In the realm of Indian labour laws, the Payment of Wages Act, 1936 plays a pivotal role in protecting the financial rights of employees. Understanding the definition of wages and the concept of authorised deductions is essential for both employers and workers. This article explains the key provisions of the Act and shows how it ensures fair treatment of employees by regulating legal wage deductions.
What Are Wages?
Under Section 2(vi) of the Payment of Wages Act, 1936, wages refer to all remuneration (whether in money or kind) expressed in terms of money that is payable to an employee for the work done during a specific period. It includes basic pay, dearness allowance, incentive bonuses, and any other additional allowances.
However, wages do not include:
- Bonus not forming part of remuneration.
- The value of house accommodation or medical services.
- Contributions to pension or provident funds.
- Any traveling allowances.
In simpler terms, employers include the core components of an employee’s take-home pay in wages but may exclude certain allowances and benefits.
Purpose of the Act
The Payment of Wages Act was introduced to prevent unwarranted deductions and unjustified delays in wage disbursement. It applies to employees drawing wages below a certain threshold (currently ₹24,000 per month) and ensures that the worker receives timely and fair payment for their services.
What Are Authorised Deductions?
The Act allows employers to make only authorised deductions from an employee’s wages. These are deductions that are explicitly permitted under Section 7 of the Act. The intent is to prevent arbitrary or exploitative financial practices by employers.
Let’s delve into the various categories of authorised deductions under the Act:
Fines
Fines imposed on employees for specific acts of misconduct can be deducted, but only under certain conditions:
- The employer must have prior approval from the appropriate government authority.
- The misconduct must be clearly mentioned in the standing orders or service rules.
- Deductions should not exceed 3% of the employee’s wages.
Absence from Duty
If an employee is absent without valid reason or permission, the employer can deduct a proportionate amount from their wages. However, this cannot be punitive and must align with the actual duration of absence.
Damage or Loss
If an employee damages the company’s goods, equipment, or property due to negligence or default, the employer can make deductions. However, the employer must conduct a proper inquiry and give the employee an opportunity to explain before making the deduction.
House Accommodation
If the employer provides house accommodation, they may deduct its cost from the employee’s wages, as long as both parties have approved and agreed to the arrangement.
Advance Recovery
Employers can recover advances or overpayments made to employees. They may deduct a fixed sum in instalments from the employee’s wages until they recover the full amount.
Income Tax and Provident Fund
The employer may recover advances or overpayments made to the employee. They can deduct a fixed sum in instalments from the employee’s wages until they recover the full amount.
Co-operative Society Payments
Employers can make deductions for payments to registered cooperative societies or insurance schemes that the employee approves.
Court Orders
If a court issues a directive or attachment order, employers must make deductions according to the ruling.
Limits on Authorised Deductions
Section 7(3) of the Payment of Wages Act stipulates that the total amount of authorised deductions in any wage period shall not exceed:
- 50% of the wages, in general cases.
- 75% of the wages, in cases where deductions include payments to cooperative societies.
If deductions exceed this limit, the excess must be carried forward to the next wage period.
Role of Inspectors and Redressal
The Act authorizes inspectors to examine wage records and ensure that employers make only permitted deductions. If an employee believes the employer has made illegal deductions, they can file a complaint under Section 15 of the Act. The competent authority can order the refund of such amounts with compensation.
Real-World Significance
Understanding authorised deductions is vital, especially for employees working in factories, shops, and other unorganised sectors. The law not only ensures transparency but also protects low-income workers from exploitation. Employers must maintain clear wage records and deduction registers to comply with legal requirements.
Importance for Employers
Compliance with the Payment of Wages Act is not just a legal formality—it is a crucial aspect of responsible human resource management. Employers must train payroll departments to distinguish between authorised and unauthorised deductions to avoid legal penalties and employee grievances.
Mnemonic to Remember Authorised Deductions:
FARM CHIC can help you remember the major categories of authorised deductions:
- F – Fines
- A – Absence from duty
- R – Recovery of advances
- M – Misconduct causing damage/loss
- C – Court orders
- H – House accommodation
- I – Income Tax & Insurance
- C – Cooperative society payments
