Salary Calculation Confusion: Should We Divide Monthly Pay by 26, 30, or 31 Days?

I have the following queries:

Salary Calculation Method

1. In my company, unions demand to divide the monthly salary by 26 to find out the per-day salary. We currently divide by 30 or 31 days. Which is correct?

Leave Encashment Calculation

2. For leave encashment, the management gives BASIC + DA, which forms only 56% of the gross salary. The remaining 44% consists of allowances that we exclude from the salary calculation for this purpose. However, when we deduct salary due to loss of pay leave, we deduct the salary of all allowances and BASIC + DA. Unions demand the leave encashment salary based on BASIC + DA + ALLOWANCES. Which is correct?

Kindly reply.

Salary Calculation for Workers and Staff

For workers, wages should be divided by excluding weekly offs, while for staff, the salary is divided by 30 or 31 days.

For Example:
- For the month of April: 30 days, Weekly off (Sun) - 4, Payable days - 26
- For the month of May: 31 days, Weekly off (Sun) - 4, Payable days - 27

So, the wages are to be divided by 26 or 27 days.

Leave Encashment Policy

Regarding your second query, there is no legal support concerning leave encashment. It totally depends on management whether to encash the leave on Basic + DA or Basic + DA + Allowances.

Shri Ganesh has correctly explained the position. A worker earns wages for the time he has worked. That is why a proportionate deduction is made for the period of absence counted in hours/minutes. The Payment of Wages Act authorizes such deductions. However, as regards the salaried class, there is no deduction for lesser absence; the minimum unit is half a day, and lesser absence is condoned. The principle of 26 days equaling a month applies to workmen who are paid wages, while the 30/31 days principle applies to the salaried category like office staff. Following the directive from government audit, the leave encashment formula in PSUs, which were operating on the 26-day principle earlier, has now been changed to 30 days and is made applicable to all categories. The matter is under challenge before the High Court; hence, a final word cannot be said.

Leave Encashment Details

As regards leave encashment, the compensation includes only Basic + DA, and the allowances are excluded. In most cases, the allowances are actually linked to the performance of some duty. For example, conveyance is for coming on duty, washing allowance is for keeping the uniform/dress in a presentable condition while performing duty, and newspaper allowance is for purchasing newspapers. None of these conditions are met while encashing leave; hence, it is not payable.

Regards,
KK

Very smart union you have..! Monthly salary should be calculated based on the number of days in each month. It varies because each month has a different number of days. According to labor acts, only basic pay and DA (Dearness Allowance) are the mandatory allowances to be given to employees. However, the salary often includes other allowances, which make the gross salary significantly higher than the minimum wages. Salary refers to the payment made for work done over the period of one month. A month includes normal working days and declared weekly offs like Sundays and other declared holidays. This means those declared holidays are paid holidays. When we pay for the whole 30 days, the per-day salary should be calculated by dividing the gross salary by the number of days we pay in a month, not by the number of days an employee works.

Again, as per labor laws, minimum wages are mandatory when computing the salary. The method you are using to calculate the Earned Leave encashment is correct. It is not an employer's obligation to calculate it based on the gross salary. It depends on the management's instructions on how to proceed.

Further, please check with the seniors.

Calculation of 15 Days' Wages for Monthly-Rated Employees

As per Sec. 4 Sub. Sec. (2) of the above Act, the calculation of 15 days' wages per year for a monthly-rated employee is as follows: The monthly rate of wages last drawn is divided by 26, and the quotient is then multiplied by 15.

Supreme Court Judgment on Salary Computation

There is a Supreme Court judgment that states per day salary is to be computed on the basis of a 26 working day month.

That apart, there is a justification for both methods, 26 and 30 days.

26 Days Rule

- The Payment of Wages Act and the Minimum Wages Act both require you to pay for the weekly off. Since the majority of workers get their salary based on days worked (with no paid holiday given), the minimum wages notifications include week offs in the rate by dividing by 26 working days. This makes the computation of wages transparent and easier for workers to understand.

30-Day Rule

- If you are considering a 30-31 day month, then you must include all weekly offs as present and working in the computation of wages. If you do not do that, you will violate the minimum wages law of providing a paid weekly off.

