TIBS Blog

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

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.

When an employee works for a part of a month – in their first or last month of employment — on what basis should their pay for that month be calculated? Should the pay be calculated on the basis of the total number of calendar days in the month, or should it be on the basis of a fixed number of days such as 26 or 30? As a payroll service provider, we receive this question quite often from organizations.

Organizations in India follow a variety of methods for pay calculation.

1. Calendar day basis

The monthly pay is calculated as total number of pay days multiplied by pay per day. In a calendar month, the per day pay is calculated as the total compensation for the month divided by the total number of calendar days.

For example, if the total monthly compensation of an employee is Rs 30,000, and if the employee joins the organization on June 21, they would be paid Rs 10,000 for the 10 days in June. Since June is a 30 day month, the per day pay is calculated as Rs 30,000/30 = Rs 1,000.

In the calendar day method, an employee — depending on whether they join or leave the organization in a 30 day or a 31 day month — will receive different pay amounts for the same number of pay days. In the above example, if the same employee joins the organization on July 22 (instead of June 21), even though they work for 10 days in July, they would receive only Rs 9,677 (after rounding off) in July. Since July is a 31 day month, the per day pay is calculated as Rs 30,000/31 = Rs 967.74.

2. Calendar days adjusted for Sundays

The monthly pay is calculated as total number of pay days multiplied by pay per day. In this method, pay per day is calculated as the total compensation for the month divided by the total number of calendar days minus Sundays.

Let us assume that an employee joins work in June which happens to have 4 Sundays. If the employee’s total monthly compensation is Rs 26,000, and if the employee joins on June 21, they would be paid Rs 10,000 for the 10 days in June. Since June has 26 pay days (30 minus 4 Sundays), the per day pay is calculated as Rs 26,000/26 = Rs 1,000.

Some organizations add public holidays to the total number of Sundays in order to arrive at the total pay days for the month.

In this method, the total number of pay days each month varies from one month to another depending on the number of calendar days, Sundays, and other holidays.

3. Fixed number of days, such as 26 or 30

The monthly pay is calculated as total number of pay days multiplied by pay per day. In this method, pay per day is calculated as the total compensation for the month divided by 26 or 30, as specified by the organization.

If an organization uses 26 as the fixed number of pay days each month, an employee who joins on June 21 and whose total monthly compensation is Rs 26,000, will get paid Rs 10,000 for the 10 days in June; the per day pay is calculated as Rs 26,000/26 = Rs 1,000.

In the fixed days method, an employee whether they join or leave the organization in a 30 day or a 31 day month, will get the same pay amount for the same number of pay days. In the above example, if the same employee joins the organization on July 22 (instead of June 21), he would be paid the same amount of Rs 10,000 (for 10 pay days) since both July and June are 26 day months from a payroll perspective.

Of course, the discussion on the method of pay calculation is relevant only for employees who have to be paid for less than a month – due to loss of pay or in their first or last month of service. For employees who have to be paid full salary for the month, the method of pay calculation is of no consequence.

Which is the best method?

Given the many methods of pay calculation that are being followed, is there is a particular method which stands out as the best?

From a statutory standpoint, labor laws in India do not seem to mandate the method which should be used by organizations; this is evident from the different methods that are in vogue. However, from the standpoint of logic, we recommend the use of calendar day logic or its variant, instead of the fixed day logic. The use of a fixed number of days such as 26 or 30 each month leads to inconsistencies in pay calculation and organizations should consider not using the method.

We will present our views on why the fixed day logic should not be used for pay calculation, in the next post.