I am working in a company where there is a rule (they term it as a scheme). As per the rule, the company will deduct 5% of your basic every month and will contribute an equal amount. This amount (both your and company contribution) the company will return after 10 years of service along with simple interest. But if in between you leave the company before completion of 10 years then the amount will be forfeited and you will not get anything. The company gives an idea about this rule at the time of interview and if agreed makes you sign on stamp paper wherein all this is mentioned. After completion of 10 years immediately again new stamp paper is signed for next 10 years.
My question is - is it legally correct to do so? Can it be challenged in Industrial court or Court of Law?
My question is - is it legally correct to do so? Can it be challenged in Industrial court or Court of Law?
Dear member,
If your company is clarifying the terms and conditions of employment right at the stage of the recruitment and if the recruitment has been taking place with complete acceptance then where is the problem?
An appointment letter is a contract between an employer and employee under the provisions of the Indian Contract Act, 1872. But while executing this scheme, your company is not just relying on the appointment letter but going beyond and signing a legal agreement. Therefore, in the eyes of the law, there is no flaw as such.
Hopefully, the company is executing the scheme for everybody and the deductions are shown in the salary slip. In that case, there is nothing wrong per se.
As far as labour laws are concerned, the legal requirement is to pay the minimum wages. The labour laws do not look into the wages paid on and above the minimum wages. Nevertheless, experts in labour law are better persons to comments on this scheme.
From the Finance Point of View: - For the sake of convenience, suppose your company deducts Rs 1,000/- per month for 120 months (10 years). So on completion of the scheme, the company is liable to pay Rs 1,20,00 + Rs 1,20,000 = Rs 2,40,000/- For this amount, the simple interest is 10% and the compound interest is 7.17%
Your company could continue with this scheme because it had two advantages. The first one was the higher bank interests. After deducting the amount, if the company had opened a Recurring Deposit (RD) account, they would have got the interest from the bank more than 7.17% So anyway the company was not into the loss. The second benefit was from the employees who were not completing a tenure of 10 years. They were ready to forego the deducted amount. This also helped the company to continue with the scheme.
Nevertheless, bank interests have come down drastically. 7% interest is a distant dream. Therefore, in future, economically it may not be viable to continue with the scheme.
Thanks,
Dinesh Divekar
From India, Bangalore
7884If your company is clarifying the terms and conditions of employment right at the stage of the recruitment and if the recruitment has been taking place with complete acceptance then where is the problem?
An appointment letter is a contract between an employer and employee under the provisions of the Indian Contract Act, 1872. But while executing this scheme, your company is not just relying on the appointment letter but going beyond and signing a legal agreement. Therefore, in the eyes of the law, there is no flaw as such.
Hopefully, the company is executing the scheme for everybody and the deductions are shown in the salary slip. In that case, there is nothing wrong per se.
As far as labour laws are concerned, the legal requirement is to pay the minimum wages. The labour laws do not look into the wages paid on and above the minimum wages. Nevertheless, experts in labour law are better persons to comments on this scheme.
From the Finance Point of View: - For the sake of convenience, suppose your company deducts Rs 1,000/- per month for 120 months (10 years). So on completion of the scheme, the company is liable to pay Rs 1,20,00 + Rs 1,20,000 = Rs 2,40,000/- For this amount, the simple interest is 10% and the compound interest is 7.17%
Your company could continue with this scheme because it had two advantages. The first one was the higher bank interests. After deducting the amount, if the company had opened a Recurring Deposit (RD) account, they would have got the interest from the bank more than 7.17% So anyway the company was not into the loss. The second benefit was from the employees who were not completing a tenure of 10 years. They were ready to forego the deducted amount. This also helped the company to continue with the scheme.
Nevertheless, bank interests have come down drastically. 7% interest is a distant dream. Therefore, in future, economically it may not be viable to continue with the scheme.
Thanks,
Dinesh Divekar
From India, Bangalore
This practice is absolutely illegal and, if you are in the "workman" category and are covered under the Payment of Wages Acts, 1936, then it could be challenged as unauthorized deduction from wages, before the Prescribed Authority under the Payment of Wages Act 1936. Otherwise also, it can be claimed under the Industrial Disputes Act before Labour Court.
- S. K. Mittal
9319956443
From India, Faridabad
- S. K. Mittal
9319956443
From India, Faridabad
Dear Mr SK Mittalji,
Would you mind explaining specifically which clause of the Payment of Wages Acts, 1936 or Industrial Dispute Act, 1947 prohibits the said scheme? Please note that the query is for learning purposes and not to challenge you as such.
Regards,
Dinesh Divekar
From India, Bangalore
Would you mind explaining specifically which clause of the Payment of Wages Acts, 1936 or Industrial Dispute Act, 1947 prohibits the said scheme? Please note that the query is for learning purposes and not to challenge you as such.
