ADDRESSING ARBITRARINESS IN GRATUITY FORFEITURE: THE NEED FOR STANDARDIZED GUIDELINES UNDER THE PAYMENT OF GRATUITY ACT, 1972 AND SOCIAL SECURITY CODE, 2020

This piece has been written by Shelly Jain & Shreya Dwivedi 4th Year, B.A. LL.B. (Hons.) students at Institute of Law, Nirma University

INTRODUCTION

Gratuity, a statutory benefit under the Payment of Gratuity Act, 1972 and and Social Security Code, 2020, in India, is an economic  reward for an employee who has completed at least five years' continuous service, to be paid on  retirement on superannuation, death, physical incapacity, disability, or otherwise.The purpose of  offering gratuity is to provide a retirement benefit to workers who have provided extended and  flawless service to their employer, thus supporting the employer's growth and success. In India,  gratuity is regulated by the Payment of Gratuity Act, 1972, and Chapter V of the Social Security  Code, 2020. As per these laws, an employer may forfeit gratuity (either completely or partially)  in two situations: first, if an employee's termination resulted from engaging in riotous, disorderly,  or violent behaviour; and second, if the termination was due to an offense classified as  moral turpitude.Regarding the second situation, it is essential to note that the term ‘moral  turpitude’ has not been explicitly defined in the Payment of Gratuity Act, 1972, which enables employers to deny gratuity in certain types of misconduct without objective standards to  determine such actions. This absence of pre-defined norms facilitates arbitrary discretion by  employers, which typically results in unequal treatment, such as denial of gratuity for one  infraction after decades of faithful service. 

In the landmark case of Union Bank of India and Ors. v. C.G. Ajay Babu, the Supreme Court  sought to eliminate ambiguity by holding that gratuity could only be forfeited for misconduct  involving moral turpitude if such misconduct was proven in a court of law. However, this  safeguard was recently removed by the Supreme Court in Western Coal Fields Ltd. v. Manohar  Govinda Fulzele, where it ruled that an employer may forfeit gratuity if an employee’s  misconduct amounts to moral turpitude, even without a criminal conviction.This development  raises significant concerns over the unchecked discretion granted to employers to withhold  gratuity based on the vague standard of moral turpitude, without judicial verification.This blog  seeks to examine the implications of the recent ruling, explore the continuing ambiguity  surrounding the notion of moral turpitude, and provide a comparative analysis of how gratuity

forfeiture and moral turpitude are addressed in different countries, with the aim of identifying  measures that balance employee protections and employer rights.

PROBLEMS AND UNFAIRNESS IN GRATUITY FORFEITURE

The Payment of Gratuity Act, 1972, introduced as a landmark piece of welfare legislation, was  meant to ensure financial stability for employees after years of service. However, its true purpose  has been diluted by the structural and interpretative issues embedded in its forfeiture  clause, particularly under Section 4(6). While the intent is to allow employers to withhold gratuity  in cases of grave misconduct, the provision has instead become a tool vulnerable to misuse,  primarily due to its vague terminology, procedural loopholes, and lack of proportional  safeguards. The clause permits gratuity forfeiture for acts involving “moral turpitude,” without  clearly defining the term or specifying procedural checks to prevent arbitrary application.

The problem lies at the heart of how “moral turpitude” is understood. In Pawan Kumar v. State  of Haryana & Anr., the Supreme Court gave definitional guidance to describe “moral turpitude”  as conduct that is inherently base, vile, depraved, or connected to such depravity. Generally, acts such as fraud, embezzlement, or serious breach of trust fall within the ambit. However, without  codification, this guidance lacks binding clarity, which allows employers to extend the term to  minor infractions or lapses in judgment. 

Recently the Supreme Court in Western Coal Fields Ltd. V. Manohar Govinda Fulzele has  intensified this concern by removing the requirement to prove misconduct in court of law before  forfeiture. Now, an internal departmental inquiry by the employer is sufficient on “balance of  probability” without needing a criminal conviction. While this encourages effectiveness, it  aggravates vagueness; what counts as “moral turpitude” is still case-based, without fixed  objective standards. This subjectivism not only encourages inconsistency but also prevents  employees from questioning unjustified dismissal, as the threat of complete forfeiture of gratuity  outweighs it. A safeguard exists in the form of issuing a show-cause notice, as recognised in  Siyaram Basanti v. Chhattisgarh Rajya Gramin Bank & Ors., allowing employees to defend  before forfeiture is finalised. Yet, in practice, this safeguard is limited, since the employer who  issues the notice is also the ultimate decision-maker,perpetuating a power imbalance.  Furthermore, the law fails to consider mitigating factors such as employees’ tenure, prior record, and proportionality between misconduct and forfeiture, which results in a single alleged lapse  erasing decades of earned benefits. 

