Umakanthan53
Labour Law & Hr Consultant
Swatig002
Sr. Hr Executive
+3 Others

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Hello All, In our company we have a salary component called as Loyalty Pay. The amount of Loyalty Pay is calculated as 5% of CTC.
Currently, the loyalty pay (5%) of CTC is paid in full, annually on completing 1 year from the date of joining. Loyalty Pay is not payable on pro-rata basis in the event of employee leaving the organization prior to the loyalty bonus disbursement date. The cycle continue every year. The purpose of this loyalty pay is to retain the employees for longer period.
Now, I am planning to give this loyalty pay on monthly basis from the start of the month and if the employee leaves the company before completion of one year then, the total amount of loyalty pay given would be adjusted in the FnF.
For Eg.; the loyalty pay amount is Rs. 5000/- per month & an employee works for 5 months from the date of joining & leave the company then in such case (5*5000) Rs. 25,000/- would be deducted in full and final settlement.
All these clauses are mentioned in Appointment letter. Is it ok/legal to do so? Please let me know if there is any illegality involved?
Thanks & Regards
HR
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Deductions permitted under minimum wages act does not include this type of deduction. As such this will be illegal deduction. Law overpowers if terms of appointment are incorrect or less favourable.
Purpose of giving loyalty pay on monthly basis is not very clear.
Paying yearly is a better alternative and will incentivise employee to stay on, if other things are equal.
So reconsider the idea, as implementation of recovery may not be in legal order.
Dear friend,
To me, your proposal seems to be like the old wine in a new bottle. You've just changed the name of retention bonus as "Loyalty Pay" and revised its periodicity from yearly to monthly and introduced the practice of deduction from the F&F amount in the event of the employee leaving in the middle of the year without completing one full year of service. The scale you've indicated shows such employees are out of the purview of the Payment of Wages Act,1936 and even otherwise since it is a sum payable just for incentivising the employee to stay on it would not form part of the definition of the term wages under the Act. However, paying it monthly and recovering it later does not seem to be better than its denial if the condition is not fulfilled by the employee on his exit.
Dear colleague,
You have not given rationale for changing loyalty payment from yearly to monthly.
In my view your proposed change may prove to be hitting at the roots of the purpose of this payment besides the avoidable transaction in monthly mode of paying first and deducting later if he leaves midway.
Suggest you stay put with present yearly system of payment which is more advantageous keeping the purpose of loyelty payment in mind.
Regards
Vinayak Nagarkar
HR-Consultant
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