Notice Period buyout - asked to pay gross instead of basic

Notice Period Guidance Needed

Kindly guide on the notice period. If an employee is not able to serve the employer's notice period due to some reason but is ready to pay the notice period amount, they have been asked to pay the gross instead of the basic salary. This is the case that happened with one of my relatives, where he had to leave the organization as the notice period is for three months, and the amount asked to pay is three months' gross salary.

Now, my question is: Is there any law that specifies an employer can charge gross pay instead of basic pay?

What does this statement mean (mentioned in the letter): "Have to serve a 3-month notice period or in lieu of 3-month salary"?

Does this specify three months of gross salary? Because paying three months' gross is very high for any employee. Please shed some light to understand the policy related to the notice period that can help my family in many ways.

Regards,
Yamini B

Understanding Wage Definitions and Legal Context

Your question is valid, but the industry's regular practice is as mentioned above. Nowhere in the labor acts is there a clear definition of wages.

Payment of Wages Act Definition

The Payment of Wages Act defines "wages" as all emoluments earned by an employee while on duty or on leave in accordance with the terms and conditions of employment, paid or payable in cash. It includes dearness allowance but excludes any bonus, commission, house rent allowance, overtime wages, and any other allowance.

Basic Wages under EPF & MP Act, 1952

Section 2(b) defines "basic wages" as all emoluments earned by an employee while on duty, on leave, or on holidays with wages, in accordance with the contract of employment, paid or payable in cash. It excludes:

i. The cash value of any food concession;
ii. Any dearness allowance, house rent allowance, overtime allowance, bonus, commission, or any other similar allowance;
iii. Any presents made by the employer.

Wages under ESIC Act

The term "wages" under Section 2(22) of the ESIC Act includes all remuneration paid or payable in cash to an employee if the terms of the contract of employment, express or implied, are fulfilled.

Payment of Bonus Act Definition

"Salary or wage" means all remuneration (excluding overtime work) capable of being expressed in money, payable to an employee if the terms of employment are fulfilled. It includes dearness allowance but excludes:

(i) Any other allowance the employee is entitled to;
(ii) The value of house accommodation, light, water, medical attendance, or any service or concessional supply of foodgrains or other articles;
(iii) Any traveling concession;
(iv) Any bonus (including incentive, production, and attendance bonus);
(v) Any contribution to any pension fund or provident fund;
(vi) Any retrenchment compensation or gratuity;
(vii) Any commission payable to the employee.

Legal Ambiguity and Collective Bargaining

When the law itself is unclear on the definition of salary, take-home salary, gross salary, wages, CTC, etc., courts and authorities remain silent in such cases. They are resolved through collective bargaining.

You can raise a dispute under the Payment of Wages Act (if your pay is less than 18k per month). However, it delays the process of exit formalities like proper relieving from work and service certificates.

Therefore, people often adjust the notice period days with their earned leaves and pay their wages except for performance pays and bonuses.

All the best.

What is defined as salary for the purpose of notice pay in the contract of service, i.e. letter of appointment or service rules? If it is defined as mere basic pay, then you have to pay basic pay only. If it is defined as gross salary, then you need to pay gross salary. If nothing is defined, then gross salary will be the basis for notice pay. Please note that gross salary does not mean CTC.

B. Saikumar

Understanding Contractual Obligations and Exit Clauses

The fulfillment of any contractual obligation is determined solely by the terms of the contract. When there is no inherent ambiguity in a particular clause, no party to the contract can retract based on personal assumptions arising from their inabilities. Legal definitions are based solely on the purpose for which the particular enactment stands and not for every other thing. For example, referring to the definitions cited by Mr. Stephan, the term "wages" has been defined in the respective enactments with some inclusions and exclusions, but not absolutely. Therefore, in my opinion, such legal definitions may not serve any purpose when interpreting an exit clause in the contract of employment or letter of appointment beyond what is plainly mentioned therein.

Interpreting "Three Months' Salary"

What comes to mind by the phrase "three months' salary" is "three months' eligible salary without deductions for three months' work without any unauthorized absence" and nothing more or less. In the case where an employee's service is simply terminated by the employer based on the same exit clause, what the employee would expect as salary in lieu of notice is three months' gross or basic. Therefore, personal incapability of performance by the employee cannot be an excuse for not complying with the exit clause while resigning, nor for the employer when simply terminating an employee's services.

Kind regards