Struggling with Notice Period Buyout: Is My Employer's Gross Salary Demand Fair?

Hi Everyone,

I am working for an Indian IT company. Currently, I am in the US with my spouse on Leave without pay. Due to some personal reasons, I had to resign from my job, so I submitted my resignation, and my supervisor approved the same. Since I am unable to leave the US, i.e., going back to India to serve the notice period of 3 months, I opted to buy out my notice period. To buy out, my employer is asking me to pay 3 months' gross salary, which amounts to around 2.5 lakhs, a very high amount. This includes Basic pay (~35,000) + HRA (17,350) + Special Allowance (26,000) per month.

My employer does not have clearly defined policies. No policy document clearly states the procedure for buying out the notice period. Furthermore, when my employer's HR team prepared the FnF Statement, they made numerous mistakes in calculating the amount, which I had to point out to get corrected. When I inquired why I need to pay 3 months' gross pay, they referred me to a point in my offer letter. However, nowhere does it specify that the payment should be based on Gross salary. As per industry standards, most companies ask for the basic salary to buy out the notice period.

In my offer letter, the point under Notice period reads as follows:

"Notice Period: On confirmation, your appointment with the Company will be subject to termination with 3 months' notice or payment in lieu thereof. Should you desire to resign, you shall provide the Company with a prior written notice of a similar period or payment in lieu thereof. In case of disciplinary proceedings, the Company reserves the right not to accept your resignation. If you choose to resign, you shall make yourself available during office hours for a period from the date of resignation as required by the company for a smooth transition."

Please note that it states "payment in lieu thereof." Just payment. What does this really mean? Nowhere does it specify that the payment should be based on Gross salary, just a payment.

Please advise on how I can proceed. I am willing to pay to buy out my notice period but not the gross salary, as I have been on Leave without pay for the past 4 months.

Looking forward to your responses.

Thanks,

Victor.

Normally, notice pay or the payment of salary in lieu of notice shall mean to include only Basic Salary and DA, if applicable. This shall be the same if the employer wants to terminate the service of an employee. Since you do not fall under the definition of a workman/employee under labor laws pertaining to such disputes (specifically the Industrial Disputes Act), a cross-reference is not possible.

In such circumstances, it would be appreciated to refer to the certified Standing Orders of the company. In the absence of these, it shall be understood as Basic Salary only.

To support your stand, you can say that if you had been eligible for gratuity, it should be basic salary only that could have been taken into account for calculating your gratuity. Similarly, if, on your leaving, you had encashed the balance of leave, it should have been done on your basic salary and not on gross salary. In the same way, notice pay shall only mean basic salary for the required months (in your case three months).

Regards,

Madhu.T.K

Dear Madhu,

I need your opinion. The employment offer letter contains the clause "In case of resignation by the employee or termination of employment by the employer, three months' notice or pay in lieu of notice has to be given."

Now the question is, one employee has submitted his resignation by giving three months' notice. The employer is willing to relieve him immediately. In this case, is the employee entitled to notice pay?

My view is that the employer insisted on three months' notice from the employee. Now, he is willing to waive it and does not want to insist on that. If the employer calls the employee in the afternoon and tells him that his services are no longer required, then the employee is entitled to get the notice pay.

I have seen some threads about "selling out or buying of the notice period." Hence this request.

KCS Kutty

Dear Mr. Kutty,

In my opinion, in this situation, the employer has to pay in lieu of notice. As per the conditions of the appointment, the individual has planned his future course of action and accordingly given a 3-month notice. If the employer relieves him immediately, then he has to pay in lieu of notice.

Regards,
JS Malik

Dear Malik,

I have a different opinion on it. When the termination of a contract of employment comes from the employee in the form of resignation, it is up to the employer when to relieve him. If the employer is willing to relieve the employee with immediate effect, then why should the employer pay notice pay to the employee? It will be done on mutual agreement. Taking another view, if the employer serves three months' notice of termination of employment and the employee wants to leave immediately, will the employer demand notice pay from the employee?

My understanding of the notice period is that it is the maximum period required by the employer to find a substitute employee for the one who is leaving. If the employer finds a replacement, he can relieve the employee even before the three months are up. Similarly, the notice period from the employer's side is the maximum period given to an employee to secure alternative employment. If the employee under notice period secures alternative employment, he is free to leave during that notice period without paying notice pay to the employer. In both these circumstances, since the decision to leave or terminate has been made, there seems to be nothing wrong with relieving at an early date.

Regards,

Madhu.T.K

Dear Malik Saheb and Madhu,

Thank you both for the prompt reply. I raised this issue because I have seen many posts on this topic. No employer would like to let go of an employee who is a valuable asset to the organization, even in challenging times.

KCS Kutty

Dear All,

My question for all of you is: Is there any agreement or specific format for a salary buyout? If you have one, could you please share it with me?

