Home > Payroll > Basis of pay calculation – Part II

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 26th 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 1st will get paid Rs 26,000 which is equal to what a person would get even if he joins only on the 2nd (due to the same 26 days). Here again the method of calculation is not fair to the person who joins on the 1st since another person (with the same monthly salary) who joins on the 2nd 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.

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Categories: Payroll
  1. Jayasankar N
    May 1, 2011 at 3:56 pm

    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

    • May 3, 2011 at 3:59 pm

      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.

  1. April 5, 2010 at 6:07 pm

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