Excess DA Payment Recovery: Are There Legal Hurdles in Deducting Overpayments?

Dear All, My query is: we have paid excess payment of DA to unionized employees for the last three years. Now, management is ready to deduct the same. Please suggest if there are any legal complications. If available, kindly provide judgment copies for reference.

Thank you.

If you are certain that the DA has been paid in excess, then the company is entitled to recover the same since the employees are not entitled to retain what they are not entitled to and shall refund it to the company. However, you should, in my view, give notice of the same to the employees concerned and obtain desirable letters of consent from them. Secondly, since the DA was not paid to them in a lump sum, it is not appropriate to recover it all at once but in installments.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Addressing Overpayment of Salary

You have made a mistake and paid an amount higher than what you should have paid. This has gone on for 3 years. What has happened is that your salary levels have, in effect, been increased. People have sent the money. They have got used to receiving that money every month. It may have been different if the mistake was for a month or two. After 3 years, you can't say give it back. In fact, you cannot even reduce it now. Any such action will result in an industrial dispute.

Probably, it can be adjusted in the next settlement or when the DA increases, you do not increase it until you reach parity. However, you must communicate this to your workers clearly.

I agree with the views of our member Saswata Banerjee. For your mistake of paying a higher amount of a salary component for three years, employees cannot be penalized now. You have the only alternative of adjusting the excess paid amount against any future increases by explaining the position suitably to the employees.

Regards,
S. Dass

If you are going to recover Excess DA now, what about the PF payment you have deducted on Basic & DA? You cannot get it back either from PF authorities or from the employees. Please think and act wisely. Now you cannot reduce the DA from the rate you were paying earlier and should pay as per the Govt. Index.

Regards,
RK

If you paid more than the actual rate, it is not an issue, as you are aware that DA is revised every six months in Maharashtra. Then, you need not revise it because you are already paying excess DA. My suggestion is not to recover from employees. It means you are demotivating employees, and they will lose trust in the company. From an HR point of view, we need to ensure employee satisfaction while working in great organizations, like a Great Place to Work.

Recovery of Excess Payment: A Balanced Approach

Mr. Saikumar of Mumbai has provided a very clear answer on the matter. Management has the full right to recover any excess payment made. However, the recovery should not penalize or put the employee into difficulty with a lump sum recovery.

It is important to make employees aware of any excess payment and then recover the excess paid amount without significantly affecting the take-home pay of the employee. If the take-home pay is meager, serve notice to the employee to refund the excess paid amount. The employee can avail of a loan or find another way to arrange for repayment. Management can also give the option of recovering the amount from future payments.

The option of adjusting the excess DA against future increases in DA by Babu Poojari seems to be a worthwhile suggestion. Mr. Radha Krishnan raised a very valid point regarding PF contributions paid on the excess DA. The PF contributions paid on excess DA cannot be recovered. If the option of adjusting the excess amount against future incremental DA or recovery of the same in installments every month is adopted, it will not disturb the existing rate of PF contributions.

Regards,
B. Saikumar
Mumbai

Mr. Babu Poojari's suggestion is apt, and as mentioned by Radhakrishna, the PF-related matter comes into the picture. Hence, you should act wisely. First of all, communicate to the employees and union in writing. You can adjust accordingly until the DA hike is matched, or else link it with the next settlement, i.e., calculate the total amount to be refunded by each employee and deduct the same amount from the arrears/lump sum amount payable to the workers on finalization of the wage settlement. First, you need to communicate the same.

In addition to this, your management needs to initiate action on the employees who are responsible for this grave mistake.

Regards,
Kamesh

There are two different views on this matter—one saying that we can deduct the excess paid and another saying that we cannot deduct. But what is the legal basis for both these views? What does the Payment of Wages Act or any other relevant Act say in this context? Or, are there any decided cases on this issue? We cannot be acting on the basis of opinions. We have to act on the basis of the law. Of course, I am not denying the practicality of the suggestion at post #4 above.

