Crafting a Salary Deduction and Reimbursement Policy: Any Templates or Advice?

Hi all,

I need to create a policy in which we aim to deduct a certain amount from an employee's salary each month. This deducted amount will be reimbursed to the employee if they fulfill the notice period when resigning from the company. We intend to reimburse the deducted amount along with additional benefits or an extra amount.

Can anyone please provide me with a template for this type of policy?

Thanks,
Rajni

As far as I'm concerned, it is not legal and anyone can sue the company on this basis.

Maybe you can form a policy to submit some sort of amount as a security deposit or bond, which shall be returned upon leaving the organization with the proper procedure, i.e., serving the notice period. That will save your neck in case of any mishap.

Hi Swapnil,

Yes, you are right. I am also inquiring about a policy requiring the submission of a security deposit or bond, which will be returned upon leaving the company properly. In this company, people do not do that, but many organizations are implementing this practice. It is not illegal.

Rajni

Hi Rajni,

May I understand the notion behind this kind of thought process by your company? Usually, nowadays, companies do keep a clause for the employee regarding a notice period. Failing to adhere to this clause may require the employee to pay his salary for 1-2 months in order to buy out the notice period. As far as the formatting of the salary is concerned, it can always be supplemented by a retention bonus, or a structure of fixed and variable components can be designed. However, the point mentioned by you - "some amount of the employee's salary per month, and this amount will be given to the employee if he serves the notice period when he leaves the company" - cannot be implemented.

Thanks and Regards,
Deepa

Dear Rajni,

The Payment of Wages Act does not allow any employer to deduct such an amount against the notice period. As an HR person, you should find out why the company wants such a deduction. I guess this suggestion might be from the management side. May I suggest that you please apply good HR practices in your organization so that employees should stay with the organization. Still, if an employee leaves the organization, they should be relieved with a handshake. An HR person is there to support the employees, not to control them.

V.K. Sehgal

Hi Deepa,

Actually, we have a 2-month notice period, and employees often leave the company without providing any information the next day after receiving their salary. They seem to be unconcerned about obtaining their relieving letter, experience certificate, and their full and final settlement. This practice is detrimental and needs to be addressed. In addition, we aim to provide some benefits to employees by adjusting the deducted amount to enhance employee satisfaction. Therefore, I am seeking legal advice and a suitable format to help us resolve this issue.

Rajni

Hi,

In such a case, you can structure the salary by including a component as a bonus (which is in addition to your regular take-home pay). This bonus is generally payable after the completion of 6 months based on the past 6 months' performance. It serves as a motivation for employees to stay with the company. The bonus is payable in case an employee leaves the company, provided they follow the proper Full and Final settlement process and give notice for the period they have served.

Regards,
Sheetal Sehgal

Hi Rajani,

The idea is good, but you are also supposed to take care of the legal part. In the given circumstances, you can structure some incentive schemes, and the same will be paid after completion of one year. In addition to the incentive, you can also have an LTA part, and the same will be after completion of one year. Between 2 LTAs, the gap should be one year. You will also structure the leave policy in such a way that a minimum of one year eligible leave should be (Ex: each employee will get around 15 - 18 earned leaves per annum) in his credit. You can also think about variable pay, which will be paid at the end of the financial year. Ensure that there are no loans sanctioned from the company side; for any personal loan tie-up with banks.

The above points may support you in your process.

Thanks and regards,
Kameswarao

Hi Rajni,

Your problem can be looked at from a different angle.

Say 5% of an employee's salary is kept as severance pay. At the end of one year, you have 5% of the employee's CTC, which is payable only if he leaves anytime after completing 1 year. If he resigns before completing the minimum time as defined by the policy, then you may not give this amount at the time of resignation. But you may not show this as a part of CTC. You show 95% as CTC and 5% as severance pay, which is over and above the CTC.

The policy could read something like:

If an employee serves the company for a minimum of 1 year, then upon completion of one year, he is entitled to 5% of his current CTC as severance pay. However, this amount is payable only if the employee resigns. This amount is multiplied by the number of years completed in service. If an employee resigns after X number of years, then the employee is entitled to X multiplied by 5% of the current CTC at that time.

CTC is structured in such a fashion to retain employees and to reassure them during and at the end of employment. The wording and concept in the policy should be presented in a manner acceptable to all.

Thanks,

Geeta

Hi Rajni,

I think Sheetal is right. You can include a component in the salary as a bonus and later give it to your employee once they serve a proper notice period.

Regards,
Akshu

Dear Sheetal,

Thank you very much for your advice. We will definitely proceed with it. However, I would need a format detailing how much percentage we should offer on each salary slab and what other benefits we should provide.

Rajni

Hi Rajni,

Your problem can be looked at from a different angle.

