Employee Loan Defaults: How Should HR Handle Bank Requests for Salary Deductions?

Dear Seniors, please let me know if any of our employees default on bank loans and if the said bank approaches the company's HR department, what are the right procedures? If the employee has signed a right of lien on the salary account, do we adhere to the procedures for deduction of the amount from the employee's account?

Employee Loan Responsibility and Salary Deductions

This is a conceptual question, right? If an employee has used their salary account for obtaining a loan, it's their responsibility to clear the loan and not the organization's.

The process of deduction is either a deduction from the salary account via ECS or through the cheque clearing system. The salary that is paid by you to your employee is obligation-free, and it's the responsibility of the employee to clear their loan and not yours.

Understanding Wage Deductions and Bank Loans

The payment of wages is very clear. You cannot make any deduction from the wages of the employee other than those specified in Section 7 of the Act.

With reference to a bank loan, deductions can be made, and money can be paid to the bank only if there is a request from the employee to do so and until the employee revokes the request. Even if the request is made by the employee, the company is under no obligation to do so, and most companies will not comply.

Therefore, deducting on the instruction or request of the bank is out of the question unless the employer was a guarantor of the loan and is liable to pay it from their account and entitled to recover from the employee.

A lien on a bank account, whether it is a salary account or a savings account, does not concern the employer. In fact, I don't think there is any such concept. Banks do not give a lien on any account. What the employee does with the money in their salary account (which is essentially a normal bank savings account) is their concern, not the employer's.

If the bank needs to attach the employee's salary, they must approach the court and obtain orders from the court to do so (which the courts will likely be very reluctant to grant), only then does the employer need to act accordingly.

You did not mention if the bank is a cooperative bank under the Co-Operative Societies Act, 1960. However, if the bank is a Cooperative Bank registered under the Co-Operative Societies Act, 1960, and if the bank has made a requisition under Section 49 of the said act along with consent or authorization by the employee drawn in favor of the employer, then it becomes mandatory for the employer to effect such deduction subject to the provisions of the Payment of Wages Act, 1948. If the employer defaults in the deduction of the loan and remittance to the bank, in such a case, the employer becomes liable for the payment of the loan amount.

I think the deduction specified in the Payment of Wages Act, Section 8, is only for payments made to a cooperative credit society of the company's employees and specifically recognized. It does not cover banks. Secondly, employees can revoke their consent at any time in the case of payments to a bank. Only in the case of the cooperative credit society, they do not have that option.

Mandatory Deductions for Employee Loans

Affecting deductions for a loan taken by an employee from a cooperative bank is mandatory for the employer if the bank has informed them. The total maximum deductions of wages can be up to 75% of the gross wages in such a case.