Regards,
Dinesh Divekar
From India, Bangalore
The deduction is illegal because it is not allowed deduction under Sec 6 and 7 of the Payment of Wages Act (similar provision is in the new Code on Wages)
If they were giving him lower gross wages and offering the total amount as a bonus for working for 10 years, it would be different. This deduction which may not come to him if he leaves for any reason, is definitely illegal.
Interesting thing is that it also has serious tax implications and also a dangerous GST Implication for the employer
From India, Mumbai
If they were giving him lower gross wages and offering the total amount as a bonus for working for 10 years, it would be different. This deduction which may not come to him if he leaves for any reason, is definitely illegal.
Interesting thing is that it also has serious tax implications and also a dangerous GST Implication for the employer
From India, Mumbai
Payment of Wages Act, 1936
7. Deductions which may be made from wages
(1) Notwithstanding the provisions of sub-section (2) of section 47 of the Indian Railways Act 1890 (9 of 1890) the wages of an employed person shall be paid to him without deductions of any kind except those authorised by or under this Act.
Explanation I: Every payment made by the employed person to the employer or his agent shall for the purposes of this Act be deemed to be a deduction from wages.
Explanation II: Any loss of wages resulting from the imposition, for good and sufficient cause upon a person employed of any of the following penalties namely:-
(i ) the withholding of increment or promotion (including the stoppage of increment at an efficiency bar);
(ii) the reduction to a lower post or time scale or to a lower stage in a time scale; or
(iii) suspension;
shall not be deemed to be a deduction from wages in any case where the rules framed by the employer for the imposition of any such penalty are in conformity with the requirements if any which may be specified in this behalf by the State Government by notification in the Official Gazette.
(2) Deductions from the wages of an employed person shall be made only in accordance with the provisions of this Act and may be of the following kinds only namely:
(a) fines;
(b) deductions for absence from duty;
(c) deductions for damage to or loss of goods expressly entrusted to the employed person for custody or for loss of money for which he is required to account where such damage or loss is directly attributable to his neglect or default;
(d) deductions for house-accommodation supplied by the employer or by government or any housing board set up under any law for the time being in force (whether the government or the board is the employer or not) or any other authority engaged in the business of subsidising house-accommodation which may be specified in this behalf by the State Government by notification in the Official Gazette;
(e) deductions for such amenities services supplied by the employer as the State Government or any officer specified by it in this behalf may by general or special order authorise.
Explanation: The word "services" in this clause does not include the supply of tools and raw materials required for the purposes of employment;
(f) deductions for recovery of advances of whatever nature (including advances for travelling allowance or conveyance allowance) and the interest due in respect thereof or for adjustment of over-payments of wages;
(ff) deductions for recovery of loans made from any fund constituted for the welfare of labour in accordance with the rules approved by the State Government and the interest due in respect thereof;
( fff ) deductions for recovery of loans granted for house-building or other purposes approved by the State Government and the interest due in respect thereof;
(g) deductions of income-tax payable by the employed person;
(h) deductions required to be made by order of a court or other authority competent to make such order;
( i ) deductions for subscriptions to and for repayment of advances from any provident fund to which the Provident Funds Act 1952 (19 of 1952) applies or any recognised provident funds as defined in section 58A of the Indian Income Tax Act 1922 (11 of 1922) or any provident fund approved in this behalf by the State Government during the continuance of such approval;
(j) deductions for payments to co-operative societies approved by the State Government or any officer specified by it in this behalf or to a scheme of insurance maintained by the Indian Post Office and
(k) deductions made with the written authorisation of the person employed for payment of any premium on his life insurance policy to the Life Insurance Corporation Act of India established under the Life Insurance Corporation 1956 (31 of 1956) or for the purchase of securities of the Government of India or of any State Government or for being deposited in any Post Office Saving Bank in furtherance of any savings scheme of any such government.
( kk ) deductions made with the written authorisation of the employed person for the payment of his contribution to any fund constituted by the employer or a trade union registered under the Trade Union act 1926 (16 of 1926) for the welfare of the employed persons or the members of their families or both and approved by the State Government or any officer specified by it in this behalf during the continuance of such approval;
( kkk ) deductions made with the written authorisation of the employed person for payment of the fees payable by him for the membership of any trade union registered under the Trade Union Act 1926 (16 of 1926);
(l) deductions for payment of insurance premia on Fidelity Guarantee Bonds;
(m) deductions for recovery of losses sustained by a railway administration on account of acceptance by the employed person of counterfeit or base coins or mutilated or forged currency notes;
(n) deductions for recovery of losses sustained by a railway administration on account of the failure of the employed person to invoice to bill to collect or to account for the appropriate charges due to that administration whether in respect of fares freight demurrage wharfage and carnage or in respect of sale of food in catering establishments or in respect of sale of commodities in grain shops or otherwise;
(o) deductions for recovery of losses sustained by a railway administration on account of any rebates or refunds incorrectly granted by the employed person where such loss is directly attributable to his neglect or default;
(p) deductions made with the written authorisation of the employed person for contribution to the Prime Minister's National Relief Fund or to such other Fund as the Central Government may by notification in the Official Gazette specify;
(q) deductions for contributions to any insurance scheme framed by the Central Government for the benefit of its employees.