In effect, there will be no difference in paying on 26 working days or 31 days including the weekly off.

In terms of mathematical computation, 26 days working will save you some money. What happens in reality is not that you are paying for working days; you are actually deducting absent days. For that purpose, deduction on the 26 days rule allows you to deduct more.

E.g., if a worker gets a salary of 6000 and is absent for 3 days:

- Method 1: Daily rate: 6000/26 = 230.75. Absent deduction: 692.3. Payable: 5307.
- Method 2: Daily rate: 6000/30 = 200. Absent deduction: 600. Payable: 5400.

Most unions do not realize this.

Unless, of course, you have not been paying for the weekly off, which is non-compliance.

Hope this helps. By all means, do agree to the union requests.

Gratuity Calculation and Salary Division

While for gratuity purposes, the Act itself provides for dividing by 26. For other purposes, it is better to follow what is provided for in your Standing Order or agreement with the Union.

Regards,
Kumar S.

The Factories Act mandates that one paid weekly day off must be given after six days of work, and no worker should work more than ten days without a day off. My logic is that if we calculate salary based on 26 days, we are excluding weekly offs (not paying for the weekly off), which means it is non-compliance. If we pay for 30 days, then we are compensating for weekly offs, leading to 100% compliance. For gratuity calculations, we should consider 26 days in a month.

Seniors, please correct me if I am wrong.

No, you got it wrong. By dividing by 26, you are enhancing the rate to absorb the weekly holiday into the working days. Say the monthly salary is 3000. This would be 100 per day on a 30-day basis. Instead of dividing by 30, if you divide by 26, you get a rate of 115 per day. This way, you are absorbing the weekly off days into the daily rate. Both 115 x 26 and 100 x 30 result in the same total.

Sir, suppose in a month there are 4 Sundays, and Sunday is the weekly off day for workers. With 30 days in a month, according to your logic, you are paying a rate of Rs. 115 per day instead of Rs. 100. I fully agree that you are paying a higher per-day rate. According to the law, we need to pay for the weekly off days, so we should pay for 26 working days + 4 weekly offs (1 paid weekly off should be given after 6 days of working).

Now, for 26 working days: 26 x 115 = 2990, and for weekly offs: 4 x 115 = 460. If you are paying for 26 days only (i.e., for working days only), then the payment is Rs. 2990.00, which means Rs. 460 for weekly offs are not paid. The actual payment should be Rs. 3450 (for 26 AWD + 4 WOFF).

As per the Factories Act or Minimum Wages Act, we have to provide one paid weekly off for every six working days, and the salary should be divided into the number of days in a month multiplied by the number of working days in a month (including weekly offs).

Regards,
Srini

The minimum wages notification specifies wages on a monthly and daily basis. In computing daily wages, the notifications consider 26 working days. So, the wages are per day worked, not per calendar day. Therefore, you do not need to pay weekly off separately.

To cross-verify, check if any person who was not absent on any working day of the week is receiving full wages, and you will be able to verify it.

Dear Sir, Thank you for providing detailed information. You have shared very useful information, and it is correct as per the law. However, even if we pay on a 30/31-day basis, we are not violating the law.

Regards,

So long as you are paying higher than required, there won't be a problem. Meanwhile, try to explain to your union how your method gives more money to the workers.

Understanding Salary Calculation According to the Factory Act

As per the Factory Act or Minimum Wages Act, you can't reduce anybody's daily average wages. Every month's salary (whether 30, 31, or 28 days) is divided into 30 days by default and multiplied by the number of payable salary days, but not more than 30 days (even if the month has 31 or 28 days). For a 31-day month, the gross salary should be calculated as 30000 / 30 x 30 (if greater than 30, it remains 30), but attendance is shown for 31 or 28 days as per the month.

Impact of Absenteeism on Salary Calculation

If an employee is absent in January, February, or any other month with 31 days, his/her average daily salary/wages will be reduced, increased, or changed if divided by 31 or 28 days. You don't have the right to reduce or change the daily wages/salary of any employee.

Consequences of Incorrect Salary Practices

Your wrong practice affects ESIC daily wages as well as PF daily average wages if any employee is absent on any day of the month. In some months, you increased his/her daily wages, only to reduce them the very next month. Your incorrect practices are also followed by the department.