Can We Hold an Employee's Salary for Final Settlement if They're Leaving Next Month?

If an employee is leaving the organization next month after working for 15 days, can we hold his salary for the current month for full and final settlement in the next month?

Salary Withholding and No Objection Certificates

Legally and ethically, you should not withhold the salary for a period an employee has worked. Therefore, the salary due should be paid. However, HR practices show that once an employee of managerial or supervisory cadre (not a workman) resigns, their salary for the period worked may be kept on hold and released only after obtaining No Objection Certificates (NOCs) from different departments. The NOC will be issued only after the employee's handover process is complete. The salary for the month of resignation is held to check for any negative remarks in the NOC and to adjust any dues.

Certainly, gratuity should be paid within 30 days of the employee's relieving, and the payment of gratuity cannot be postponed indefinitely for want of an NOC from the departments.

Withholding Salary for Final Settlement

This is a practice commonly followed by most organizations to ensure that the employee completes their notice period. However, it is an illegal activity.

The Factories Act specifies that the salary must be paid to the worker every month, as does the Payment of Wages Act. Therefore, withholding salary until the final settlement is not allowed.

On the other hand, if the employee draws a salary of more than ₹21,000 a month, then the only way they can complain is by filing a case in the labor court or as a civil claim for interest. Therefore, as there is no effective avenue for the employee to complain, employers may take undue advantage.

Legal Rights Regarding Salary Withholding

Legally, you do not have any right to hold the salary of a workman for the days he has performed his duties as your employee. Customary practices are not governed by law, so if the employee seeks a legal remedy, it can lead to consequences such as compensation and damages as decided by the labor court or tribunal. We tend to believe a common practice followed by everyone is legitimate unless it is questioned.

Best Practices to Avoid Legal Consequences

If the goal is to avoid any legal consequences, the best practice would be to pay the salary for the previous month, irrespective of the final settlement that will occur forthwith.

Regards,