(3) Notwithstanding anything contained in this Act the total amount of deductions which may be made under sub-section (2) in any wage-period from the wages of any employed person shall not exceed -
( i ) in cases where such deductions are wholly or partly made for payments to co-operative societies under clause (j) of sub-section (2) seventy-five per cent of such wages and
(ii) in any other case fifty per cent of such wages:
Provided that where the total deductions authorised under sub-section (2) exceed seventy five per cent or as the case may be, fifty per cent of the wages the excess may be recovered in such manner as may be prescribed.
(4) Nothing contained in this section shall be construed as precluding the employer from recovering from the wages of the employed person or otherwise any amount payable by such person under any law for the time being in force other than the Indian Railways Act 1890 (9 of 1890).
Comment: The list given in this section is exhaustive and no other deduction from the wages is permissible. AIR 1956 Madras 79
5% deduction is not in order and is indirectly keeping employee bonded for 10 years by not refunding his 5% deduction.
Has many aspects and company should avoid adopting such schemes to retain employees.
From India, Pune
7. Deductions which may be made from wages
(1) Notwithstanding the provisions of sub-section (2) of section 47 of the Indian Railways Act 1890 (9 of 1890) the wages of an employed person shall be paid to him without deductions of any kind except those authorised by or under this Act.
Explanation I: Every payment made by the employed person to the employer or his agent shall for the purposes of this Act be deemed to be a deduction from wages.
Explanation II: Any loss of wages resulting from the imposition, for good and sufficient cause upon a person employed of any of the following penalties namely:-
(i ) the withholding of increment or promotion (including the stoppage of increment at an efficiency bar);
(ii) the reduction to a lower post or time scale or to a lower stage in a time scale; or
(iii) suspension;
shall not be deemed to be a deduction from wages in any case where the rules framed by the employer for the imposition of any such penalty are in conformity with the requirements if any which may be specified in this behalf by the State Government by notification in the Official Gazette.
(2) Deductions from the wages of an employed person shall be made only in accordance with the provisions of this Act and may be of the following kinds only namely:
(a) fines;
(b) deductions for absence from duty;
(c) deductions for damage to or loss of goods expressly entrusted to the employed person for custody or for loss of money for which he is required to account where such damage or loss is directly attributable to his neglect or default;
(d) deductions for house-accommodation supplied by the employer or by government or any housing board set up under any law for the time being in force (whether the government or the board is the employer or not) or any other authority engaged in the business of subsidising house-accommodation which may be specified in this behalf by the State Government by notification in the Official Gazette;
(e) deductions for such amenities services supplied by the employer as the State Government or any officer specified by it in this behalf may by general or special order authorise.
Explanation: The word "services" in this clause does not include the supply of tools and raw materials required for the purposes of employment;
(f) deductions for recovery of advances of whatever nature (including advances for travelling allowance or conveyance allowance) and the interest due in respect thereof or for adjustment of over-payments of wages;
(ff) deductions for recovery of loans made from any fund constituted for the welfare of labour in accordance with the rules approved by the State Government and the interest due in respect thereof;
( fff ) deductions for recovery of loans granted for house-building or other purposes approved by the State Government and the interest due in respect thereof;
(g) deductions of income-tax payable by the employed person;
(h) deductions required to be made by order of a court or other authority competent to make such order;
( i ) deductions for subscriptions to and for repayment of advances from any provident fund to which the Provident Funds Act 1952 (19 of 1952) applies or any recognised provident funds as defined in section 58A of the Indian Income Tax Act 1922 (11 of 1922) or any provident fund approved in this behalf by the State Government during the continuance of such approval;
(j) deductions for payments to co-operative societies approved by the State Government or any officer specified by it in this behalf or to a scheme of insurance maintained by the Indian Post Office and
(k) deductions made with the written authorisation of the person employed for payment of any premium on his life insurance policy to the Life Insurance Corporation Act of India established under the Life Insurance Corporation 1956 (31 of 1956) or for the purchase of securities of the Government of India or of any State Government or for being deposited in any Post Office Saving Bank in furtherance of any savings scheme of any such government.
