India: Legality Of Deduction Of Wages Of Factory Workers' For Failure To Serve Notice Period

Last Updated: 22 September 2017
Article by Seema Jhingan, Neha Yadav and Monica Benjamin

Employees resigning and ceasing to report to work without due notice and employers facing issues due to lack of proper handover and replacements is a common concern of employer companies. In an earlier article1, we had assessed the issue of deduction of wages of employees of a corporate office in Delhi, upon their failure to serve the required notice period. As a follow up, this article seeks to examine the legality of deduction of wages by employers due to lack of notice by a resigning employee, employed in a factory.

The 'workers' employed in a factory in Delhi are governed under the provisions of the Factories Act, 1948 ("Factories Act"). The term "workers" under the Factories Act, has been defined in a wide manner to mean any "person employed, directly or by or through any agency (including a contractor) with or without the knowledge of the principal employer, whether for remuneration or not, in any manufacturing process, or in cleaning any part of the machinery or premises used for a manufacturing process, or in any other kind of work incidental to, or connected with, the manufacturing process, or the subject of the manufacturing process but does not include any member of the armed forces of the Union".

Incidentally, the Delhi Shops & Establishment Act, 1954 ("Delhi S&E Act"), which applies to all establishments situated in Delhi, does not apply to employees who are covered under the Factories Act. However, in case of employees engaged at a factory who are not covered under the Factories Act, the Delhi S&E Act, and the termination and notice period related provisions contained therein (as discussed in our earlier article), would continue to be applicable to such employees.

Unlike the Delhi S&E Act, however, the Factories Act does not contain any provisions governing termination of employment by workers or provision of prior notice or payment in lieu thereof. Relevant then are the provisions of the Industrial Employment (Standing Orders) Act, 1946 ("Standing Orders Act"), in terms of which, if a factory employs 100 (hundred) or more workmen, or had employed on any day of the preceding 12 (twelve) months, then it is required to adopt standing orders in line with certain prescribed model standing orders.

As per the prescribed model standing orders, permanent workmen employed in a factory, are required by law to provide 1 (one) month notice of resignation (in case of monthly rated workmen) or 2 (two) weeks' notice of resignation (in case of other workmen). Where no such notice is given, such workmen are required to pay their employer, their wages which are equal to their respective notice periods.

Consequently, in case such workmen terminate their employment without giving the prescribed prior notice, the employer can argue that it has the right to deduct proportionate wages for such notice period which was not served. Reliance can be placed in this regard on the order of the Madras High Court in M.R. Appadurai v. Additional Commissioner for Workman's Compensation & Anr.,2 where it had upheld deduction of wages by an employer where the employee had failed to serve the notice period required under the standing order governing his contract of service.  

In any event, to avoid further interpretation issues, it is suggested that employers enter into employment contracts or issue appointment letters to their employees expressly providing for a right to deduct such wages in a manner which is consistent with their standing orders. This strategy can also be adopted for existing employees by issuing appointment letters effective from their joining dates.

We may also add that the term "workman" under the Standing Orders Act has the meaning assigned to it in Section 2(s) of the Industrial Disputes Act, 1947, and excludes from its definition a person employed in a (a) managerial or administrative capacity; or (b) supervisory capacity while drawing wages of more than Rs. 10,000/- per mensem or who exercises, either by nature of the duties attached to the office or by reason of the powers vested in them and functions mainly of a managerial nature ("Excluded Employees"). In case of these Excluded Employees, the terms of their employment and termination thereof would be as per their contract of employment (unless they get covered under the Delhi S&E Act).

Further, for employees who are covered within the definition of "workman" and also under the Payment of Wages Act, 1936 ("Wages Act"), i.e. if they earn wages which do not exceed Rs. 24,000/- per month3, the employer would need to be cautious with respect to deduction of wages due to the restrictions imposed on deduction of wages under the Wages Act. The employer under the Wages Act is permitted to make the deductions from wages (and not otherwise) under the heads as specified thereunder namely, fines, deductions for absence from duty, deductions for house accommodation supplied, adjustment for overpayment and advances and provident fund, income tax, etc., which deductions have been limited to 50% of such wages. 

In view of the foregoing, the employer would need to consider the applicability of the Standing Orders Act and the Wages Act read with the terms of the employment contract for the purposes of assessing its right of deduction of salary in lieu of the notice with regard to an employee who has resigned without providing proper notice.

Footnotes

1 "Legality Of Deduction Of Wages Upon Failure To Serve Notice Period By Employees", by Seema Jhingan, Neha Yadav and Monica Benjamin:[http://www.mondaq.com/india/x/628166/Employee+Benefits+Compensation/
Legality+Of+Deduction+Of+Wages+Upon+Failure+To+Serve+Notice+Period+By+Employees
]

2 .AIR 1964 Mad 265.

3 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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