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Hi Everyone,
Need help in this case - the company I work equalize notice period pay with basic pay, which means if someone does not has to serve the notice period then he/she has to pay the amount in lieu of notice period which will be equal to basic pay component of salary breakup and vice versa.
Is this fixed that it should be equal to basic pay or it varies from company to company? As I have seen some organizations deducting the amount on their gross salary or net salary/take home.
What exactly constitutes the basic pay, the basic pay component of salary breakup or net pay/CTC/gross considers as basic pay of an employee?
It will be really helpful if someone can provide useful insights on this.
Thanks :)

From India, Delhi

Dear Divya,
As notice pay refers to the amount of salary in lieu of notice payable either by the employer or by the employee when either of them unilaterally forecloses the contract of employment, basically its calculation depends on the length of the notice period and the components of salary structure included thereof.
If it is specifically mentioned as basic pay, then the notice pay shall be equal to the amount of basic pay only for the duration of the notice period; if it is mentioned as gross pay it shall be the amount calculated on the basis of the total value of only those components in the salary structure other than such components payable/ reimbursable to defray special expenses relating to the performance of the job.
It is thus determined in the exit clause of the contract of employment pertaining to unilateral termination.

From India, Salem
Thanks Sir for the information.
Does this mean, notice period pay calculation varies from company to company, it can be either on basic pay or gross pay?
It is not specified in any law that how it will be calculated. is that right?

From India, Delhi

Dear Divya
Yes. Notice period clause varies company to company and an employee governed by appointment orders that are being signed during employee engagement. But if it is not specifically mentioned in your appointment letter about the recovery of notice period on basic pay or gross pay, The employer can recover what ever he wishes to. Legally notice period clause comes under Standing orders act which applicable to only to workers, and staff are not governed by this act. Hence as for as notice period is concerned unless it is salary component exclusively written, the employer can recover on gross salary.

From India, New Delhi

Many organisations follow the norm of Basic Pay plus DA for determining the notice pay amount. The gross pay is much more inclusive and would include allowances like incentive, conveyance/transport, telephone, education, uniform, etc so not suitable for this purpose.
From India, Mumbai

Notice Pay is always on Gross Salary, you are buying out your Notice Period which means you were suppossed to be paid the full salary if you have completed the Notice Period, since it is not possible for either or employee/employer the Notice Period Buyout should be on Gross pay to the best of my belief. Some companies more of blue collar employees to cut short their burden of Notice Pay they usually mention it in the appointment letter/employee handbook.
From India, Ahmadabad

Notice pay deduction refers to the amount deducted from an employee's final settlement when they do not serve the notice period as required by their employment contract. The basis for calculating notice pay deduction can vary, and whether it should be equal to the basic pay or gross pay depends on the terms outlined in the employment contract, company policy, and sometimes judicial interpretations. Here’s a detailed explanation:

Basic Pay vs. Gross Pay
Basic Pay: This is the core salary of an employee, excluding allowances, bonuses, and other benefits. It forms the base of the salary structure.

Gross Pay: This includes the basic pay plus all additional earnings such as allowances, bonuses, overtime, and any other forms of income before deductions like taxes and provident fund contributions.

Determination Factors
Employment Contract: The primary determinant of whether the notice pay deduction should be based on basic pay or gross pay is the employment contract. The contract should specify the terms related to notice period and the calculation of notice pay.

Company Policy: In the absence of clear contractual terms, the company’s internal policy on notice pay deductions will apply. This policy should be clearly communicated to employees and consistently applied.

Legal Interpretations and Precedents: Sometimes, legal precedents or interpretations by labor courts or relevant authorities can influence whether notice pay is based on basic or gross pay. Generally, judicial decisions lean towards a fair and reasonable interpretation, often taking the gross pay into account, especially if it reflects the true economic loss to the employer.

Practical Considerations
Standard Practice: Many organizations base notice pay deductions on the gross pay, as it represents the total earnings of the employee and thus the actual cost to the employer. This includes all the components of the salary that the employee would have earned during the notice period.

Employee Agreements: It is important for the terms regarding notice pay deduction to be clearly mentioned in the employee’s offer letter, appointment letter, or employment agreement. This clarity helps prevent disputes at the time of separation.

Legal Guidance
Payment of Wages Act: While the Payment of Wages Act, 1936, regulates the payment and permissible deductions from wages, it does not specifically address the calculation of notice pay. Therefore, the terms set by the employment contract and company policies are generally followed.

Industrial Disputes Act: This Act and other labor laws might be referenced for broader interpretations of employee rights and employer obligations, which could influence practices related to notice pay deductions.

Notice pay deduction should ideally be determined as per the terms of the employment contract and company policy. In the absence of specific contractual terms, gross pay is commonly used for such deductions, as it reflects the total financial impact on the employee and is considered a fair practice. Employers should ensure that their policies are clear, consistently applied, and in compliance with applicable labor laws to avoid legal disputes.

From India, Mumbai

In simple terms if you are calculating Loss of Pay on Gross Wages, Leave Encashment on Gross Wages then Notice period shall be on Gross Wages basis.

However, if you are computing the above on Basic Pay then Notice period shall be on Basic pay.

Any practice has to be logical in terms of Employer and Employee.



From India, Madras
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