
the applicable state’s shops and establishment enactment. While in most states employees occupying
positions of confidential, managerial or supervisory character are excluded from the purview of the shops
and establishment legislations (‘S&E Act’), there are a few states such as Punjab and Haryana that do not
afford a similar exemption and therefore, employees working in managerial or supervisory capacity in these
states fall within the purview of the S&E Act. Consequently, the wages of an employee in these states are
liable to be paid within 2 working days of termination without any deductions.
With respect to the other states where the employees working in managerial or supervisory capacity are not
protected by the S&E enactments, payment of the unpaid salary is governed by their respective contracts
(which usually provide for deduction of salary against losses and damages caused to the employer).
(ii) Leave Encashment: Under the provisions of the S&E Act as applicable to the state of Haryana, the dismissed
employee is entitled to wage in lieu of un-availed earned leave up to a total accumulation of 30 days, if any,
of previous financial year. With respect to other states which do not cover the managerial employees under the S&E enactments, employees would be entitled to payment for the accumulated earned leaves subject to the contractual
provisions and company polices related to deductions.
(iii) Provident Fund: In terms of the Employees’ Provident Funds Scheme, 1952 (“Scheme”), at the time a
member of Scheme (in this case, the terminated employee) leaves the services, the employer is required to
forward a duly filled and attested form to the jurisdictional Provident Fund Commissioner.
In view thereof, a copy of the aforementioned application (Form 19) should be provided to the terminated
employee, to be filled by him for onward submission to the jurisdictional Provident Fund Commissioner.
(iv) Gratuity: In terms of the Payment of Gratuity Act, 1972 (“PGA”), if the termination of the employment
agreement/dismissal of services is, inter alia resultant of acts, wilful omission or negligence causing
substantial damages to the company, the entitlement of gratuity is liable to forfeited to the extent of the
damages/losses so caused to the company.
However while effecting the aforementioned right of forfeiture of the gratuity entitlement of the terminated
employee, the extent of damages/losses caused to the company would need to substantiated/proved if
challenged by the concerned employee. If the company fails to prove such loss the aforementioned forfeiture
may be held untenable by the courts (refer the judgment of the High Court of Madhya Pradesh in the case
of Permali Wallance Ltd. vs. State of M.P., 1996 MPLJ 262).
In view thereof if the claim for gratuity of an employee is being rejected by the company, then the company
would need to issue a notice specifying the reasons why the claim for gratuity is not considered admissible.
Further, a copy of this notice has to be forwarded to the ‘Controlling Authority’ notified under the PGA. The
terminated employee would be entitled to apply to the Controlling Authority for issuing a direction to the
company for payment of the amount of gratuity, within 90 days on receipt of such rejection of his claim. After
conducting hearings in the matter, if the Controlling Authority is of the opinion that the gratuity is payable to
the employee, then it can issue directions specifying the amount payable and directing payment thereof to
the employee under intimation to the Controlling Authority, within 30 days from the date of the receipt of the
notice by the company.
In view thereof the terminated employee may challenge the company’s decision of forfeiting his gratuity and
it will be for the company to prove to the contrary.
In nutshell, the Company would need to release the salary and compensation for the earned leaves to the
terminated employee subject to deductions wherever applicable and the gratuity payment can be rejected subject
to following the above procedure, which may be subject to challenge by the terminated employee.
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