( kk ) deductions made with the written authorisation of the employed person for the payment of his contribution to any fund constituted by the employer or a trade union registered under the Trade Union act 1926 (16 of 1926) for the welfare of the employed persons or the members of their families or both and approved by the State Government or any officer specified by it in this behalf during the continuance of such approval;
( kkk ) deductions made with the written authorisation of the employed person for payment of the fees payable by him for the membership of any trade union registered under the Trade Union Act 1926 (16 of 1926);
(l) deductions for payment of insurance premia on Fidelity Guarantee Bonds;
(m) deductions for recovery of losses sustained by a railway administration on account of acceptance by the employed person of counterfeit or base coins or mutilated or forged currency notes;
(n) deductions for recovery of losses sustained by a railway administration on account of the failure of the employed person to invoice to bill to collect or to account for the appropriate charges due to that administration whether in respect of fares freight demurrage wharfage and carnage or in respect of sale of food in catering establishments or in respect of sale of commodities in grain shops or otherwise;
(o) deductions for recovery of losses sustained by a railway administration on account of any rebates or refunds incorrectly granted by the employed person where such loss is directly attributable to his neglect or default;
(p) deductions made with the written authorisation of the employed person for contribution to the Prime Minister's National Relief Fund or to such other Fund as the Central Government may by notification in the Official Gazette specify;
(q) deductions for contributions to any insurance scheme framed by the Central Government for the benefit of its employees.
(3) Notwithstanding anything contained in this Act the total amount of deductions which may be made under sub-section (2) in any wage-period from the wages of any employed person shall not exceed -
( i ) in cases where such deductions are wholly or partly made for payments to co-operative societies under clause (j) of sub-section (2) seventy-five per cent of such wages and
(ii) in any other case fifty per cent of such wages:
Provided that where the total deductions authorised under sub-section (2) exceed seventy five per cent or as the case may be, fifty per cent of the wages the excess may be recovered in such manner as may be prescribed.
(4) Nothing contained in this section shall be construed as precluding the employer from recovering from the wages of the employed person or otherwise any amount payable by such person under any law for the time being in force other than the Indian Railways Act 1890 (9 of 1890).
Comment: The list given in this section is exhaustive and no other deduction from the wages is permissible. AIR 1956 Madras 79
5% deduction is not in order and is indirectly keeping employee bonded for 10 years by not refunding his 5% deduction.
Has many aspects and company should avoid adopting such schemes to retain employees.
From India, Pune
Though correct as per Contract Act,this deduction is unauthorised under POW Act 1936 for wages upto Rs 24000/- pm and under the Code of Wages without wage limit. Varghese Mathew
From India, Thiruvananthapuram
From India, Thiruvananthapuram
The scheme to deduct 5% of the basic per month and equal amount contribution by employer is right at its place. The return of contributed & deducted amount with simple interest after 10 years is also right at its place. The forfeiture of deducted/contributed amount if one leaves the job before completion of 10 years is bad and illegal.
It is legal and correct till to the contribution part but forfeiture of entire amount is illegal and bad. This can be challenged in court of law for legitimate ground, the service can be ended due to death or termination by the management or due to permanent disablement of employee( something that is one's legal right on ground of consent but is an unreasonable demand to forfeit the hard earned living substance to be treated as per to have one's pound of flesh). Therefore, it can not be called a scheme of labour welfare nature.
From India, Mumbai
It is legal and correct till to the contribution part but forfeiture of entire amount is illegal and bad. This can be challenged in court of law for legitimate ground, the service can be ended due to death or termination by the management or due to permanent disablement of employee( something that is one's legal right on ground of consent but is an unreasonable demand to forfeit the hard earned living substance to be treated as per to have one's pound of flesh). Therefore, it can not be called a scheme of labour welfare nature.
From India, Mumbai
This is not an authorised deduction once the Code of Wages is enforced.
From India, Thiruvananthapuram
From India, Thiruvananthapuram
Thank you all for your helpful insights & contributions. I would like to add and clarify -
1. The scheme is only for Staff category and workers are excluded.
2. The deduction is shown in salary slip under - Other deduction
3. The deducted amount is not deposited in any fund.
4. The 5% deduction is only for retaining the employee and deter him from leaving and is renewed even after completion of 10 years i.e. as long as he is working for the company this deduction will continue. Which I think is nothing but a scheme of company to earn easy money.
5. In between even if the company management asks the employee to leave for some reason or other, the amount is not refunded.
1. The scheme is only for Staff category and workers are excluded.
2. The deduction is shown in salary slip under - Other deduction
3. The deducted amount is not deposited in any fund.
4. The 5% deduction is only for retaining the employee and deter him from leaving and is renewed even after completion of 10 years i.e. as long as he is working for the company this deduction will continue. Which I think is nothing but a scheme of company to earn easy money.
5. In between even if the company management asks the employee to leave for some reason or other, the amount is not refunded.
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