Basis of pay calculation – Part II
In our previous post, we said calculating pay on the basis of a fixed number of days such as 26 or 30 leads to logical inconsistencies. Here is an illustration to describe the problem with the 26 day basis; the below illustration holds good even for 30 or any other fixed number of days.
Let us assume that the monthly salary for an employee is Rs 26,000 — which translates into Rs 1,000 per day due to the 26 day basis. For employees who join the organization in the month of July — which has 31 days — the salary calculation shall be as follows.
For those who join in early July, the number of days paid must be as per the number of days not worked in July. For example, employees who join on July 1 will have zero “not worked” days and hence will get paid Rs 26,000 as salary. Employees joining on July 2 will have 1 “not worked” day and hence will get paid Rs 25,000 as salary and so on. The “not worked” days logic will not work till the end of the month since as per this logic anyone who joins on the 26^{th} of July will have 26 “not worked” days and hence will get Rs 0 as salary.
Hence, for those who join towards the end of the month, one should use “worked” days instead of “not worked” days for salary calculation. For example, employees who join on July 31 will get salary for 1 day (Rs 1,000), employees joining on July 30 will get salary for two days (Rs 2,000) and so on.
The problem in using 26 as the basis of pay calculation is that at some point in time during the month the payroll manager should switch from the “not worked days” basis to the “worked days” basis, and whenever the switch is made, there will be a problem of logical inconsistency. Let us assume that the switch is made on July 16. A simple calculation shows that a person who joins on July 15 would get paid Rs 12,000 as salary for the month of July (on the basis of the “not worked days” method) and another person who joins one day later on July 16 gets paid Rs 16,000 (on the basis of the “worked days” method) — please see the table below. This is neither logical nor fair to the person who works for more number of days. Please see the table below for salary calculations for different dates of joining.
Table – Salary in July for employees with a monthly salary of Rs 26,000
Standard days – 26, Monthly salary – Rs 26,000, Month – July, and No of calendar days – 31
N W Days (in the Calculation Method column) refers to “Not Worked” days
Join date | Total days | Calculation method | Not worked days | No of salary days | Salary (Rs) | Calculation method | Worked days | Salary (Rs) | |
1 | 26 | N W days | 0 | 26 | 26000 | Worked days | 31 | 26000 | |
2 | 26 | N W days | 1 | 25 | 25000 | Worked days | 30 | 26000 | |
3 | 26 | N W days | 2 | 24 | 24000 | Worked days | 29 | 26000 | |
4 | 26 | N W days | 3 | 23 | 23000 | Worked days | 28 | 26000 | |
5 | 26 | N W days | 4 | 22 | 22000 | Worked days | 27 | 26000 | |
6 | 26 | N W days | 5 | 21 | 21000 | Worked days | 26 | 26000 | |
7 | 26 | N W days | 6 | 20 | 20000 | Worked days | 25 | 25000 | |
8 | 26 | N W days | 7 | 19 | 19000 | Worked days | 24 | 24000 | |
9 | 26 | N W days | 8 | 18 | 18000 | Worked days | 23 | 23000 | |
10 | 26 | N W days | 9 | 17 | 17000 | Worked days | 22 | 22000 | |
11 | 26 | N W days | 10 | 16 | 16000 | Worked days | 21 | 21000 | |
12 | 26 | N W days | 11 | 15 | 15000 | Worked days | 20 | 20000 | |
13 | 26 | N W days | 12 | 14 | 14000 | Worked days | 19 | 19000 | |
14 | 26 | N W days | 13 | 13 | 13000 | Worked days | 18 | 18000 | |
15 | 26 | N W days | 14 | 12 | 12000 | Worked days | 17 | 17000 | |
16 | 26 | N W days | 15 | 11 | 11000 | Worked days | 16 | 16000 | |
17 | 26 | N W days | 16 | 10 | 10000 | Worked days | 15 | 15000 | |
18 | 26 | N W days | 17 | 9 | 9000 | Worked days | 14 | 14000 | |
19 | 26 | N W days | 18 | 8 | 8000 | Worked days | 13 | 13000 | |
20 | 26 | N W days | 19 | 7 | 7000 | Worked days | 12 | 12000 | |
21 | 26 | N W days | 20 | 6 | 6000 | Worked days | 11 | 11000 | |
22 | 26 | N W days | 21 | 5 | 5000 | Worked days | 10 | 10000 | |
23 | 26 | N W days | 22 | 4 | 4000 | Worked days | 9 | 9000 | |
24 | 26 | N W days | 23 | 3 | 3000 | Worked days | 8 | 8000 | |
25 | 26 | N W days | 24 | 2 | 2000 | Worked days | 7 | 7000 | |
26 | 26 | N W days | 25 | 1 | 1000 | Worked days | 6 | 6000 | |
27 | 26 | N W days | 26 | 0 | 0 | Worked days | 5 | 5000 | |
28 | 26 | N W days | 27 | -1 | -1000 | Worked days | 4 | 4000 | |
29 | 26 | N W days | 28 | -2 | -2000 | Worked days | 3 | 3000 | |
30 | 26 | N W days | 29 | -3 | -3000 | Worked days | 2 | 2000 | |
31 | 26 | N W days | 30 | -4 | -4000 | Worked days | 1 | 1000 |
Of course, in order to solve the above problem, the organization could simply say that anyone who works for 26 days or more will get full salary, while anyone who works for less than 26 days will get a reduced salary. Here the problem is that someone who joins on the 1^{st} will get paid Rs 26,000 which is equal to what a person would get even if he joins only on the 2^{nd} (due to the same 26 days). Here again the method of calculation is not fair to the person who joins on the 1^{st} since another person (with the same monthly salary) who joins on the 2^{nd} gets paid the same salary.
The above problem exists — whether the basis is 26 or 30 days — for pay calculation in the first or last month of service when an employee works for less than full month, and in cases of loss of pay. The problem ceases to exist only when the calendar day basis or its variant is used for pay calculation.
Why do organizations use the fixed day basis?
Arguments in favor of the fixed days method are fallacious. Here are the typical arguments.
1. Let us maintain consistency across 30 and 31 day months. Whether an employee joins on June 21 or July 22 (and hence works for the same 10 days) they should be paid the same compensation.
As users of the Gregorian calendar system, we have chosen to live with the idea of paying the same amount as salary whether it is a 28 or 30 or a 31 day month. What about the issue of consistency there?
2. Indian laws mandate salary payment on the basis of a fixed number of days such as 26.
We haven’t received a satisfactory reply to the question of which statute (Factories act, Payment of wages act, etc.) mandates it, from anyone. If any such a mandatory requirement exists, it would be safe to say that many organizations are not following it.
We wonder how organizations that follow the fixed days logic resolve the problem inherent in the method. Or maybe they don’t, and just pay employees whatever comes out of using the method.
I have a doubt,
1. If an existing employee takes leave from 8th April 2011 and join back to company by 26th April 2011, should we consider 18 days of leave i.e., inclusive of Sundays or 15 days excluding Sunday?
2. Company is offering Tamil New year holidays on 14th and 15th will that be included or excluded on the no. of days not worked?
Please advice me ASAP.
Thanks in advance.
Jayasankar.N
1. If an existing employee takes leave from 8th April 2011 and join back to company by 26th April 2011, should we consider 18 days of leave i.e., inclusive of Sundays or 15 days excluding Sunday?
It depends on the leave policy in your organization. To our knowledge, most organizations include Sundays for the sake of loss of pay calculation.
2. Company is offering Tamil New year holidays on 14th and 15th will that be included or excluded on the no. of days not worked?
Holidays notified by the government are typically paid holidays.