Salary Withholding in India: Can Companies Legally Hold Part of Your Pay to Ensure Notice Period Compliance?

In India, is there any clause regarding holding a percentage of an employee's salary monthly to ensure that the employee will serve a notice period and prevent absconding cases, especially for mid and higher-level employees?

No, there is no such law in India. However, concerning an employee who is not covered by the Payment of Wages Act or whose salary does not exceed Rs 24,000 per month, you can make a contract with the employee stating that there will be a deduction of a certain amount towards a fund which will only be paid at the time of proper handover. It is up to the employee/candidate to decide whether to accept such an offer or not. If the offer letter contains such a clause, do not accept it.

In the case of employees covered by the Payment of Wages Act, only deductions as per section 7 are permitted. These permitted deductions do not include deductions for the adjustment of a notice period in the future.

Dear Himanshi Srivastava,

I wish you had provided sufficient background information on your query. Are you going to join a company that will deduct caution money every month? Are you the HR professional of the company who will start deducting caution money from future employees?

Part of the last sentence of your post says: there will be no absconding cases, especially in the case of mid and higher-level employees.

If the caution money is deducted under the notion that it will act as a deterrent and help curb the absconding cases, then it is a myth. Regardless of the deduction of a certain amount, those who wish to abandon employment will do it anyway. Abandonment of employment is a result of distaste or bitter feelings toward the organization. When people make decisions under frustration, they do not worry about the monetary losses but reconcile themselves with them.

What if the problem of abandonment of employment persists despite the deduction of some amount from the salary? What would be the next step then?

Companies from across the industry spectrum grapple with the problem of employee attrition. However, your problem is severe because it is not just routine separation but abandonment of employment. The sudden absence of employees could throw operations out of gear, which, in turn, could result in customer dissatisfaction.

The abandonment of employment is generally restricted to the lower level of the hierarchy or even at the lowest level, the workers' level. But you say that "mid and higher-level employees" abandon the employment. This exacerbates the severity of the problem and shows that irrespective of the level, the employees are highly disengaged. Therefore, the malaise lies in the lack of allegiance or disaffiliation toward the organization. Rather than employing quick-fix solutions like the deduction of money, you need to fix the root cause. Otherwise, your company will be seized by this challenge perpetually.

Thanks,

Dinesh Divekar

Further to what Mr. Dinesh said,

1. Do the employees trust the company to give that money back later? Most will not and will just consider it as if they are getting a lesser salary. Their willingness to join or switch jobs will be based on the amount they actually receive, not the so-called 'gross' salary.

2. If the next job offers a good salary increase, they will not care about the pending amount. Very few are naive enough to take that into account and wait.

3. How do you propose to show it in income tax, PF, ESIC, PT? Is it shown as payable to the employee, or are you accounting for only the actually paid part? If you are showing proper gross wages, you are actually liable under the law to pay it, even if the employee 'absconds'. In fact, the deduction may be a ground for absconding, and courts or the labor commissioner may consider it a valid ground.

Rather than holding back a part of the salary, giving a retention bonus for completing a certain number of years of service will motivate employees to continue working with the organization.

Thank you to the members who have replied and given me some valuable insights regarding my question. Your thoughtful responses have not only helped me but also countless others who seek guidance and support on this topic.

Seeking Expert Guidance on HR Clauses

I am an HR professional, so I just wanted to know more about this area of HR as I have been primarily focused on recruitment. I have asked many of my HR friends about this question, and one of them mentioned that nowadays companies are including clauses in appointment letters to mitigate losses in such situations. That's why I am seeking expert guidance for my questions and truly want to thank you, members, for helping me.

Regards.

Dear Mr. Dinesh Divekar,

I understand your point, which reflects an ideal world scenario. However, in today's world, it is unlikely that an employee will spend their entire career with one organization, even if the work culture is excellent. When organizations hire freshers and invest time and resources in training them, they typically expect these employees to remain with the company for a minimum period after the training so they can begin contributing effectively. In such cases, offering a retention bonus serves as a motivator.

Thank you.