Employer’s loss of confidence in employee: the confusing legal evolution, a cautious route to tread

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Anshul Prakash
Khaitan & Co, Mumbai

Abhisek Choudhury
Khaitan & Co, Mumbai

Deeksha Malik
Khaitan & Co, Mumbai



India’s employment laws adopt beneficial legislation intended to protect the interests of the workforce. The underlying concept to such laws is that employers and employees do not have an equal bargaining power and, therefore, the need to step in to protect the latter. When it comes to the cessation of employment, the laws provide a safeguard in the sense that an employer must, in cases of misconduct, carry out an internal inquiry into the employee’s misdemeanour in accordance with principles of natural justice and, in cases of simple dismissal, have a reasonable cause to terminate the services.

Loss of confidence in the employee presents a curious case. For years, courts have been rendering judgments which have led to uncertainty as to whether loss of confidence should be regarded as misconduct or a reasonable cause for dismissal.

This article examines the jurisprudence evolved around the concept, its application to employees in managerial and non-managerial groups, and the factors an employer should take into account before considering the same as a ground for terminating an employee’s services.

Understanding the evolving jurisprudence

Loss of confidence envisages a situation where, due to certain circumstances, an employer loses confidence in an employee in such a way that the employer no longer considers it appropriate for the employee to render their services in the relevant capacity within the organisation.

Loss of confidence as a case warranting disciplinary inquiry

In certain cases, courts have held termination on the ground of loss of confidence as dismissal of an employee that would necessarily be preceded by a disciplinary inquiry. The stance of the courts in such cases is that dismissal on this basis would create a stigma. The employee must therefore have an opportunity to put forward their defence in an inquiry before termination can be put into operation. In Amarjit Singh v Punjab National Bank and Others [(1986) 2 LLJ 354], the Delhi High Court observed that if the order of termination demonstrates loss of confidence, it has a stigmatic character as it implies that the relevant employee is ‘not worthy of credit, confidence or trust’. Accordingly, the employer must conduct an inquiry into the allegations against the employee concerned, which should establish their guilt.

While courts have taken the above stance in some cases, what appears to be clear is that even where a dismissal on the basis of loss of confidence was declared invalid on the ground that no inquiry took place, the employee concerned will not be entitled to reinstatement. The Supreme Court of India, in Anil Kumar Chakraborty v Saraswatipur Tea Company Ltd [AIR 1982 SC 1062], noted that while the usual relief in cases of wrongful employment dismissal would be reinstatement, a case of loss of confidence is an exception to the rule wherein reasonable compensation would be the appropriate relief. This is understandably so because the relationship between the employer and the dismissed employee has already been strained due to lack of trust.

Loss of confidence as resulting in termination unconditionally (or ‘termination simpliciter’)

In several cases, however, courts have taken a more pro-employer approach where they have recognised that the concept of loss of confidence entails a situation in which the suspicion of the employer is well-founded notwithstanding absence of a disciplinary inquiry, and the employer may, therefore, not like to take the risk of continuing to employ a dubious employee.

In Torrent Power Ltd v Chelabhai Nathabhai Luhar [(2018) 1 GLR 392] (Luhar), the concerned employee was holding the position of plant technician and, as such, visited the premises of one of the employer’s customers for meter installation. Soon after, the customer complained of an incorrect installation. The employer sent a few of its officers to the customer’s office to investigate the matter, and it was informed by the customer that the plant technician had accepted an illegal bribe from someone to conceal the overload in electricity supply. The customer eventually filed a written complaint with the employer. On receipt of the complaint, the employer dismissed the services of the plant technician without holding an inquiry and paid all dues that would be paid to any employee in case of an unconditional discharge. The Gujarat High Court upheld the termination, observing that the customer’s complaint containing serious allegations is enough to create reasonable suspicion about the credibility of the plant technician who had been given a position of responsibility. More recent cases have supported the court’s stance in Luhar.

It is not that India’s highest court in has not resorted to this approach. In Sudhir Vishnu Panwalkar v Bank of India [(1997) 6 SCC 271] (Vishnu Panwalkar), the employer adopted the unconditional termination route to remove an employee on the basis that it had lost confidence in the employee after he was involved in misappropriation of funds which was confirmed by the Maharashtra Co-operative Tribunal. The Supreme Court of India upheld the dismissal. However, several High Courts did not allow the employer appearing before them to take the defence of Vishnu Panwalkar on the basis that the employer could not meet the high threshold set by the apex court in the said ruling. Note that the employer’s decision of termination in Vishnu Panwalkar was backed by a tribunal ruling in favour of misappropriation. However, it appears that the recent cases including Luhar have raised the threshold to an extent and are leaning towards the objectivity of the employer’s decision.

Applying ‘loss of confidence’ to managerial and non-managerial employees

In Luhar, the court placed an emphasis on a three-pronged test to determine loss of confidence:

  • the employee is holding the position of trust and confidence;
  • by abusing the position, they are committing an act which results in forfeiting the same; and
  • continuing to employ them in the establishment would be embarrassing and inconvenient for the employer or would be detrimental to the discipline or security of the establishment.

Courts have indeed observed that unless there is a position of confidence held by the employee, there cannot be a loss of confidence.

However, a deviation from this approach has also been observed, in the sense that few courts have held that the position occupied by an employee should not be overemphasised. In Maruti Suzuki Ltd v Presiding Officer [2010 (4) SLR 455], the Punjab and Haryana High Court observed as follows:

‘A workman fulfils the need of the management by his ability to produce, the same way as the management evokes the confidence in the workman by fulfilling the commitment to remunerate him for the services. It is in some sense mutual and shared trust […] a workman could breach the trust vis-à-vis his employment. It will be meaningless to urge that confidence can be lost only on a particular aspect or if particular items which were entrusted to him were misused or stolen.’

In the above case, it appears that the court was leaning towards the principle that every employment relationship has an underlying obligation of trust irrespective of the employee’s position. Similarly, in Seeralan v Facit Asia Ltd [Writ Petition Number 3513 of 1979 (Madras High Court)], the Madras High Court dealt with a situation where a non-managerial employee was allegedly involved in certain unscrupulous activities which were reported to the management by several people. Without initiating an inquiry into the employee’s conduct, the employer terminated his services. The court upheld the dismissal, treating loss of confidence as a reasonable cause in a termination simpliciter scenario.

Considerations for the management

The above discussion indicates that loss of confidence is a cautious path for management to tread. It is understandable that an employer in certain situations (especially those concerning top executives) would not like to pursue a problematic case in the form of a domestic inquiry despite the presence of a well-founded suspicion. The immediate priority of the management could be to protect its interests and reputation.

While management may, in such cases, resort to termination simpliciter, it should ensure that any communication made to the employee culminating in cessation of employment does not make reference to a misconduct on the part of the employee or any investigation conducted by the employer in this regard. The termination documentation should be carefully drafted to prevent unwarranted adverse reaction. At the same time, there should be a well-documented paper trail to demonstrate that the ultimate decision made by the employer is indeed founded on a reasonable suspicion.