Employee’s Right to Sue after Obtaining Full and Final Settlement from Employer

[Guest post by Ravi Pandey, IX Semester, National Law University, Lucknow]

Full and final settlement is usually used by the employers to absolve themselves from all the previous dues and claims of their employees. It is usually actuated in the form of a settlement contract and effectively concludes the employer-employee relationship. Ideally such a settlement ought to serve its purpose and lead to the dissolution of all the pre-existing disputes and claims between the employer and employee. Sadly, that is not always the case.

Employers usually get dragged into the labour courts for certain previous dues or claims which are claimed by the employees to be beyond the purview of the terms of settlement. The author proposes to analyse several judgments of courts to examine the legal position relating to such matters.

 Case Law on Point

In Bennett Coleman & Co. (P) Ltd v. Punya Priya Das Gupta (AIR 1970 SC 426), the employee, after resigning from the company, claimed his dues for the leave period. While receiving his full and final settlement from the company, he signed a receipt which had no mention of the payment of dues during the leave period. The Supreme Court held that the employee can claim his dues for the leave period, since he has not waived his claims for such dues in the full and final settlement.

In P. Selvaraj v. The Management of Shardlow India (W.A.No.1478 of 2006), the Madras High Court was of the opinion that where a full and final settlement was a predicament whereby it was mandatory for an employee to sign it to get any amount, even if it was less than the sum he was entitled to, in those cases the full and final settlement will  not stand, and the employee can claim the sum he was entitled to. It also asserted that an employee cannot be estopped from claiming the gratuity amount by virtue of section 14 of Payment of Gratuity Act, 1972, since it has an overriding effect over any other enactment or any instrument or contract.

In Automotive and Allied Industries v. Regional Provident Fund (1990) 95 BOMLR 740, the Bombay High Court expressly stated that once a full and final settlement has taken place between the employee and the employer through a contract, including all claims for compensation and loss of office, then the employee cannot hold the employer liable for any other claim whatsoever. It also rejected the trial court’s verdict, in which the trial judge had held that payment of provident fund arises from statutory provisions and they cannot be given up through contractual means. The Court further applied the principle of approbate and reprobate to negate the employee’s claim. According to this common law principle, a party cannot be allowed to accept and reject the same instrument. It was enunciated in England in the early 1920s and has been subsequently applied by Indian courts. One court stated:

A person cannot say at one time that a transaction is valid and thereby obtain some advantage, to which he could only be entitled on the footing that it is valid, and then turn around and say it is void for the purpose of securing some other advantage.[1]

The Court in Automotive and Allied Industries went into the specific terms of the settlement contract and stated that the ambit of several clauses was so wide that they swept away any claim arising out of the employment.

In Burroughs Wellcome (I) Ltd. v. Jagannath Namdeo Patel and ors. 2006 (1) Bom CR 812, Bombay High Court tackled the issue of full and final settlement through Voluntary Retirement Scheme (VRS). The employees had assented to their employer’s VRS, whereby the relevant clause stipulated:

7(e) The payment made under the Scheme to workman (or his nominee in case of death) shall be in full and final settlement of and in complete satisfaction of all claims of the said workman and no further amounts will be claimed by such workman (or his nominee) against the Company, once payment has been received under the Scheme.

The consent to the aforesaid scheme was provided through letters, whereby the employees confirmed to abide by it. The employer had approached the High Court to quash the criminal proceedings initiated against them by the respondents under Maharashtra Recognition of Trade Unions and Prevention of Unfair Labour Practices Act, 1971 for the dispute relating to non-payment of wages during the employees’ unlawful suspension in the year 1987-88. The employer contended that the aforesaid dispute no longer exists by virtue of employees’ acceptance of VRS, which explicitly ruled out any claim arising out of any pending dispute. The High Court cited the Supreme Court judgment in Vice Chairman & Managing Director v. R. Varaprasad and Others (Civil Appeal No. 5638 of 1999), in which it had held (in paragraph 12):

…When the employees have opted for VRS on their own without any compulsion knowing fully well about the Scheme, guidelines and circulars governing the same, it is not open to them to make any claim contrary to the terms accepted. It is matter of contract between the Corporation and the employees. It is not for the courts to rewrite the terms of the contract, which were clear to the contracting parties, as indicated in the guidelines and circular governing them under which Voluntary Retirement Schemes floated.”

The Court finally held that, after availing the VRS, the employees are not entitled to continue with the complaint filed by them against the company, since they have waived all previous claims.

In L. Ravi v. The Presiding Officer (W. P. No.2442 of 2008), the Madras High Court was faced with a claim by an employee who had resigned from his post and also received all his dues from the employer in the form of full and final settlement on that very day. Subsequently, he alleged that he was coerced to resign from his post and was threatened by his General Manager to whom he had addressed his resignation letter.

The Court, in its well-reasoned judgment, rejected the employee’s claim by citing the fact that:

he received all the dues by way of full and final settlement from the company on the same date, thereby bringing the relationship of master and servant to an abrupt end. Had the petitioner really been forced by threat to put up his paper, he would not have received the full dues on the same day without protest.

