Deductions are one of the few areas of Indian labour law that is genuinely rule bound. The Code on Wages, 2019 starts from a prohibition and then lists the exceptions, which puts the burden on the employer to place its deduction inside the list, not on you to show it is unfair.
The starting rule
There shall be no deductions from the wages of an employee except those authorised under the Code, notwithstanding anything in any other law. The Code adds that any payment made by an employee to the employer or his agent is deemed a deduction, which closes the workaround of asking you to pay the shortfall back in cash. Deductions may then be made only for a closed list of purposes: fines; absence from duty; damage to or loss of goods expressly entrusted for custody, or loss of money the employee must account for, where the loss is directly attributable to his neglect or default; house accommodation and authorised amenities; recovery of advances, overpaid wages and approved loans; income tax, statutory levies and court ordered deductions; social security and provident fund subscriptions; co-operative society payments; and, with written authorisation, union fees and notified relief fund contributions.
The total amount of deductions in any wage period shall not exceed fifty per cent of the wages for that period. Where authorised deductions do exceed one half, the excess is to be recovered in the manner prescribed rather than simply taken. So even a deduction that is otherwise lawful cannot swallow more than half a month's wages at once.
A shortfall deduction, tested against the provision
Take the common case: cash short at the end of a shift, stock missing from a counter, a refund that cannot be reconciled. For the deduction to survive, the employer must say yes to all of these:
- Entrustment or accountability. Were the goods expressly entrusted to you for custody, or was this money for which you were required to account? A general responsibility for a shop floor is not express entrustment.
- Causation. Is the loss directly attributable to your neglect or default? Loss from a system failure, a shared till, theft by a third party, or a shortfall that could equally be another person's is not.
- Show cause first. A deduction for damage or loss shall not be made until the employee has been given an opportunity of showing cause against it, or otherwise than in accordance with the prescribed procedure. A blanket policy applied to every cashier without an individual show cause fails here, and this is the step employers skip most often.
- Quantum and record. The deduction shall not exceed the amount of the damage or loss caused by your negligence or default: not a round figure, not a penalty, not a multiple. And all such deductions and realisations shall be recorded in a register in the prescribed form. Ask for the extract.
If the employer calls it a fine instead
Then a stricter set of rules applies. A fine may be imposed only for acts and omissions the employer has specified by notice with the previous approval of the appropriate Government or the prescribed authority, and that notice must be exhibited on the premises. No fine may be imposed until the employee has been given an opportunity of showing cause. The total fine in any one wage period shall not exceed three per cent of the wages for that period. None may be recovered in instalments, and none after ninety days from the day it was imposed. Every fine and realisation goes in a register. Very few informal workplace fines survive that list.
Two neighbouring rules worth knowing
- Absence from duty. A deduction for absence must be strictly proportionate: it cannot bear a larger proportion to the wages for the wage period than the absence bears to the period you were required to work.
- Suspension and withheld increments. A loss of wages from withholding an increment or promotion, a reduction to a lower post, or a suspension is not treated as a deduction only where the employer's provisions satisfy the requirements specified in the notification issued by the appropriate Government. An employer with no such provision cannot rely on this.
What to do
Write on the day you see the deduction and ask five things: the head under which it was made, the show cause notice and your reply if one exists, the computation of the loss, the register entry, and total deductions for that wage period against your wages. Do not sign an acknowledgement of liability or a consent to recovery, and be careful before signing an inventory or reconciliation sheet that records the shortfall as yours. Read the appointment letter too, because a recovery clause cannot enlarge what the Code permits, though it may narrow it; our guide on what an Indian employment agreement should contain covers those clauses.
An unlawful deduction is unpaid wages, so the remedy is a claim before the authority appointed under the Code on Wages, ordinarily within three years, and that authority may order compensation in addition and certify recovery to the Collector. Where the same shortfall is also being treated as misconduct, do not answer the two separately, since a disciplinary finding is what an employer will later rely on to justify the recovery and, in a worse case, the exit; our guide on wrongful termination and employee rights in India sets out that sequence. For why the Payment of Wages Act references in older material no longer lead anywhere, see our overview of what the four labour codes changed for employees.