With due respect to all contributors, I would like to submit my views as follows:

1. Firstly, the Law of Limitation does not bar the recovery of any payment made in excess to an employee. This means that the law permits the recovery of any excess payment.

2. A written notice should be given to the employee, communicating the facts and requesting the employee to pay back the amount paid in excess. An option of repayment in installments has to be given to the employee if he/she is unable to repay in a lump sum.

3. Adjusting against future rises is not a good option from both accounts and legal points of view.

4. The matter of the payment of an excess amount of EPF can be settled with EPFO.

5. An explanation should be requested from the Accounts Department as to how the mistake continued for three years. Appropriate penalties should be imposed as a disciplinary measure on the delinquent employee.

Lastly, I would like to emphasize that appropriate action should be initiated ASAP.

With due regards to all.

Regards

In continuation of my views expressed above, I would like to further point out that an employee receiving excess salary is equally responsible for the mistake. An employee knows how much salary is to be paid to them. Even an illiterate employee is fully aware of the amount of salary they should receive. An employee must check the salary amount at the time of payment or when the salary is credited to their bank account. Additionally, a salary slip is provided to employees. Therefore, it is not only the moral but also the professional duty of an employee to report any excess amount received. An employee cannot refuse to repay the excess payment using union threats or any other labor law as a cover. There is no labor law that supports an employee against the recovery of excess payment. In such cases, a warning must be issued to the concerned employee for not reporting the discrepancy.

Suggestion for Salary Slip Note

I would also suggest that a NOTE should be printed on salary slips stating that employees must verify the accuracy of the salary being paid to them and report any discrepancies to the relevant department.

With best regards to all.

Regards, C.M. Lal Srivastava

When you have paid a certain amount as salary for three years, it becomes de facto the normal salary. It is not the duty of the employee to report an excess in the salary as long as the salary slip matches the amount received, especially if everyone else or a certain group received similar excesses.

No court or labor officer is going to allow you to recover the amount paid for three years from the concerned workers. It is only logical.

Recovery by adjusting against future raises (if the union agrees, that is) would not give rise to any accounting problems. Why should it? The entry for salary or anything else is not being affected. The quantum of salary being paid in the future does not go up at the rate it was expected to. Why should that affect accounts?

And what are you planning to tell the PF department? "I made a mistake and paid more PF because I paid a higher salary to workers. Now give me the money back with interest." I would like to witness the reaction of the concerned officer. 

If you want to engineer a strike in your factory, then by all means, go ahead and give notice of recovery from the workers.

Regards.

Legal Basis for Deducting Excess Payments

There are two different views on this matter—one saying that we can deduct the excess paid and another saying that we cannot deduct. But what is the legal basis for both these views? What does the Payment of Wages Act or any other relevant Act say in this context? Or, are there any decided cases on this issue? We cannot be acting on the basis of opinions. We have to act on the basis of the law. Of course, I am not denying the practicality of the suggestion at post #4 above.

There is nothing I know in law that allows you to recover from workers in such a case. Even if the letter of the law allows it (by not specifying how many months later you can initiate recovery), the courts will not allow it as it will be considered a travesty of justice, misuse of legal position, and may even be considered as victimization of the workers for alleged (or imagined) purposes. The authority under the Payment of Wages Act, the government labor office, factory inspector, or anyone you approach for approval will refuse to support you on this. Under the doctrine of equity (I hope I got the right one), this is a practice precedent and this becomes your set normal salary. In any case, how much is the salary paid in excess? The quantum is also important.

Yes, Mr. Saikumar of Mumbai has given a very clear answer on the matter. The management has the full right to recover any excess payment made. However, in cases where payments have been made over a long period, deducting the entire sum at once can be challenging. You can gently and comfortably request employees in accordance with the principles of natural justice.

Notification and Agreement

Notify employees about any excess payments made to them towards DA and consider entering into an agreement with them for monthly deductions and potential increments based on their work appraisal.

