Recovery, by employers after 5 years, of payments granted mistakenly to employees of lower rung service, in the absence of fraud or misrepresentation, would be "iniquitous" and "arbitrary" and therefore "impermissible in law", holds the Supreme Court

A Bench of the Apex Court comprising of J.S. Khehar and Arun Mishra, JJ. in State of Punjab   and   others v. Rafiq Masih (White Washer) etc decided on 18.12.2014, has held that recovery of excess amount paid to Class-III and Class-IV employees due to employer's mistake is not permissible in law, saying that such recovery would be iniquitous and arbitrary and therefore would breach the mandate contained in Article 14 of the Constitution and it would also cause extremely harsh consequences to them who are totally dependent on their wages to run their family. 

The Court was considering a batch of cases in all of which, the  private respondents who were employees belonging to Class-III and IV grade, were beneficiaries of a mistake committed by the  employer,  and on account of the said unintentional mistake, employees were in  receipt  of monetary benefits, beyond their due. In all the cases before the Bench, the excess amounts received by the private employees was not on account of any misrepresentation made or any fraud committed by them, but purely on account of the wrongful determination of the emoluments due and released to them by their employer. 

The Bench raised the following question for determination : “Whether all the private respondents, against whom an order of recovery  (of  the  excess amount) has been made, should be exempted in law, from the reimbursement  of the same to the employer?”

Proceeding to lay down  the  parameters  of  fact   situations,   wherein employees, who are beneficiaries of wrongful monetary gains at the hands  of the employer, may not be compelled to refund the same in the light of the peculiar facts of the case, Court  said 

"the instant benefit  cannot extend to an employee merely on account  of the fact, that he was not an accessory  to  the  mistake  committed  by  the employer; or merely because the  employee  did  not  furnish  any  factually incorrect information, on the  basis  whereof  the  employer  committed  the mistake of paying the employee more than what was rightfully due to him;  or for that matter, merely because  the  excessive  payment  was  made  to  the employee, in absence of any fraud or misrepresentation at the behest of  the employee.”

The Apex Court ruled that orders  passed  by  the  employer  seeking  recovery  of monetary benefits wrongly extended to  employees,  can  only  be  interfered with, in cases where such recovery would result in a hardship of  a  nature, which would far outweigh, the equitable balance of the employer's  right  to recover.

"In other words, interference would be called for, only  in  such cases where, it would be iniquitous to recover the payment made”, said the Bench.  

Writing the judgment for the Bench, Justice J.S. Khehar said,  

“The right to recover being pursued by the employer, will have to be  compared,  with  the effect of the recovery on the concerned employee.   If the effect  of  the recovery from the concerned employee would be, more unfair,  more  wrongful, more improper, and more unwarranted, than the  corresponding  right  of  the employer to recover the amount, then it would be iniquitous  and  arbitrary, to effect the recovery.  In such a situation, the  employee's  right  would outbalance, and therefore eclipse, the right of the employer to recover….An  action  of  the  State, ordering a recovery from an employee, would be in order, so long  as  it  is not rendered iniquitous to the extent, that the action of recovery would  be more unfair, more wrongful, more improper, and more  unwarranted,  than  the corresponding right of the employer, to recover the  amount.”

The Court however said that if the mistake of wrongful payment to employee is detected within five years, it would be open to the employer to recover  the  same. 

“It is apparent,  that  a  government  employee  is  primarily dependent on his wages, and if a  deduction  is  to  be  made  from  his/her wages, it should not be a deduction which would make it  difficult  for  the employee to provide for the needs of his  family.   Besides  food,  clothing and shelter, an employee has to cater, not only to the  education  needs  of those dependent upon  him,  but  also  their  medical  requirements,  and  a variety of sundry expenses.  Based on the above  consideration,  we  are  of the view, that if the mistake of  making  a  wrongful  payment  is  detected within five years, it would be open to the employer  to  recover  the  same. However, if the payment is made for a period in excess of five  years,  even though it would be open to the employer to correct the mistake, it would  be extremely iniquitous  and  arbitrary  to  seek  a  refund  of  the  payments mistakenly made to the employee. “

The Apex Court said employees of lower rung service spend their entire earning in the upkeep and welfare of their family, and if such excess payment is allowed to be recovered from them, it would cause them far more hardship, than the reciprocal gains to the employer. 

"We are therefore satisfied in concluding, that such recovery from employees belonging to the lower rungs (i.e., Class-III and Class-IV - sometimes denoted as Group 'C' and Group 'D') of service, should not be subjected to the ordeal of any recovery, even though they were beneficiaries of receiving higher emoluments, than were due to them. Such recovery would be iniquitous and arbitrary and therefore would also breach the mandate contained in Article 14 of the Constitution," Justice Khehar, who wrote the judgment said. 

The Bench passed the judgment on appeals filed by the Punjab government challenging the judgment of the Punjab and Haryana High court order restraining it from recovering the excess amount paid by mistake to numerous employees over the years. 

The Court summarized the following few situations, wherein recoveries by the employers, would be impermissible in law: 

“(i) Recovery from employees belonging to Class-III and Class-IV service (or Group 'C' and Group 'D' service). 

(ii) Recovery from retired employees, or employees who are due to retire within one year, of the order of recovery. 

(iii) Recovery from employees, when the excess payment has been made for a period in excess of five years, before the order of recovery is issued.

(iv) Recovery in cases where an employee has wrongfully been required to discharge duties of a higher post, and has been paid accordingly, even though he should have rightfully been required to work against an inferior post.

(v) In any other case, where the Court arrives at the conclusion, that recovery if made from the employee, would be iniquitous or harsh or arbitrary to such an extent, as would far outweigh the equitable balance of the employer's right to recover.”