TIBS Blog

In the previous post, we talked about how some organizations make the mistake of presenting loss of pay as a deduction in payroll instead of reduction in pay. Let us examine some more issues pertaining to loss of pay in this post.

Loss of pay when pay calculation is on the basis of the calendar day logic

If your organization follows the calendar day logic, ensure that you record dates pertaining to the days for which loss of pay should be applied for an employee. For example, let us assume that the payroll manager wishes to apply 1 day loss of pay for an employee in July payroll. It is important for the payroll manager to know to which month the loss of pay pertains. Depending on the month, the loss of pay value would change. If the employee has a monthly salary of Rs. 31,000 on which loss of pay has to be applied, the value of one-day salary in July is Rs. 1,000 (Rs. 31,000/31 days) while the value of one-day salary in June is Rs. 1033 (Rs. 31,000/30).

In case the loss of pay pertains to a day in June, and if the payroll manager applies a 1 day loss of pay in July and reduces pay by Rs 1,033 instead of Rs. 1,000, he would be committing a mistake.

Hence, in the above example, the payroll software should have the capability to take the loss of pay input by way of dates, calculate the correct loss of pay amount and reduce pay accordingly. It may be noted that many of the payroll software applications in India simply take the loss of pay input by way of days without taking cognizance of the month in which the loss of pay days fall.

Taking cognizance of dates is important not only for calculation but also for reversal of loss of pay. There are occasions when loss of pay, applied in the previous month’s payroll, may be reversed in a subsequent month on account of loss of pay having been applied by mistake earlier. Again, if the dates pertaining to the loss of pay are not considered, the reversal of loss of pay may be done incorrectly and the employee may be credited with a loss of pay reversal amount which may be different from the actual loss of pay amount deducted earlier.

Impact of loss of pay on pay arrears

Whenever pay structure changes happen with retrospective effect, payroll managers should remember to make adjustments for loss of pay, if applicable, while calculating arrear pay. Here again, unless dates pertaining to loss of pay days are recorded, the payroll manager may be calculating arrear pay incorrectly.

For example, let us assume that an employee has 1 day loss of pay in June. If the organization hikes pay by revising the pay structure of the employee in August with effect from June 1, the payroll manager should ensure that the arrear pay is calculated after taking into the impact of the one-day loss of pay in June.

Clarity in loss of pay rules for non-statutory deductions in payroll

We find that in many organizations there is no clear-cut policy pertaining to application of loss of pay on deductions, particularly with reference to fixed deductions such as loan recovery and those on account of benefits such as accommodation, recreation club facility, and transport provided by the organization.

The organization’s policy should specify if there is a hierarchy among deductions with regard to applying loss of pay. For example, a loan recovery may come first and a deduction for recreation club may come later.

In case an employee has loss of pay for the whole month, the policy should specify if fixed deductions should be carried out, given the possibility of a negative net salary on account of 100% loss of pay. If deductions such as loan recoveries are deferred to subsequent months on account of 100% loss pay, the payroll manager should re-work perquisite valuation, if applicable, on loan deductions and re-calculate the income tax liability for the year.