When employee resigns from the services having outstanding amount of advances and loan taken by him, can employer adjust such outstanding amount from his full and final settlement payable?
Yes! Employer will be within his rights to adjust the outstanding amount of advances and loan from the full and final dues. Madras high Court in the case of Rajapalayam Mills Ltd. vs. Labour Court, Madurai, has also held so.
The employee challenged the adjustment under Payment of Wages Act as illegal deduction. Court said that after resignation, relationship of employer and employee ceases and parties are governed under Contract Act and not Payment of Wages Act. If the employee owes any money to the employer, the former becomes debtor and latter becomes creditor and therefore it would be open to the employer to adjust the entire amount due on account of wages under section 7(4) of the Act. Section 7(1) to 7(3) will come into play in such circumstances.
It can not be said that after severance of the employer employee relationship the employer should be required to chase the workman to recover the loan amount by filing civil litigation as also held by Bombay High Court in Engineering and Ancillary Manufacturers vs. Salim Khan.
But such advances and loan can only be adjusted against payable wages, leave encashment and bonus only.
Even if the amount of recovery is higher than the payable full and final dues, such balance recoverable amount can not be adjusted against Gratuity if payable being barred by the Payment of Gratuity Act itself. The only option left with the employer in such situation is to recover the balance amount through Civil Suit in the Court of Law.
By Dayanand Mangaonkar