Navigating Termination: Misconduct vs. Loss of Confidence in India

Termination of employment is a complex process in India, as various labor laws are involved and become applicable based on various factors. Handling such complexities appropriately is prudent from an employer’s perspective to minimize the risk of a claim of an illegal termination from an employee. Employment may be terminated for various reasons, and depending on the reason for termination of employment, distinct legal implications and procedural requirements come into play that affect the entitlements of the concerned employee and the necessary actions that an employer is required to undertake during the termination process.

This article focuses on termination of employment due to misconduct and loss of confidence, aims to draw a distinction between termination on these grounds, and discusses the legal framework, the required process, and the implications of termination on these grounds. Understanding these distinctions is crucial for ensuring compliance and protecting the rights of all stakeholders involved.

Misconduct

Misconduct can be described as a form of unacceptable behavior of an employee in a workplace that is in violation of the company policies, codes of conduct, and terms of employment. Misconduct can range from minor infractions, such as tardiness and absenteeism, to serious offenses, such as theft, harassment, and fraud. In the case of State of Punjab v. Ram Singh ex. Constable, the Supreme Court of India held that “the word ‘misconduct’… though not capable of precise definition, on reflection receives its connotation from the context[:] The delinquency in its performance and its effect on the discipline and the nature of the duty. It may involve moral turpitude, it must be improper or wrong behavior, unlawful behavior willful in character, a forbidden act, a transgression of established and definite rule of action or code of conduct.”

While the term “misconduct” is not explicitly defined under labor legislations in India, there are various provisions relating to misconduct in different labor legislations. For instance, the model standing orders prescribed under the Industrial Employment (Standing Orders) Act, 1946 (“Standing Orders Act”), read with the Industrial Employment (Standing Orders) Central Rules, 1946, provides a list of acts—such as fraud, unauthorized absenteeism, willful insubordination, etc.—that may be categorized as misconduct. The Standing Orders Act also lays down the procedure to be followed by an employer prior to termination of an employee for misconduct and other related aspects.

The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, also deems sexual harassment as a type of misconduct. In case a complaint of sexual harassment is proven against an employee, the company is required to take action against the employee as it would in case of misconduct.

Additionally, certain state-specific shops and establishments acts, such as that of Uttar Pradesh, provide a list of acts or omissions that may constitute misconduct. Similarly, the Andhra Pradesh Shops and Establishments Act, 1988, applicable to the states of Andhra Pradesh and Telangana, outlines the conditions and procedures to be followed for termination of an employee on account of misconduct.

It is prudent to note that, depending on the nature of the act, misconduct may also be considered as an offense under the Indian Penal Code, 1860 (IPC). Instances of cheating, forgery, dishonest misappropriation of property, etc., are offenses punishable under the IPC. The forum (the disciplinary committee of the company or the police) approached by the complainant shall determine the nature of investigation against the accused employee. In criminal cases, because the complainant has the right to approach the law enforcement authorities, it becomes crucial that the company addresses such complaints internally in an efficient manner.

On receiving a complaint of misconduct, before taking any action against an accused employee for misconduct (including termination of employment), it is important for the employer to conduct a disciplinary inquiry.

A disciplinary inquiry is an internal investigation process conducted by an employer into an alleged act of misconduct by an employee. The primary goal of the disciplinary inquiry is to ensure fair and unbiased examination of the charges, allowing the accused employee an opportunity to present a case.

Governed by the principles of natural justice, the inquiry typically involves the preparation of a charge sheet, appointment of an inquiry officer/committee, issuance of notice of inquiry, calling of witnesses, and preparation of a disciplinary report. If, during the disciplinary inquiry, the charges against the accused employee are proven and misconduct is established, the inquiry officer/committee shall recommend in its report the disciplinary action (such as suspension, reduction in pay, demotion, termination, etc.) to be taken against the accused employee.

It is the responsibility of the employer to consider the recommendation of the inquiry officer/committee and take appropriate action. The key aspect to be kept in mind while taking a disciplinary action is that it should be commensurate with the gravity of the misconduct and should be in line with the company’s internal policies.