Analysis

The aforesaid judgments reflect upon a trend whereby the employee after assenting to the full and final settlement, usually drags the employer to the court of law, so as to procure certain benefits which were not explicitly included within the final settlement agreement or were deemed to be excluded from it.

In Bennett Coleman, the Court held an employee to be entitled to the dues pertaining to leave period, since at the time of signing the settlement agreement it had not waived his right to claim the same. Section 14 of the Payment of Gratuity Act, 1972 clearly states that the payment of gratuity cannot be overridden by any other statutory provision or contractual obligation. It is arguable, citing the Bombay High Court’s verdict in Automotive and Allied Industries, whereby the court had stated that any statutory benefit, which gives rise to a claim, can be waived. But, it is pertinent to note here that gratuity is the sum paid to a superannuated, retiring or dead employee and the significance of the same cannot be overshadowed or coerced through a contractual consent on his part. The provision bears the essence of welfare legislation and possesses enough moral backing to be overlooked by any court.

Through Automotive and Allied Industries, the Bombay High Court has brought the principle of appropriate reprobate within the labour law jurisprudence. A contractual obligation needs to be strictly followed and in cases of full and final settlement; it becomes even more significant citing its constant derogation in the labour courts, so as to avail of some illicit gains.

In Burroughs Welcome, we can observe that a VRS attained via a full and final settlement stands tall and all the claims, including disputes, waived under it cannot be raised in any court of law.

Finally, in L. Ravi, the Madras High Court looked into the issue of coercion that was raised by an employee who had resigned and had received all his dues via full and final settlement. The Court acknowledged that the master-servant relationship culminated on the day the employer resigned and received the full compensation. The fact that he received the full and final compensation on the same day, that too without any protest from his side, ensured the court that the resignation was not vitiated by coercion. Also, it is pertinent to point here that the burden of proving any such acts of coercion lie solely on the claimant.

Conclusion

A full and final settlement doesn’t necessarily mean that the employer is exonerated from providing its employee all the benefits. The employer still has to pay the gratuity amount to its employees, which cannot be contracted out by it. It usually depends on the terms and conditions of the settlement agreement; all those pending disputes and claims, which are addressed within the said terms and conditions, will stand fully resolved and recovered.

In addition to that, an employee claiming coercion while resigning, after which he received a full and final settlement, has to prove coercion conclusively. The courts can adjudicate upon the same by observing the claimant’s conduct while receiving the said settlement.

– Ravi Pandey

[1] Verschures Creameries Ltd. v. Hull and Netherlands Steamship Co. Ltd., (1921) 2 KB 608, at p. 612, Scrutton L.J.

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3 comments

  • OFFHAND
    The write-up has discussed the selected case law, and the scope left for further dispute (s) , even after the employee has agreed to and accepted a “full and final settlement” . As visualized, – in fact, implied by the writer himself- three could be only two types of employee’s rights /entitlements to be covered in any such settlement- contractual and statutory. If so, and on that premise, to negate or minimize the scope for any prolongation of dispute, perhaps, the only way is to have the formal agreement , including under a sacheme of VRS, drafted as eminently as possible, and do so, sparing no pains to cover, keeping in full focus, -A) the specific terms and conditions, as spelt out/ embodied in the employment contract itself, and B) the employee ‘s additional rights to- such as, gratuity, – under anyone or more of statutes, such as the Gratuity Act.
    In short, as past experience may go to illustrate, more often than not, all such further disputes arise mostly because of the inept/ inefficient drafting by the enraged lawyer/law office failing to realize, and bear in mind, the utmost importance of proficiency on the job.
    For that matter, likewise, it is nothing else, except such inept or inefficient or mindless drafting on the part of even the government law department(s) to which the disputes arising with reference to the taxation and other laws, almost as a routine, are to be attributed /traceable to.
    To intimately know what a towering law legend had to say: NA Palkhivala’s famous speeches and writings on the topics related to law /legal regime, published, may make for an interesting /inspirational read !

  • RIDER
    Instances to fortify the foregoing personal views :

    On inept drafting, of legislation , –
    READ Article (2014) 226 TAXMAN 143 (Mag)
    That marks an instance in which, in the legislation (original enactment), use of the article- ‘a’ – to signify ‘one’ (to mean , not more than one) lead to a spate of long lasting controversy, dispute and court litigation; and, in the aftermath whereof, an amendment of the enactment came to be made, to bring about clarity, but only prospectively (rightly or wrongly so ! – resulting in not an insignificant loss to the Exchequer)

    On a mindless drafting, of a contract agreement
    READ Article (2016) (85) Kar. L.J. pg 1.
    That is an instance in which by reason of an obviously callous drafting of the contract agreement (ref. discussion on Clause 5 thereof) between the parties, the lowly AO, relying thereon, was inspired to, albeit wrongly so , and took an adverse view; hence had to be taken on in court litigation.

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