Thanks & regards,
Hemlata Sharma
Asst. Manager HR

Understanding Salary Buyout Clauses

In my humble opinion, there is no prescribed format or specific agreement formulated under the law for buying out salary. However, it depends on a case-by-case basis, depending on the clause mentioned in the offer letter issued to the potential candidate.

When an employer makes an offer of employment to a potential candidate to join the services as early as possible, it may result in the candidate paying a salary in lieu of the notice period to their current employer. The clause may be as follows:

"The Company would reimburse any shortfall in the notice period extended to your present employer, should it result in the payment of salary (mention whether Basic or Gross salary) in lieu of notice upon producing the receipt or any documentary proof of having paid the said amount."

However, simultaneously, you may also include one more clause for the repayment of the reimbursed amount by the candidate, in case they leave the Company within a stipulated time. Failing which, it may result in a loss to the Company if the employee leaves within a short span.

The clause may be as follows:

"Whereas, should you leave the services of the Company within THREE years (just indicative, you may change according to your requirement) from the date of your joining, you shall be required to repay the amount so reimbursed in the following manner:

a) First year of your joining = 100% of the amount reimbursed
b) Second year of your joining = 75% of the amount reimbursed
c) Third year of your joining = 50% of the amount reimbursed
d) Thereafter = Nil."

Kindly note: There is no need to have a separate letter drafted for this purpose; you may include the same in the Offer letter issued to the candidate.

Hope this meets your requirement.

Regards,
Sharath M. Kumar
12.11.2010

Very recently, I came across some Supreme Court verdicts which state that an employee has the right to withdraw their resignation before it becomes effective. Hence, I have developed a variant opinion about what I have already expressed.

Union of India & Others vs Gopal Chandra Misra & Others

In this case, it was held that the general principle is that in the absence of a legal, contractual, or constitutional bar, a 'prospective' resignation can be withdrawn at any time before it becomes effective.

Balram Gupta Vs Union of India & Anr.

The principle laid down in the Gopal Chandra Misra case was summarized as follows: "A complete and effective act of resigning office is one that severs the link of the resignor with his office and terminates his tenure."

Nand Keshwar Prasad Vs Indian Farmers Fertilizers Cooperative Ltd. & Ors.

The Court reiterated that it is open to the employee concerned to withdraw a letter of resignation before the date indicated in the notice of voluntary retirement. It was also observed: "It appears to us that the law is well settled by this Court in a number of decisions that unless controlled by conditions of service or statutory provisions, the retirement mentioned in the letter of resignation must take effect from the date mentioned therein, and such date cannot be advanced by accepting the resignation from an earlier date when the employee concerned did not intend to retire from such an earlier date."

Power Finance Corporation Ltd. Vs Pramod Kumar Bhatia

The Apex Court went a step further and observed that "It is now a settled legal position that unless the employee is relieved of duty, after acceptance of the offer of voluntary retirement or resignation, the jural relationship of the employee and the employer does not come to an end."

Shambhu Murari Sinha versus Project & Development India & Another

This is yet another case that supports the above views.

It is to be understood that once an employee has submitted a resignation, their relieving date cannot be advanced because they have the option to withdraw the resignation before the effective date of their relieving. Therefore, if an employer wishes to relieve them earlier, notice pay should be given, treating it as termination of employment by the employer.

I would appreciate it if Mr. Mallik, Mr. Kutty, and others also share their thoughts on this.

Regards,
Madhu.T.K

Dear Mr. Madhu,

After reading both of your views, there is a strong point for all of us to understand that in the case of resignation or voluntary retirement from the services, an employee has to serve a notice period. The point here to be noted is whether the employee has requested early relieving from the services. If yes, then the employer is at liberty or has the discretion to relieve him on a much earlier date than the actual. If not, as cited by you in a couple of judgments given by the APEX Court, the employer cannot advance the date of relieving unless for want of two reasons, namely:

A. The employer has to pay the employee for the difference in the notice period resulting from early relieving.
B. In the case of any public sector employment (in some cases private sector), as stated, the employee has every opportunity to withdraw his resignation before the effective date of relieving.

I am stressing this issue because I am facing a similar situation. I was employed as Manager - HR/IR in Syndicate Bank. My notice period is three months in case I put in my papers. I had resigned on 20th Sept '2010 and served the three months' notice to the employer which falls due on 18th Dec '10 without asking for early relieving. However, forcibly and without giving sufficient reason and notice, I have been abruptly relieved on 08th Nov '2010, without paying for the difference in the notice period.

The point to be noted here is that I have neither asked for early relieving nor does my offer letter contain a clause that upon serving such notice period, the Bank can relieve me at an earlier date without any compensation.

There are, once again, two points which I consider as points of argument to put forth my contention:

1. The clause of the notice period cannot be one-sided, where if the employee wants to leave the services, he has to serve a three-month notice, and the employer may relieve him at any time without compensation. It is oppressive in nature.

2. The employee is also losing monetarily as he is deprived of his earnings for such a period as he would be unemployed and cannot join his prospective employer if there is no mutual agreement.

I would be contesting my case on the above two grounds. What is your opinion?