Terminating an employee for misconduct without conducting a disciplinary inquiry may entail a risk of a wrongful termination claim by the dismissed employee. In the matter of D.K. Yadav v. J.M.A. Industries Ltd, the company terminated the worker’s employment without conducting a disciplinary inquiry on the grounds of absence from duty for more than eight days without prior permission from the management. The Supreme Court held that such termination, carried out under the standing orders and without holding a disciplinary inquiry or providing any opportunity for the worker to defend himself, violated the principles of natural justice.

Loss of Confidence

Loss of confidence refers to a situation where an employer, due to specific circumstances, no longer trusts an employee, making it inappropriate for the employee to remain in their role within the organization. It is crucial to emphasize that this loss of confidence should not arise from mere whim or fancy of the employer, and it should be for bona fide and reasonable grounds. The decision must be supported by tangible evidence, and the employer should exercise this authority objectively and in good faith, demonstrating honesty, due care, and prudence.

While loss of confidence is not explicitly defined under the employment legislations, it is important to note that the Indian courts have, through a plethora of judgments, distinguished between termination on grounds of misconduct and of loss of confidence. They have time and again held that a termination order for loss of confidence is not stigmatic in nature as in the case of misconduct.

In the case of Torrent Power Ltd v. Chelabhai Nathabhai Luhar, a plant technician accepted an illegal bribe from a consumer to install an electricity meter improperly, thereby concealing an overload supply of electricity from the employer. No disciplinary inquiry was conducted by the employer, and the employee was terminated. The court held that if the facts constituting misconduct resulting in loss of confidence form the record of the employee, the employer may invoke the power to discharge simpliciter for loss of confidence while dispensing with disciplinary inquiry into the conduct of the worker.

Similarly, in the case of Air India Corp., Bombay v. V.A. Rebellow, the company terminated the employment of the employee due to loss of confidence without conducting any disciplinary inquiry, as there was grave suspicion regarding the employee’s conduct and behavior with an air steward. The Supreme Court observed that “once bona fide loss of confidence is affirmed the impugned order must be considered to be immune from challenge. The opinion formed by the employer about the suitability of his employee for the job assigned to him even though erroneous, if bona fide, is in our opinion final and not subject to review by the industrial adjudication. Such opinion may legitimately induce the employer to terminate the employee’s services; but such termination can on no rational grounds be considered to be for misconduct and must, therefore be held to be permissible and immune from challenge.”

Termination for loss of confidence may be treated as termination simpliciter and, consequently, the entitlements payable by an employer may be similar to that in case of termination simpliciter. The primary rationale for distinguishing “loss of confidence” from “misconduct” is that misconduct typically involves clear violations of established service rules, including an employee’s delinquency in performance or willful improper, unlawful, or unethical behavior. However, loss of confidence may occur simply because of failure of a worker to carry out duties properly due to incompetence or failure to properly abide by instructions of the employer, resulting in no faith in the employee. 

Tests for Establishing ‘Loss of Confidence’

Prior to terminating an employee for loss of confidence, it is essential that the following test is applied to classify the said termination as loss of confidence. The Supreme Court has listed three conditions, or tests, to be satisfied for concluding that the employer has validly lost confidence in its worker:

• The worker is holding a position of trust and confidence.
• By abusing such position, the employee commits acts which result in forfeiting the same.
• To continue the worker in service would be embarrassing and inconvenient to the employer or would be detrimental to the discipline or security of the establishment.

Loss of confidence cannot be established based on the subjective opinion of the management. Management must be able to demonstrate objective facts that clearly indicate their concerns about the employee’s trustworthiness or reliability. It is important to note that not all instances of loss of confidence involve allegations of misconduct against an employee.

Comparative Analysis

Comprehending the legal frameworks surrounding termination of employment is vital for employers and employees. Termination can be broadly categorized into two main types: stigmatic termination, which involves termination for cause or misconduct, and termination simpliciter, which refers to termination for convenience and may include loss of confidence. Each type has distinct legal implications and requirements that must be adhered to during the termination process.