Legal Considerations

In practice, recovering amounts from employees is not straightforward and may contradict the provisions of Section 12 of the EPF and MP Act, 1952, as well as the provisions of the ESI Act.

Regards

Responsibility for Excess Salary Payments

Mr. Srivastava's statement that employees are equally responsible for the blunder in receiving more salary seems absurd. The excess payment was made due to the fixation of a higher rate of DA for all company employees, and it is not due to any arithmetic error that employees could identify. Moreover, employees generally do not know the methodology of DA fixation. They rely on management's notification about the DA payable based on the rise in the consumer price index, unless it is a very large organization where trade unions manage the DA quantum employees are entitled to receive.

Therefore, it is unclear how one could fix the responsibility on the employees for a mistake committed by the administration, with no fault on the part of the employees.

Regards,
S. Dass

It will not be possible for the recovery/deduction of the DA excess paid to the unorganized workers deployed in the last three years by your establishment. It will be a gross violation of Section 12 of the EPF and MP Act, and Section 72 of the ESI Act.

Thanks

Regards,
R. B. Yadav
Advocate

If we discuss the topic, it will increase its volume in pages, but there will not be any results. To conclude from any point of view, we cannot retrieve the excess DA paid to the employees by any means.

Regards,
RK

For more clarification, I consulted my friend, Assistant Labour Commissioner in Bangalore, who informed me that once excess fixed DA is paid, we cannot collect it back at all. Therefore, there is no need to serve notice to the employees.

Regards,
RK

This is a very tricky matter. First, for whatever reasons, you pay excess DA to your employees/workers. Then suddenly you wake up and realize this error on your part and have planned to recover the excess amount so paid (by you, I mean the management, please do not take offense to this).

Incidentally, did you try to find out how this excess amount was paid out to workers for three years and how this mistake was identified? I am interested to know what exactly happened.

Recovery Challenges in a Unionized Environment

Now coming back to the matter at hand, yours being a unionized environment, recovery of the excess amount paid may not be as easy as you may think it is. The Union may object to this.

The best you can do is to have a meeting with Union members and through an agreement with them in writing, come to a settlement of how this recovery can happen. The final outcome of such a meeting will all depend upon how you are able to negotiate with them.

The other alternative, as has been suggested by a fellow member, is to get written consent from each worker individually and then go ahead and effect the recovery.

Yet another useful and very practical suggestion that has been made is that the excess amount could be adjusted against any future increase in wages. This also will have to be agreed to in a meeting with your Union Members. The modalities and mode of recovery will depend on the terms of the agreement with the Union.

Best Wishes,

Vasant Nair

Dear All Contributors,

Those who do not agree with me are free to do so, but at the same time, those who disagree must do so based on relevant legal provisions and authentic judgments, which in this case are absent. Sections of the EPF and ESI Act are not restrictive to correct a mistake. If a statute does not permit correction, then that statute must be reviewed by the law-making institution.

Understanding the Question

In this case, the question put forward was that "DA was paid in excess to unionized employees." What does it mean? The question is not unambiguous.

Appropriate Actions and Clarifications

How is it that no contributor wants to support the appropriate action of initiating disciplinary action against the erring staff and internal audit officials? For those who do not see accounting problems, I would like to be enlightened on this aspect. My answer was based on the understanding of the question that there were two sets of employees, one "unionized" and the other "non-unionized." If this is not so, the questioning member must clarify his question with a proper description of circumstances so that conflicting answers are not posted on the site.

I seek pardon from all contributing members with due respect to their acumen.

With humble regards,

SRIVASTAVA C.M. LAL

Clarification on Legal Implications of Excess Payment

The points you have raised are important but were not the focus of the original post. The original query did not seek advice on actions against the person who made the mistake. I assume either that has been dealt with, or that the person who made the mistake is the one posting :) This being an HR forum, I focused on that part.