Regards,
Sharath M. Kumar

Dear Sharath, you can withdraw your resignation before 18th Dec '10. Acceptance of your resignation before the due date is illegal. Furthermore, you have just given notice, which cannot be treated as your resignation. Can you please email me your notice to [Email Removed For Privacy Reasons]? You can certainly claim for compensation.

With regards,
Mukesh Tripathi

I agree that following the court verdict stated in reference, there should be a consensus that an employee who has submitted their resignation with a notice period, if asked to leave before the effective date, should be compensated for the remaining notice period. I am unsure if there is any specific verdict for the current scenario, but if you review the cases where the court has ruled that a resignation can be withdrawn before it becomes effective, it is reasonable to interpret that if an employer advances the relieving date of an employee, they should receive notice pay.

We wish Sharat all the best.

Regards,
Madhu.T.K

Understanding Resignation and Notice Period Implications

This is really a good topic and very observatory, analytical, and informative. As observed by the Apex Court in a number of judgments mentioned by Madhu, it is clear that an employee can withdraw their resignation before the date it becomes effective. This means it will be the last day for the employee-employer relationship, or on that day, this relationship will come to an end.

It is rightly pointed out that after resignation, if the employer relieves the employee the very next day, then in that case, the employee will lose their 3/2/1 months' salary and become unemployed between the period of joining a new prospective employer and the date of relieving, leading to the end of the employee-employer relationship with immediate effect.

The employee has given only the notice of termination of the agreement of services, not actually terminated the agreement. But by relieving earlier by the employer before the expiry of the notice period, it operates as a termination of the agreement. In that case, the employer should pay the amount of the shortfall in completing the notice period and compensation from their side.

Understanding Employment Contracts and Notice Periods

1. Employment being a Contract of Service between the Employer and Employee, the pay, service benefits, including severance of service such as resignation, termination, and Notice pay, will be either in the Appointment Letter or in the Company's Standing Orders.

2. The Period of Notice and Notice Pay, consequent to termination by the employer as well as resignation by the employee, will be regulated as per the provisions stated under paragraph (1) above.

3. In case the Period of Notice and Notice Pay, as regards termination versus resignation, both must be equally poised. Whereas any agreement to the effect that the Period of Notice and Notice Pay thereof as regards the employee is more than that of the employer, the same being in violation of equity and equality, would be declared void by courts.

4. However, there can be a lesser Notice period and notice pay thereof as regards the employee, as it would come under 'remission' by the employer.

5. In case of termination by the employer, it would be advisable and legally prudent to issue the termination order/letter together with the Notice pay (90/60/30 days as the case may be as per the conditions mentioned under paragraph 1 above), constituting Basic pay plus DA, wherever applicable.

6. In case, however, an imprudent employer still retains an employee after the issue of a termination order either until the expiry of the entire Notice Period or a lesser period with due pro-rata Notice pay, though it would be legally defensible, the employer will only be earning disruptive tactics by the terminated employee to the detriment of the organization and especially to the boss.

7. As regards the resignation of employees, the resignation can be withdrawn before the expiry of the Notice Period. In other words, resignation cannot be accepted prior to the expiry of the Notice Period, as the law allows withdrawal of resignation before the expiry of the Notice Period.

8. However, such withdrawals must be before the acceptance of the employee's resignation, subject to the condition that the resignation will take effect only in accordance with the notice period as indicated in the resignation letter of the employee, which is also in accordance with the initial contract of employment.

9. Early acceptance of the resignation by the competent authority, subject to the conditions stated under paragraph 8 above, therefore cannot be vitiated. In other words, if the acceptance of the resignation is to take effect with effect from any date prior to the date of expiry of the Notice Period, the same being vitiated by non-acceptance of the offer to resign, such acceptance of resignation is void, and hence the employee will be deemed to be in employment.

10. As regards the question of waiving the notice period by the resigning employee and the concomitant notice pay, the employer is at full liberty to waive the same and release the employee provided no fresh request for withdrawal of resignation has come to the hands of the employer.

Regards,
A. Irudayam
Advocate – High Court Madras
[Phone Number Removed For Privacy Reasons]

Hi, my name is Nagaraj, and I am having a 3-month notice period. My employer is asking me to pay 3 months' gross salary for the period I will not be servicing. Could you please provide information on the labor laws regarding this situation and clarify how much I am required to pay? If my employer refuses to accept the basic pay, what steps should I take?

Thank you.

Hi Everyone,

I am quitting my current organization and joining another. I am buying out my 2-month notice period as I cannot serve it. I approached my manager about the amount, and he gave an indicative range of 40k-50k.

Now, I would like to mention that my basic salary is 11,799.00. I feel this is too much as I understand that only the basic salary is taken into account to calculate the buyout amount.

Please help.

Had you served the notice period, the company would have paid you the entire salary and not just the basic. Since you are not serving the notice period, you need to pay the entire amount that you would have received from the company had you not resigned, which is your monthly gross. There should not be any confusion on this.