Can Employers Legally Hold Part of Your Salary Until Probation Ends? Seeking Advice

Can any organization retain some part of our salary as security or retention amount, and the amount shall be given to the employee upon successful completion of the probation period.

Kindly advise.

Dear Sharadardran@Gmail.Com,

There is no provision in the Law - Payment of Wages Act or any other Act permitting the employer to make deductions from the salary of an employee for retention or security. Please note that any deduction other than authorized deductions as listed in section 7(2) of the POW Act 1936 is an unauthorized deduction.

This is an unethical and age-old practice carried out in some family-type companies. Holding money as a security deposit from a salary is neither statutory nor ethical. Therefore, ask your employer to conduct business in an ethical manner where people would like to work with your company.

You have not given any details of the company, size, position of the employee, etc., so we are talking on assumption.

Legal Considerations Regarding Salary Retention

1. If you are covered by the Payment of Wages Act, this is illegal (note wages not exceeding ₹18,000 per month).

2. If your salary is above ₹18,000, then there is no protection under that act, so the company can retain. However, from the point of view of PF, ESIC, and income tax, it does not make sense.

3. If this is at the minimum wages level, then definitely asking for trouble. If they were smart, they would instead have a completion bonus, which is legal and allowed.

May I request you to kindly elaborate on it?

Security Deposits in Organizations

God bless you. All theories and laws aside, organizations keep money as security deducted as a percentage of your wages to cover potential losses related to stores, tools, and equipment issued to you for functioning. Many schools retain security from their teachers to cover equipment, books, or laptops issued to them. The aim is to ensure the organization does not suffer from sudden separation.

Secondly, it is not for compensation of the notice period. Thirdly, there is no law banning organizations from keeping a deposit of money against the issues made to the employee.

Regards,
Dr. Ram

Under the Companies Act 1956, the deposit retained by a company from an employee's salary was to be kept in a separate bank account designated as such. This Act has been replaced by the Companies Act 2013; however, certain sections of this 2013 Act are not yet notified. I do not know what the status of such deposits is under the new act. Perhaps some experts in this forum can clarify.

A S Bhat

Can you please mention the EXACT WORDING used in your Offer/Appointment letter regarding this amount retention? I am not sure if the words you used here—"security" or "retention"—are the exact words. IF INDEED the words used are what you mentioned, then linking the payment with probation doesn't make sense at all. I agree with Saswata Banerjee's views on this aspect, having observed even Limited Companies utilizing this concept in their HR practices. UNLESS you provide the exact wordings, you are leaving it to each member to make his/her own assumptions to offer suggestions, and then DON'T blame any of them for providing such suggestions/advice.

Regards,
TS

You don't need to put so many dots. If the message is more than 35 words long, it is accepted. If any salary is held back, the company has to pay tax/TDS on it at the time it becomes due, not when it is paid. If that TDS is not paid, the amount becomes disallowed as an expense. PF and ESIC have to be paid when the salary becomes due, not when it is paid. Also, if the amount is not paid, the company cannot keep it; it has to be deposited with the labor welfare fund. In the end, if laws are followed, holding back the salary is not worth it. If laws are disregarded, then of course, this is all moot.

User input:
There is a law that bans such things - it's called payment of wages act :)
Corrected Spelling and Grammar:
There is a law that bans such things - it's called the Payment of Wages Act. :)

Retention of LTA and Medical Expenses in Salary

In our company, there is a deduction of LTA and medical expenses. In our appointment letter, it was mentioned that this deduction is a retention amount and will be repaid after the completion of one year. However, in practice, we are not receiving this amount promptly. It is paid once in 2.5 to 3 years. As a result, a substantial amount is deposited with the employer every month. It is a common practice for the employer not to return this amount to the employee in full and final settlement. This deduction is reflected in the employees' CTC, resulting in a shortfall in salary equivalent to the amount of LTA and medical expenses. Generally, each component, such as LTA, is approximately 8% of the employee's basic salary.

Please advise on how to recover this amount, as the employer often does not refund a substantial portion. Kindly suggest any legal methods as there is a mention of this point in our appointment letter.

Regards,
Rajendra

Salary accrued to a person is their property and hence is protected by Article 300A of the Constitution. Any deduction could be effected only if required under a statute or if there is any recovery against any advance given or overpayment made, etc.

Quite illegal. No deduction of such type is permissible. You can only resort to a service bond or training bond to be entered into with the employee, but no recovery of security money to be deducted out of the salary/wages just to secure the probation period.

Discussion on CTC Deductions

There is a lot of discussion on CTC deductions. Please go and read the various threads. I think in your case, the CTC provides a certain amount for LTA and medical reimbursement that is not being given. First, CTC is a fictitious amount created by HR to show how much you MAY cost the company and make your salary look higher than what it is. CTC has no validity in law and no meaning either.

If the deduction was from the gross salary, then it is illegal. So, you need to check if the deduction is appearing in the gross salary on your salary slip. Otherwise, you have been fooled by HR when you joined to think the pay is higher than what it actually is, and there is little you can do about it now.

Issue with LTA and Medical Deductions

In our company too, there is a deduction of LTA and medical, and in our appointment letter, it was mentioned that this is a retention amount and will be repaid after completion of one year. But practically, we are not getting this; it will be paid once in 2.5 years or 3 years. Thus, every month a substantial amount is deposited with the employer, and it's the practice that the employer generally does not return this amount to the employee in its full and final settlement. This is shown in employees' CTC, thus there is a short salary equivalent to the amount of LTA and medical, generally each component, say LTA, is approx 8% of the employee's basic salary.

Please advise on how to recover this amount, as every substantial amount is not refunded by the employer. Kindly advise any legal method as there is mention of this point in our appointment letter.

Regards,

Rajendra

@maze_now...

You can go to the labor union office and file a formal complaint. They will call your employer for a hearing where they would ask both parties to present their cases. The concerned officer then pronounces the verdict, and the employer will have to comply with it.

Legally permissible deductions are listed in the Payment of Wages Act. Deduction towards security deposit is not on the list, and as such, it is an illegal deduction.

The course of action, as suggested above, would be based on expediency rather than any principle. It is my considered view that HR needs to be based on the rule of law rather than on overawing the hapless employees.

If the employee has not been made aware of any provision through the terms & conditions mentioned in the offer/appointment letter about the deduction of a security deposit, it would be quite unlawful on your part to deduct any amount in the name of a security deposit.

Why do you have to stoop to such a level? Employees should be motivated enough to come to work and get associated with the company for a long duration. This requires a complete employee engagement driving vision, mission, and values.

Apart from being illegal, this would be harmful for the company as no one would like to work in such an environment. Make sure the culture of the company is good where employees are happy.

Salary Deductions and Probation Periods

Any such deduction from salary in the name of a security amount or similar is not permissible and can be challenged by an employee as per law. If I have correctly understood the intention of the employer here, the company wants to ensure that the new joiner is employable and can make a decision regarding the continuity of employment accordingly, by confirmation or probation extension, whatever the case may be.

In such a case, you may look to keep the CTC low (exclude the security amount from the total CTC) and keep the lesser amount as the actual CTC during hiring. You may then add the clause that the salary shall be considered for revision to X amount/or X percentage upon successful completion of the probation period. This way, you will be abiding by the law as well as giving the final payout only post-probation completion.

In case the employee is a misfit, the probation may be extended for some duration, say 3 months/6 months, or else the employee may be asked to leave for being unsuccessful in completing the probation period.