Money Misappropriation by Former Employee: Legal Recourse Under BNS, Civil Suit, and Gratuity Forfeiture

Discovering that a former employee misappropriated company funds after they have already left is a situation that tests the limits of an employer’s legal options. The employee is no longer on the rolls, so internal disciplinary action is impossible. The question then becomes: what can the employer do under labour laws and the general legal framework to recover the money and hold the employee accountable?

The answer lies in a combination of criminal, civil, and statutory remedies. While labour laws themselves do not provide a direct mechanism for post-employment recovery, they interact with other legal provisions that offer employers powerful tools. Let me walk you through each of these options.

The Distinction Between Labour Law and Criminal Law in Misappropriation Cases

Money misappropriation by an employee is not primarily a labour law issue. It is a criminal offence under the Bharatiya Nyaya Sanhita 2023 and a civil wrong giving rise to a claim for damages or recovery. Labour laws deal with the employment relationship, termination procedures, and service conditions. Once the employee has left, the labour law framework has limited application.

However, the conduct that constitutes misappropriation may also impact the employee’s statutory entitlements, particularly gratuity. Under Section 53(6)(b)(ii) of the Code on Social Security, 2020 (Section 4(6)(b)(ii) of the Payment of Gratuity Act), an employer can forfeit gratuity if the employee is terminated for misconduct that constitutes an offence involving moral turpitude committed in the course of employment . The Supreme Court in Western Coal Fields Ltd. v. Manohar Govinda Fulzele (2025 INSC 233) has clarified that this forfeiture does not require a criminal conviction. The disciplinary authority only needs to determine whether the misconduct could, in normal circumstances, constitute an offence involving moral turpitude . The Court also specified that principles of natural justice must be followed in any departmental enquiry, including giving the employee adequate notice and an opportunity to represent their case on the nature of the misconduct. This is an important point for employers to remember if they discover misappropriation before processing the final settlement.

For cases where the employee has already left, the focus shifts to criminal and civil remedies.

Criminal Recourse Under the Bharatiya Nyaya Sanhita 2023 (BNS)

Money misappropriation by an employee typically falls under criminal breach of trust, which is defined in Section 316 of the BNS . An employee commits criminal breach of trust when they are entrusted with property or dominion over property and dishonestly misappropriate or convert that property to their own use, or use it in violation of any direction of law or legal contract .

For the offence to be made out, the prosecution must establish two elements. First, the employee was entrusted with the property or had dominion over it. Second, the employee dishonestly misappropriated or converted the property for their own use. Mere failure to return property does not constitute criminal breach of trust. The failure must indicate that the employee has misappropriated it. Courts have distinguished between mere breach of trust, which gives rise to civil liability, and criminal breach of trust, which requires dishonest or malicious intent .

Section 316(2) of the BNS provides that whoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to five years, or with fine, or with both . Section 316(4) specifically deals with criminal breach of trust by a clerk or servant and carries a punishment of imprisonment up to seven years and fine .

Employers should also consider the possibility of filing a complaint under Section 316(5) if the employee was a public servant or acted in the way of business as a banker, merchant, factor, broker, attorney or agent, which carries an even higher punishment of imprisonment for life or up to ten years .

When filing an FIR, the employer must provide sufficient material to establish a prima facie case. The complaint should detail the nature of the property, the manner in which it was entrusted, and the dishonest misappropriation that occurred. A mere civil dispute over money does not automatically become a criminal offence. Courts have observed that the criminal justice system should not be used for recovery of money unless the facts are glaring and make out a prima facie offence under criminal law.

Civil Recourse: Filing a Suit for Recovery

Alongside criminal proceedings, employers can pursue civil remedies to recover the misappropriated funds. A civil suit for recovery of money can be filed in the appropriate civil court. The legal basis can be breach of contract, breach of trust, or unjust enrichment.

The employer must prove the misappropriation on the balance of probabilities, which is a lower standard than proof beyond reasonable doubt required in criminal cases. Courts have emphasized that the burden of proof lies on the plaintiff, and vague allegations without supporting evidence cannot sustain a civil recovery suit.

The civil suit can also seek an interim injunction to prevent the employee from disposing of or transferring assets acquired through the misappropriation. Courts have granted such injunctions where there is evidence of fraud and admission of liability.

Recovery Through Full and Final Settlement

If the misappropriation is discovered before the full and final settlement is processed, the employer can deduct the amount from the employee’s dues. However, this must be done in accordance with the Code on Wages and the contractual terms of employment. Employers cannot arbitrarily deduct amounts from wages. The deduction must be permissible under the law and the employee must be given notice of the deduction.

In cases where the employee has already received the full settlement, the employer must pursue civil or criminal remedies for recovery.

Forfeiture of Gratuity

As mentioned earlier, gratuity can be forfeited if the employee is terminated for misconduct that constitutes an offence involving moral turpitude committed in the course of employment. The Supreme Court has clarified that a criminal conviction is not required for forfeiture. The disciplinary authority only needs to determine whether the misconduct could, in normal circumstances, constitute an offence involving moral turpitude.

In the case of misappropriation of funds, the conduct clearly involves moral turpitude and would justify forfeiture of gratuity, provided the employee was terminated for that misconduct. If the employee resigned or left before the misappropriation was discovered, forfeiture may not be possible as the termination was not for the misconduct.

The Supreme Court has also specified that the principles of natural justice should be followed in any departmental enquiry to assess an employee’s misconduct. An employer must give the employee adequate notice, and the employee must be allowed to represent their case on the nature of the misconduct and whether it constitutes an offence involving moral turpitude.

Practical Challenges and Strategic Considerations [FREE]

Employers should be aware of several practical challenges when pursuing legal action against former employees for misappropriation.

The first challenge is the statute of limitations. Criminal proceedings must be initiated within the prescribed limitation period under the BNS and the Criminal Procedure Code. Civil suits also have limitation periods under the Limitation Act, 1963. Employers should act promptly upon discovering the misappropriation.

The second challenge is the burden of proof. In criminal cases, the prosecution must prove the offence beyond reasonable doubt. In civil cases, the standard is the preponderance of probabilities. Employers should gather and preserve all evidence, including financial records, audit reports, and any admission by the employee.

The third challenge is the cost and time involved. Both criminal and civil proceedings can be lengthy and expensive. Employers must weigh the cost of litigation against the amount to be recovered.

The fourth challenge is that former employees may not be traceable, especially if they have changed addresses or moved to a different jurisdiction. Employers should consider obtaining an asset disclosure order to identify the location of assets and preserve them from dissipation.

The Core Takeaway

Money misappropriation by a former employee is a serious offence that warrants legal action. Employers are not helpless just because the employee has left. The available remedies include filing a criminal complaint for criminal breach of trust under the BNS, filing a civil suit for recovery, and forfeiting gratuity if the employee was terminated for the misconduct.

The key is to act promptly, gather all evidence, and choose the appropriate legal remedy based on the facts of the case. While the labour laws themselves do not provide a post-employment recovery mechanism, the general legal framework offers employers powerful tools to hold former employees accountable and recover misappropriated funds.

Disclaimer: This content is for educational and informational purposes only, based on available Central and State notifications as of August 2026. Labour law is a concurrent subject, and state-specific rules may vary. This does not constitute formal legal counsel. Employers should consult with qualified legal professionals for advice specific to their circumstances and locations.