Say 5% of an employee's salary is kept as severance pay. At the end of one year, you have 5% of the employee's CTC, which is payable only if he leaves anytime after completing 1 year. If he resigns before completing the minimum time as defined by the policy, then you may not give this amount at the time of resignation. But you may not show this as a part of CTC. Show 95% as CTC and 5% as severance pay, which is over and above the CTC.

The policy could read something like:

If an employee serves the company for a minimum of 1 year, then upon completion of one year, he is entitled to 5% of his current CTC as severance pay. However, this amount is payable only if the employee resigns. This amount is multiplied by the number of years completed in service. If an employee resigns after X number of years, then the employee is entitled to X multiplied by 5% of the current CTC at that time.

CTC is structured in such a fashion to retain employees, amuse them during, and also at the end of employment. The wording and concept in the policy should be presented in a manner acceptable to all.

Thanks,
Geeta

Dear Rajni,

We take a bond for an amount equal to three months' salary to counter this practice. HR personnel should insist on obtaining relieving letters during recruitment so that the practice of not bothering for the full and final settlement (F&F) and relieving letter will decrease. It's our own grave we dug. Anyway, deducting a part of the salary doesn't seem right. A bond should be the correct approach. In case of default, a legal notice from a legal adviser to that employee will set things right.

I withdraw this post and agree with what Ms. Geeta suggests.

Rajni,

An excellent idea... but far away from a healthy HR policy. It will be a seed for a future big scam. Always think of a healthy policy for HR, not a cheaper one.

Dada

Hi Rajani,

Do the employees working in your organization know that they have to serve a 2-month notice period? Because my perception is that on this topic, views fall on two aspects: one is retention amount, and the other is to reduce the practice of leaving the organization without serving the notice period.

For retention, I think, as some of my friends have mentioned, you can implement LTA to enable them to be stress-free and enjoy time with their family, or you can give an amount under the head "Loyalty."

Hi Rajani,

Please keep in mind the minimum wages; there should not be a deduction in minimum wages (except as allowed by law), otherwise, it is considered an illegal deduction.

If you are paying more than the minimum wages, then you can structure the wages according to the company policy, and you can choose the option of Geeta.

Best Regards,
Sajid Ansari
Delhi

Dear Rajni,

As per labor laws, there are some authorized deductions specified. In case you want to formulate a policy regarding deducting some amount from the salary every month and keeping the same as security money, then you are required to pay them interest on the same amount as banks give on fixed deposits. This should be incorporated into the policy, and the policy should be discussed in detail with the employees before implementation. Their token of acceptance, duly vetted by your legal advisor, should be obtained.

Regards,
Amit Anand Gera

Rajani,

As mentioned in the earlier posts:

1. It's not legal to set aside any amount for the above-mentioned cause.
2. You can set aside an amount for 'Loyalty Bonus' to be paid once a year.
3. Understand and analyze the reasons why attrition is high and try to change that.
4. Break up the salary into Fixed and Variable components.
5. Draw up a strong and conclusive 'Employee Agreement' with the employees, which includes clauses regarding employee separation without/short notice.

Regards,
SF

Yes, this can be possible, but you have to check all other aspects about his present reputation with the organization.

Dear Rajni,

As far as the policy is concerned, including the quotation of security, I think this leaves a bad impression on the organization. There is an option for deducting some amount of money from the employee's monthly salary, i.e., EWS (Employee Welfare Scheme). A policy for this scheme can be implemented to deduct a fixed amount, e.g., 500 or 300, from the monthly salary. The contribution amount could only be withdrawn at the time of resignation or full and final settlement, with a fixed interest amount.

Regards,
Mahavir Singh

Hi Rajni, this is Shimit here.

I wanted to ask you what kind of company you are working for.

The policy-making and deductions you are talking about are for employees' benefit. If employees agree, there is no question of legality. You can make an announcement in front of your employees about the policy you are making. If they agree, you can have a written document in which all aspects should be clearly written. Both your company's HR head and the employee should sign this document.

Now, the question arises about the method of making the policy. I suggest that you should think practically while framing your policy. Decide on a salary slab and determine a specific percentage. The salary cut should not overly burden the employee. For example, if an employee earns between 10000-15000 per month, a 5% deduction could be considered.

Put yourself in the shoes of the employee while working on this policy. Provide a clear explanation to the employees about the benefits. Trust your employees to understand and accept the policy positively. By maintaining a written document, you can avoid any potential issues.

Don't worry, relax, and then start this project.

Bye,

Regards, Shimit

Hi,

I understand this measure is taken because the company has had bad experiences of employees deserting the company without proper notice.

In my opinion, it is better that this salary cut that you are thinking of is levied only for the first year of service or some such limited period. You can brand it as a forced saving for the future or something like that.