Stigmatic termination involves a more extensive process for determination. It requires employers to conduct a disciplinary inquiry into the alleged misconduct to establish the employee’s guilt. Judicial precedents emphasize the need to follow the principles of natural justice to ensure a valid disciplinary inquiry.

Key principles that have emerged include conducting a preliminary inquiry, forming an investigation committee, issuing a show-cause notice to the employee that outlines the allegations and any terms of employment that may have been violated, and allowing the employee a reasonable opportunity to be heard and cross-examine witnesses. This process culminates in an investigation report that presents findings on the employee’s guilt and recommendations for disciplinary action that are proportionate to the alleged misconduct.

Further, when an employee is terminated for misconduct, the employer may dispense with providing a notice or payment in lieu of notice as per the provisions of the local shops and establishments act or the company policies. Additionally, retrenchment compensation is typically not payable as per the provisions of the Industrial Disputes Act, 1947.

In cases of specific acts of misconduct, which involve moral turpitude, gratuity in terms of the Payment of Gratuity Act, 1972, may also be forfeited.

In the matter of A. Govindan v. State Bank of Travancore and Ors., the Kerala High Court found that tampering with the bank’s registers and customer’s passbooks constitutes behavior contrary to honesty and good morals, which is unbecoming of a bank employee, particularly one serving as a clerk cum cashier. The court observed that instances of a misconduct amounting to “moral turpitude” may differ from case to case.

“Moral turpitude” is an exception used to describe a context that is inherently vile or depraved or that has any connection showing depravity. The term, by its very nature, is somewhat nebulous, since it involves scrutiny of an action in the light of the prevailing moral norms. The misconduct committed by the employee is one involving moral turpitude, and thus the forfeiture of the gratuity was deemed justified and in line with statutory provisions.

Further, in the case of Management of Tournamulla Estate v. Workmen, a worker from a tea estate was charge-sheeted for riotous and disorderly behavior for assaulting his supervisor inside the factory. Following a valid disciplinary inquiry, the estate authorities dismissed the worker and forfeited his gratuity. The Supreme Court held that if a worker is guilty of serious misconduct—such as acts of violence against the management or other employees, or riotous or disorderly behavior in or near the place of employment, which, although not directly causing damage, is conducive to significant indiscipline—the worker’s gratuity can be forfeited in its entirety.

On the other hand, termination simpliciter typically necessitates that employers provide prior notice as provided in the employment agreement or payment in lieu of notice. In some cases, it may be necessary to notify government authorities, and retrenchment or severance compensation may be payable. Furthermore, employers must ensure that all terminal dues such as salary, leave encashment, retrenchment compensation, gratuity (if they have completed at least five years of continuous service), payment in lieu of the notice period, etc., are paid to the employee upon termination simpliciter.

Conclusion

Categorizing the type of employment termination is essential because the procedure and the entitlements that become applicable during termination differ depending on the kind of exit. Proper documentation recording the termination of the employee is also crucial to safeguard employer’s right to the intellectual property, confidentiality obligations, and protection of company property in the employee’s possession or control.

In cases of termination due to loss of confidence, a decision must be based on objective, tangible facts. Having documentation that justifies the loss of confidence readily available in the employer’s records will aid in defending the termination if a dispute arises in court. This can protect against challenges not only regarding procedural issues but also against claims questioning the existence of the loss of confidence itself.

Similarly, in cases of termination due to misconduct, the process must involve conducting a domestic inquiry. Further, the action proposed must be based on the nature of the offense. To avoid prolonged litigation, it is recommended to ensure appropriate documentation in cases of termination. As a matter of good governance, internal HR policies must be made robust in dealing with termination of employment.

Raveena Anand and Somya Bhargava are attorneys with Clasis Law in New Delhi. © 2024 Clasis Law. All rights reserved. Reposted with permission of Lexology.