COMPARATIVE ANALYSIS. 

In the United Kingdom, employers are required to establish a fundamental breach of contract by  conclusive proof and fair disciplinary proceedings in cases of “gross misconduct”, guided by the  ACAS Code of Practice and interpreted by employment tribunals.

In South Africa, the Labour Relations Act 1995 and the Code of Good Practice outline  procedural and substantive fairness, maintaining a balance of power between employers and  employees.

In the UAE, the labour law guarantees end-of-service gratuity after one year of service, which  becomes payable within 14 days of termination, and it also prohibits forfeiture, subject to  exceptional cases. While hearing cases on forfeiture of gratuity, reliance is placed on a definite  misconduct threshold, inquiries based on evidence, and speedy dispute resolution to ensure fair  trial and restrict abuse. 

In comparison, India’s act does not clearly define the scope of moral turpitude, and it does not  look into the aspect of proportionate and independent scrutiny by authorities, which is  disadvantageous to the employees. Thus, India should take inspiration from other jurisdictions and incorporate them into labour codes. The specific aspect that must be included includes  clearly defining the scope of moral turpitude, among other things, and impartial scrutiny and  strict proof, which is beneficial for employees, including gig workers.

RECOMMENDATIONS FOR REFORMS

It is necessary to reform the Payment of Gratuity Act,1972, to ensure clarity, equity, and  procedural effectiveness in forfeiture orders. The recent judiciary trends and 2025 judgment  underscore the urgent need for legislative changes, institutional enhancements, and policy  alignment with International labour standards. Firstly, there is a need to bring reform to section  4(6) by adding a clear definition of moral turpitude to remove subjective interpretations. The  definition should be restricted to major offences like fraud, embezzlement, forgery, or criminal  breach of trust, excluding minor offences or administrative errors. In addition to this, proportionality measures should be legislated, connecting the degree of forfeiture to the severity  and established extent of misconduct. For example, in cases where there is a slight loss, partial  forfeiture can be used, whereas in egregious or intentional acts of dishonesty, complete forfeiture  can be done. Incorporating the length of service of an employee as a mitigating factor would also  make this process more humane, recognising long-term service and devotion, as workers’ entire  amount of gratuity must not be forfeited for one mistake after working for decades.

Procedural safeguards are equally important. Formal show-cause notices should precede  forfeiture, which should clearly mention the allegations, the amount of forfeiture, and specify a  time limit for reply, thus complying with principles of natural justice. At the institutional level,  independent review boards of experts can be set up to review forfeiture cases on the basis of some objective criterion. To avoid any arbitrariness, these boards can conduct periodic audits.  Digital portals such as Shram Suvidha and SAMADHAN need to be expanded to feature  gratuity-specific modules for transparent and expedited settlements.

To further prevent misuse, the act can be aligned with ILO Convention No. 102 on social  security, which will safeguard gratuity as a non-penal entitlement. Lastly, introducing a gratuity  transparency index and ranking organisations based on procedural fairness would ensure public  accountability and incentivize ethical compliance. Overall, these reforms would make the  gratuity scheme of India such that it balances employee protection with employer fairness,

aligning with International labour practices.

CONCLUSION

The absence of standardized rules for forfeiture of gratuity under the Payment of Gratuity Act,  1972 and Social Security Code, 2020, has created a system that disproportionately empowers employers at the expense of  employees who have served faithfully for years. The vague definition of “moral turpitude,” lack  of proportionality in forfeiture, and absence of mandatory pre-forfeiture procedures have led to  arbitrary decisions, undermining the Act’s core purpose as a social security measure. This is  particularly unjust for long-serving or low-income workers who depend on gratuity for post

retirement stability. While the 2025 Supreme Court ruling in Western Coalfields Ltd. v. Manohar  Govinda Fulzele introduced some discussion on proportionality and fairness, the protection  remains inconsistent, leaving employees vulnerable to employer discretion and burdensome  appeals. The unregulated nature of forfeiture also weakens labour rights, especially in the

unorganized sector. Comparative models in the UK and UAE demonstrate how explicit  definitions of misconduct, legal proportionality, and institutional supervision promote fairness  without impeding accountability. With the Social Security Code, 2020, now in effect, India has  the opportunity to embed these lessons by amending Section 4(6) to define moral turpitude  clearly, enforce proportionality based on tenure, and establish digital dispute resolution aligned  with ILO conventions,ensuring gratuity remains a right, not a privilege.