India: Legality Of Deduction Of Wages Upon Failure To Serve Notice Period By Employees

Last Updated: 12 September 2017
Article by Seema Jhingan, Neha Yadav and Monica Benjamin

A. Introduction.

A common and regular concern faced by employers is the practice of resignation without notice by their employees and consequent disassociation without providing adequate time for due and proper handover. The question which the employers then face is, do we have the right to deduct amounts as payment in lieu of the unserved notice period from the outstanding wages of such employees?

An assessment as to the ability of an employer to deduct outstanding salary in lieu of unserved notice period is a mixed question of fact and law. First of all, it requires an assessment of whether the employee is employed in a corporate office or in a factory or in any other industrial establishment, as that determines the applicability of the relevant legislations. This assessment is also based on determination of the role and responsibility of the concerned employee, his/her salary, place of employment and several other related factors.

For the purpose of this article, we have limited our assessment to an employee who is engaged at a corporate office (say in Delhi) and is therefore covered under the provisions of the Delhi Shops & Establishment Act, 1954 ("Delhi S&E Act"), and evaluated the applicable laws with respect to deduction of salary as discussed. However, while this article does provide an overall view of the applicable law, it is advisable to assess each individual case on a case to case basis based on its particular facts and circumstances.

B. Notice Period Requirement under Delhi Shops and Establishment Act.

The Delhi S&E Act covers and applies to all 'establishments' situated in Delhi, irrespective of the size, turnover and persons employed.1 It applies to all employees of such establishment, whether employed directly or through an agency or contractor, and whether for wages or not, in or about the business of an establishment, including apprentices and any person employed in a factory but not governed by the Factories Act, 1948, and for the purpose of any matter regulated by the Delhi S&E Act, also includes a person discharged or dismissed whose claims have not been settled in accordance with this act.

We may also add that the Government has exempted certain types of establishments and employees from the applicability of the entire Delhi S&E Act or certain of its provisions2, however, for the sake of brevity, we have not dealt with the said exemption in detail.

Under Section 30(2) of the Delhi S&E Act, no employee who has put in 3 (three) months' of continuous service can terminate his employment unless he has given to his employer a written notice of at least 1 (one) month. In case he fails to give such 1 (one) month's notice, he will be released from his employment on payment of an amount equal to 1 (one) month's pay.

Further, Section 20 of the Delhi S&E Act specifies that the wages of an employed person are to be paid to him without deduction of any kind except such deductions as specified thereunder. One such permitted deduction is "deductions for absence from duty".

Therefore, it can be argued, that upon failure of an employee to give written notice of 1 (one) month or payment in lieu thereof, provided such employee is not released from his employment due to lack of due notice and his consequent absence from duty, can be relied upon by the employer to justify deductions of an amount equivalent to 1 (one) month's pay from his wages.

We may refer to the case of Hegde M.G. v. Wireless Manufacturers, Bombay & Anr.3, ("Hegde Case"), wherein the Bombay High Court, in case of an employee (covered under the Payment of Wages Act, 1936 ("Wages Act")) who had not served the notice period required under his employment contract, had held that no deductions from his wages could be made for reason of non-serving of notice as that was not provided in the list of permissible deductions under Section 7 of the Wages Act. Section 7 of the Wages Act lays down that the wages of an employed person shall be paid to him without deductions of any kind except those authorized by or under the act. Section 7(2) of the Wages Act then proceeds to specify the heads under which deductions from wages may be made, namely, fines, deductions for absence from duty, adjustment for overpayment and advances and provident fund, income tax, etc. The Court had observed that as the employee had resigned and ceased to be in the employment of the employer, there was no question of deduction by way of adjustment from the wages which the applicant has earned before he ceased to be an employee.