If the company has decided to cut salary throughout the years of employment, you should make sure that the money deducted from the salary yields a good rate of interest. Otherwise, it is totally unfair to make cuts throughout a person's service.

Imagine an employee working for the company for 10 years and part of his salary is left with the company. With each passing day, the money loses value because of inflation. If he has worked for 10 years, he would have collected a good amount; he might resign just to get that money!

Before making policies on such issues, make sure where the company gains and the possible losses.

Ok, great Rajni, you have already started. But seriously, remember my words: first put yourself into the shoes of the employees and then make a policy; otherwise, it will affect your company very badly. I repeat, very badly. Take care. If you require any help, then you can message me. Take care. Goodbye.

Hey, don't do that. It is truly illegal. No employer has the right to keep or deduct the amount from an employee's salary. If he/she goes to the customer court, then you will be in trouble.

With Regards,
Balaji K S

See, the thing is if they go to court...

Mr. Balaji, an HR manager, should manage everything in such a way that every employee is happy. A perfect HR manager knows how to do it. Don't worry, nothing will happen!

Don't worry, I'm not going to deduct the amount from the salary of existing employees. I would start the policy with new employees and appraised employees because their compensation structure and terms can be changed after appraisal.

Rajni

Labor law and the Wages Act do not support your idea.

To me, it seems like an illegal practice.

If your employees are leaving without serving a proper notice period, why don't you get your notice period changed to 1 month? Make it an issue and then raise it in the management meeting. (If you are not in management, I am sorry, but your intention of policy change is not valid.)

You must try some other good practices for employee retention and transparency. Also, you may include them in the company's policy.

Implement serious employee engagement programs, hire soft skill trainers from diverse backgrounds for real value addition, offer good insurance policies (individual/family coverage - life and/or medical), make your employees understand your company's policies for their benefit, keep your doors open for ex-employees (regardless of whether they served the notice period or not) so that they can be role models for others not to leave. If you choose this option, ensure it is well communicated to all. Identify internal reasons (especially team management practices) at every level and ensure regular training and capacity building take place.

I hope you will take this in a constructive way and materialize your option of providing additional benefits/amount for the employee.

This is illegal; you cannot force any employee to do so. The ID act does not allow deducting any salary without proper intimation and an MOU with any employee. These are unfair labor practices; don't engage in such acts. Create an atmosphere where every employee will feel motivated to work in the organization. As HR professionals, we should have innovative ideas to retain employees. We should strive to do things that redefine the role of HR. Engaging in such practices is altering the reputation of HR from Human Resource Development. Dear seniors, how do you feel? Regards, Abhijeet

This is Joseph. I have applied for the Management Trainee position at Steel Authority of India. Can anyone please guide me on how to prepare for the written exam?

Dear Friend,

Why are you thinking so much? What you are saying is present in the corporate field, but it is known as a Loyalty Bonus. Don't forget to communicate the same thing to the applicant before the offer or at the time of appraisal.

Why can't we form a policy on loyalty/commitment of an employee, as most MNCs and even small companies are implementing to retain their employees?

Dear Dev,

In this policy which is under process, the notice period is one month, and the deducted amount is not a part of CTC; this is a loyalty bonus.

Dear Ms. Rajani,

May I ask if you have studied HRM? What is your experience in HR? Are you familiar with specific compliances, corporate governance policies, norms, universal practices, and principles of natural justice?

Currently, you may be aligning with management to maintain their satisfaction. However, consider the perspective of lower-level employees such as peons, office assistants, drivers, and data entry operators. Would you be content if a portion of your salary was deducted without authorization on a baseless excuse and retained by management?

Not only is this practice inhumane, but it is also illegal. How can you identify yourself as a "HUMAN" Resource Professional? Have you suggested to management to allocate a specific portion of their profits for such occurrences?

The phrase, "Bass, Garib ki jeb kaato," encapsulates your human resource policy.

Best regards, [Your Name]

This is not a good practice to deduct some amount from the salary of the employees and pay at the time of full and final. First, you should make a policy to retain the employees who are worth for the company. The next step, if you really want the employees to leave the organization in a proper way, is to reduce the notice period. Nowadays, employers are not willing to give more than one month's notice, so employees leave the organization without bothering about their full and final settlement, keeping in mind the better opportunities awaiting them. Another aspect is when an employee submits his resignation, try to understand the reason for his departure. If the employee needs to join another company within a short period or has any other valid reason, and can provide a minimum notice period, that should be considered. Employees may leave without notice if there are bad practices of withholding dues. First, create confidence in employees about the company rather than resorting to force.

Thanks,

Shiv Kumar

People don't leave the company; they leave bad bosses. Your case of people leaving without notice needs attention in areas you have not thought of. The kind of policy you wish to introduce will only make matters worse.