How Should We Handle a Garnishee Order for Employee Loan Default? Seeking Advice on Compliance and Calculations

We have received the Interim Order issued by the Sole Arbitrator in a case pertaining to default on a PERSONAL Loan Case of one of our employees (respondent). The Company has been made a Garnishee in the said order.

The contents of the Interim Order are summarized below:

1) The company has been made a Garnishee and directed to stop payment to the employee to the tune of INR 1,21,564.18.

2) The company has been directed to: "remit monthly salary of the respondent (after deducting the First Rs. 1,000/- and two-thirds of the Salary) before this tribunal on or before the 15th of every month till the amount is recovered."

3) Further, the matter is now posted on 04 Jun 22 at Chennai, and the order states: "for the garnishee to comply with the order of the Tribunal and for further proceedings and to give another opportunity for the respondent to appear."

My Doubts are as follows:

A) Is the order binding on the company, especially when the company has not signed anywhere on the loan application; neither as a guarantor; nor agreeing to deduct from his salary and pay the bank? The only connection to the company is the payslip that the employee submitted and employment details he has probably filled in the loan application form.

B) The order is dated 02 May 22, and we received it today, 20 May 22. So essentially, the first recovery and remittance from our side, which could have been done by 15 May 22 (for the salary of Apr 22), is already over; and now we can comply only from the Salary of May 22 and remit the recovered amount before 15 Jun 22. How do I make a response to the Order?

How should the recovery be done for a fictitious GROSS salary of INR 10,000/-?

c1) Calculation 1:
Gross: 10000
Deductions permitted (i.e., salary payable to the respondent): 1000 + 2/3rd of 10000 (6666.67) = 7666.67
Amount to be remitted to the Claimant: 10000 - 7666.67 = 2333.33

c2) Calculation 2:
Gross: 10000
Deductions permitted (i.e., salary payable to the respondent): 1000 + 2/3rd of (10000-1000) (i.e., 6000) = 7000.00
Amount to be remitted to the Claimant: 10000 - 7000 = 3000

Which case is the correct calculation? Should the recovered amount be fixed irrespective of LOPs and consequent reduction in GROSS PAYABLE?

What should we do if the employee resigns or absconds?

Request valuable inputs from learned members.

Thanks & Regards,
Arun

There are some inconsistencies. I suggest you speak to your company's lawyers before deciding your course of action.

Arbitrator's Authority

1. An arbitrator has no authority to involve your company in any order it gives when you are not a party to it. The arbitrator does not have authority under CPC or CrPC (to the best of my knowledge) and is not a court of law. The other party has to approach the court or the district magistrate to enforce the order, and you need to obey the order of a court, not an arbitrator.

Payment of Wages Act

2. The Payment of Wages Act does not permit the deduction of more than 50% of the gross salary of an employee under any circumstances. This includes deductions on account of PF, ESIC, Income Tax, etc. Therefore, an order of 2/3 of the salary being paid to the other party is illegal.

However, since we do not know the circumstances and have not seen the order or the authority under which it was issued, I feel you definitely need to go to your company's lawyer for advice.

Dear Mr. Saswata,

Thank you for your reply. I thought it would be better to post my reply/comment after we have taken some action, hence the delay in posting a follow-up.

Consultation with Lawyers

As suggested by you, we consulted our lawyers, and the advice they gave is summarized below:

i) An arbitral tribunal can issue a garnishee order in rare cases.

ii) Such a garnishee order should be based on the final award by the arbitral tribunal.

iii) Generally, such an amount collected in the interim would go to the custody of the arbitral tribunal pending final settlement. (My Note: This is indeed what the interim order stated, directing the bank to hold funds received in trust until the final order).

iv) These types of garnishee orders are rarest of the rare, and there are High Court decisions against such notices.

v) You are advised to reply to the arbitral tribunal on the ground that you will not be able to recover the amount from the employee's salary based on the interim order and request them to issue a final order.

Employee's Situation and Actions Taken

We issued a letter to the employee to present his side of the case. The employee had missed EMI installments after the COVID Loan Moratorium ended but has been paying EMI regularly for the last 7 months and intermittently before that.

Based on the above, we sent a letter last week to the arbitrator (attaching the employee's reply and proofs presented by the individual) expressing our inability to recover monies as the order is interim and the facts presented by the individual. We requested the arbitrator to reconsider the case in light of the facts presented and issue a final order.

As of yesterday, the concerned employee, hit very adversely by this interim order, has negotiated with the bank and closed the loan with a lump sum payment.

Afterthoughts

The interesting thing about this case was the rather cavalier attitude of the employee towards the loan and liability that arises, and the impact of the interim order (deduction from salary; the interim order had even appointed a receiver to take possession of all his movable properties!). I think even the bank officials were partly to blame for this attitude as they kept misinforming (or even disinforming!) that these orders are nothing to worry about, and he need not lose his sleep over it!

I think he was finally goaded into action by our letter, which clearly spelled out the financial impact and for how long it would run.

The present-day "instant loan at a click" products will lead to the financial ruin of innumerable individuals.

Dear Mr. Saswata,

Thank you for your appreciation. I do try to give feedback before I close a thread that I initiated. It is for everyone's learning after all, and it's a never-ending process.

Clarification on the 50% Limit

Coming to your question, no, we did not specify the 50% limit but just mentioned that recoveries we make based on the final order, if any, "will be, irrespective of the final order, limited by the max deductions permissible under wage and labor laws." But now that the individual has closed the loan, the bank should withdraw this arbitration matter and close the case.

Query on Garnishee and GST Implications

Just another query out of curiosity but outside HR purview, suppose the individual has not closed the loan and the arbitrator issues the final order making us garnishee. In that case, we would have to deduct and deposit money to the bank every month till the entire amount is recovered and deposited. Will this be considered a "Service" to the bank under GST, and will it be possible for us to invoice the bank for services rendered?

Regards,
Arun

Coming to your question, no, we did not specify the 50% limit but just mentioned that recoveries we make based on the final order, if any, "will be, irrespective of the final order, limited by the max deductions permissible under wage and labor laws."

So basically, you did say the same thing in more sophisticated legal language. This is the reason that we ask a lawyer to do the stuff for us.

If the court orders you to transfer money to a particular account, it is not a service to the bank. It is a part of your HR Payroll process. There is no GST applicable to it. If you were charging a fee for it, perhaps it would be subject to GST. I hope the GST Council does not see your post, or they will come up with an amendment to include it in GST. 