On the other hand, the Madras High Court in the case of M.R. Appadurai v. Additional Commissioner for Workman's Compensation & Anr.4, upheld deduction of wages where a worker had failed to serve the notice period, as required under the standing orders governing his contract of service, before terminating his employment. The High Court had held that it would be meaningless to insist upon the requirement of this notice unless there was a corresponding liability on the employee to forego the wages for the period of the notice not given. Therefore, even though the standing order had not contained an express provision on withholding of the salary for the notice period, the Court had upheld deduction of such salary for failure to serve notice period.

In a similar vein, the Delhi High Court in the case of Amit Kumar Gupta v. Indian Oil Corporation Ltd. & Ors.5, had upheld deduction of wages for non-serving of notice period where the employee had not given a notice of 1 (one) month as required under his contract of employment.

Therefore, a strong argument can be advanced for deduction of wages for those employees who are employed at a corporate office in Delhi, if they fail to serve the notice period of 1 (one) month which has been specifically mandated under the Delhi S&E Act. Such a case can also be distinguished from the Hegde Case as the requirement of notice is mandated under another legislation i.e., Delhi S&E Act (and not just under a contract of employment as was the case in the Hegde Case).

In case the employment contract of the employee contains a requirement of a notice period which is longer that the 1 month prescribed under the Delhi S&E Act, then it is advisable to limit the deduction of wages for a period of 1 month only as is mandated by the provisions of Delhi S&E Act.

C. Limit on Deductions if Payment of Wages Act applies.

We may however add that justification of deduction of wages of an employee may be more difficult in case the employee is covered under the Wages Act, which applies to employees whose wages do not exceed Rs. 24,000/- per month6 and who are employed in any factory, or in an industrial or other establishment as defined under the Wages Act (which includes any workshop or other establishment in which articles are produced, adapted or manufactured, with a view to their use, transport or sale). In such case, deduction of wages may be limited to the limit of total deductions specified under the Wages Act (for instance the total amount of permissible deductions for fines, absence of duty, income tax, provident fund etc. cannot exceed 50% of the wages for the wage period).

D. Concluding Remarks.

As the Delhi S&E Act clearly contemplates payment of 1 (one) month's salary in lieu of notice period and the courts have also upheld the validity of deductions by employers of the same where their employment contracts have so provided, employers can reasonably justify deductions from the wages of their employees engaged in a corporate office in Delhi, up to a period of 1 (one) month (subject to assessment of applicability of the Wages Act).

It is also suggested that employers enter into employment contracts or issue appointment letters to each of its employees expressly providing for a right to deduct 1 (one) month's wages in case of failure by the employee to serve its notice period, which would not only strengthen their position in case of any dispute over deductions but also make employees aware of the rights of the employers in the event of sudden resignations.


1 Section 2(9) of the Delhi S&E Act, defines the term "establishment" as "...a shop, a commercial establishment; residential hotel, restaurant, eating house, theatre or other places of public amusement or entertainment to which this Act applies and includes such other establishment as Government may by notification in the Official Gazette, declare to be an establishment for the purpose of this Act;". Further, the term "commercial establishment" has been defined under Section 2(5) of the Delhi S&E Act to mean "any premises wherein any trade, business or profession or any work in connection with, or incidental or ancillary thereto is carried on...."

2 For instance, exemption from certain provisions of the Delhi S&E Act has been provided to persons "occupying position of management or an employee engaged in a confidential capacity". However, applicability of the relevant section being discussed above (i.e. Sections 20 and 30 of the Delhi S&E Act) has not being exempted and these provisions continue to be applicable to such persons.

3 (1967) IILLJ 460 Bom.

4 AIR 1964 Mad 265.

5 W.P. (C) No. 4233/2000, decided on 30.11.2016.

6 The Central Government has recently increased the wages threshold for applicability of Wages Act, to Rs. 24,000/- per month, vide its notification (S.O. 2806(E)) dated August 29, 2017. Earlier, the wages were specified as Rs. 18,000/- which was in effect from September 20, 2012 and therefore going forward a wider ambit of employees would be covered by the Wages Act.

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Seema Jhingan
Neha Yadav
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