Let me clarify, I have not checked back on the exact wording of the Payment of Wages Act (I was not in the office and didn't have the time to search online). Instead, I referred to a doctrine in law called the doctrine of equity. Applied to labor law, the courts in India have been taking a very liberal view of it. Basically, they are saying that the courts will support the labor in any case that puts them at a disadvantage or in any attempt to deprive them of their rights.

Here we are talking about a case where a company has made a wrong payment. Yes, if you pay someone wrongly, you can, in the next month, deduct that money from their salary. Perhaps if it happened for 2 months at a stretch, again, you can recover it. There is even a clause in the Payment of Wages Act that can be stretched to allow it (repayment of advances).

However, if you have been paying a higher amount consistently for 3 years, the courts will definitely take a stand that it is deemed to be the correct amount. The workers are getting it. Everyone (or a specified portion) of the workforce is getting it. You cannot suddenly say it was a mistake and want it back. The court will not allow it. There is also something called the doctrine of promissory estoppel, which says when you have acted in a manner that induces people to believe in a certain fact (in this case, that their salary is indeed higher), and that they have acted on that in good faith (here, it is that they have spent it), then you can't say afterward that it is not a fact (I gave a simplified version. This was a whole chapter in my law book).

Further, what I was saying is that the unions will not allow it. No union worth their salt will allow or agree where it has been paid for 3 years. It will be an industrial dispute and definitely a ground for a strike. And yes, the conciliation officer, labor officer, factory inspector, authority under the Payment of Wages Act, everyone is going to rule against you on the merit that you have paid it for 3 years and that this is what is due to the workers. In fact, they will probably not allow you to change it even now.

The PF and ESIC will also not agree to give a refund. It is money paid, credited to the accounts, etc. I consider it an impossible event.

Regards.

I would like to express my sincere gratitude and appreciation for your positive reception of my statement. I also commend the arguments presented in support of the labor wing. In the current scenario, the issue of equality will be a matter of fact, while the principle of promissory estoppel, typically applicable to future possibilities, will require review. I acknowledge and respect your legal expertise and seek your permission to address the specific matter at hand regarding the payment of excess Dearness Allowance (DA).

Understanding Dearness Allowance (DA)

It is essential to note that DA falls under State jurisdiction, regulated and announced by the Government. Therefore, it is not solely at the employer's discretion but a benefit provided through statutory regulations. The DA amount is verifiable, and any overpayment can be rectified through adjustments. As far as my knowledge goes, there have been no such instances where recovery was contested, so the doctrine of res judicata may not be applicable in determining the courts' stance on this issue.

HR Management and Disciplinary Actions

I understand your point about this being an HR platform. I would like to emphasize that disciplinary actions are a fundamental aspect of HR management. While the Employees' Provident Fund (EPF) and Employees' State Insurance (ESI) may not allow recovery, there are ways to adjust contributions for various reasons.

In conclusion, I extend my gratitude to all involved and suggest that we offer a well-rounded opinion after thoroughly considering all aspects of the matter at hand.

With respect and warm regards,

C.M. LAL SRIVASTAVA

To a large extent, I believe we are discussing similar terms. Arguing from various angles helps us all improve our knowledge, which is why we are all here . I agree that action must be taken against the person responsible for the mistake. I believe it must have been made. I await confirmation from the original poster. I was saying that most of us did not reply on that side as we assumed it was done and also that the post was not about that. I think you have brought an important angle that a reader at a later date will definitely factor in.

Regarding the Recovery Part

My experience is that courts will take a view depending on how good your lawyers are. So, we can't be sure of which way a judgment will go. Unfortunately, judgments are today completely uncertain and based on luck. However, judges will generally take a pro-labor stand.

My point again is the fact that it was done for 3 years and therefore has become the norm, and courts will disallow recovery (will? May? May not too). If the error was for 3 months (for example), recovery would be automatic and not disputed. But as I said, if the lawyer is good, he can get it approved. If the union has a good lawyer, who knows, he may even have the court declare that the company has to continue paying the wrong DA for the future 