The gratuity money of an employee can be withheld and forfeited for recovery of dues such as overstaying in official accommodation, the Supreme Court has ruled.

A bench headed by justice Sanjay K Kaul held that there is no prohibition against recovering dues including penal rent — the rent with penalty for overstaying in official accommodation — from an employee’s gratuity.

“If an employee occupies a quarter beyond the specified period, the penal rent would be the natural consequence and such penal rent can be adjusted against the dues payable, including gratuity,” said the bench, which also included justices Dinesh Maheshwari and Hrishikesh Roy.

The order, issued last week, settles a disputed point of law since a two-judge bench of the Supreme Court had previously taken a view to the contrary. A division bench in 2017 ruled unfavourably against confiscating the gratuity of an employee on account of overstaying in official quarters after his retirement. It had ordered the immediate release of his gratuity and held only normal rent, not the penal rent, should be charged for the period he overstayed.

However, the three-judge bench, led by justice Kaul, has now held that any reliance on the 2017 order is “misplaced” since it is not even a judgment but just an order on the given facts of that case. It clarified that the 2017 order cannot be treated as a precedent.

In doing so, the larger bench also cited a 2005 judgment of the top court when it upheld recovery of the penal rent from an employee for unauthorised occupation of the accommodation provided to him by the employer. In this judgment, although the court acknowledged that pensionary benefit such as gratuity is not a “bounty”, it had held that recoveries of dues can be made from gratuity without the consent of the employee concerned.

The latest case had arisen out of an order by the Jharkhand high court, which snubbed an attempt by the Steel Authority of India Ltd (SAIL) to recover penal rent amounting to Rs 1.95 lakh from an employee, who did not clear his dues and overstayed in the official accommodation in Bokaro after his retirement in 2016.

The high court relied upon the 2017 order of the top court, and said that the SAIL must release the employee’s gratuity immediately. However, it allowed the SAIL to raise a demand for normal rent.

The Supreme Court has now set aside the part of the high court order that held that the SAIL could not recover the dues from the gratuity amount. However, it did not interfere with the monetary aspect of the order, noting that a small amount is involved and that the SAIL’s residential scheme has also undergone change in recent years.