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LABOR LAW PROJECT,

CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”
CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”
A Project Submitted to:-

ARMY INSTITUTE OF LAW, MOHALI

In partial fulfilment of the requirements of the award of degree of B.A. L.L.B

Submitted to: -
Dr. Kirandeep Kaur

Submitted by: -
PRATIKSHA (2014)

PUNJABI UNIVERSITY PATIALA (PUNJAB)

Semester – 6th

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LABOR LAW PROJECT,
CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”

TABLE OF CONTENTS
Table of Contents ....................................................................................................................... 2
Introduction ................................................................................................................................ 3
Need for Enactment of The Payment of Wages Act, ............................................................. 4
Objective and Purpose of The Payment of Wages Act .......................................................... 4
Deduction ................................................................................................................................... 5
Section 7: Deductions ........................................................................................................ 5
Deductions for Fines (Section 8) ....................................................................................... 5
Deductions for Absence from Duty (Section 9) ................................................................ 5
Deductions for Damage or Loss (Section 10) .................................................................... 6
Deductions for Recovery of Advances (Section 11).......................................................... 6
Deductions for House Accommodation (Section 13) ........................................................ 6
Case Laws :- ........................................................................................................................... 7
Criticism..................................................................................................................................... 8
Suggestion .................................................................................................................................. 9
Difference between Payment of Wages Act, 1936 and the The Payment of Wages Code, 2019
.................................................................................................................................................. 10
Conclusion ............................................................................................................................... 11
References ................................................................................................................................ 11

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LABOR LAW PROJECT,
CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”

INTRODUCTION

It is a well-known fact that India’s economy depends not just on the formal sector but also on
the informal sector. The significance of the informal sector in India cannot be ignored. Before
independence in 1947, the informal sector, primarily agriculture, contributed to 95 per cent of
the Gross Domestic Product (GDP). Even today, 70 per cent of the national income of India
consists of income generated through agriculture (Food and Agriculture Organisation of the
United Nations).

As per the Employment – Unemployment Survey of 2011-12, presented by the National

Sample Survey Office (NSSO), the total workforce of India is 474.23 million. However, out of
this total workforce, only 8 per cent belong to the formal sector, and the remaining 92 per cent
are working in the informal sector. Additionally, 60 percent of the growth of GDP is due to the
contribution of these informal sector workers.

According to the Indian Constitution, the Government of India is required to create

employment opportunities and ensure that all workers (formal and informal sectors) have
access to a reasonable standard of living that includes all socioeconomic and other welfare
opportunities.

Adhering to the Constitution of India, the Indian Government in the year 1948, right after
independence, introduced legislation named the Minimum Wages Act of 1948. The legislative
intent behind the Act was to make sure that workers in the informal sector receive at least a
minimum amount of money as wages to avoid exploitation. However, before this Act,
the Payment of Wages Act of 1936 was introduced. The Act made efforts so that informal
sector workers could be linked with mainstream development by providing minimum wages,
which can be utilised to increase living standards and benefit social development schemes.

The Act has occasionally undergone modifications to ensure that the law is effectively
implemented and that workers receive adequate pay in a timely manner to maintain themselves
and their families. This article explains numerous significant clauses of the Act and related
amendments and case laws.

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CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”
NEED FOR ENACTMENT OF THE PAYMENT OF WAGES ACT,

Due to the overabundance of labour that was available in India during the industrial revolution,
which gave British merchants significant socioeconomic leverage, the labour force was
reduced to a low economic condition with no negotiating market power.

As a result, Indian employees had to work and live in abhorrent circumstances. Regarding their
work hours, there were no regulations in place until 1891. Any type of social protection against
illness, old age, joblessness, accidents, or unexpected death did not exist.

There was no provident fund programme; instead, a substandard maternity benefits programme
was implemented in the 1930s. Between 1889 and 1929, manufacturing workers’ real wages
decreased, and the average worker’s standard of living fell below the poverty line.

Among the most oppressed groups in the history of modern capitalism were the Indian
Industrial Workers, who were underprivileged and confined like animals without access to the
basic necessities of life like food, shelter, and clothing.

OBJECTIVE AND PURPOSE OF THE PAYMENT OF WAGES ACT

Considering the efforts of the public at large, the Payment of Wages Act of 1936 was passed
by the British Government on April 23, 1936. As previously stated, this Act was enacted to
regulate the payment of wages for a specific group of workers. In accordance with the Payment
of Wages Act, “wages” refers to any compensation given to employees, with some exceptions
listed in the specific exclusions mentioned under the Act. These exclusions include any
monetary value for housing accommodations or incentives, as well as gratuities, travel
expenses, and the amount offered for the delivery of electricity or water.

The Payment of Wages Act 1936 is a useful piece of legislation that governs how specific kinds
of people employed in industries get paid.

The primary goals of the Act are-

• To guarantee consistent and fast wage payments,

• To prevent wage employees from being exploited by eliminating arbitrary penalties
and wage deductions, and
• It outlines the obligations of businesses to pay wages; fix wage periods;
compensation schedules and methods; allowable deductions; and other related
issues.

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LABOR LAW PROJECT,
CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”

DEDUCTION

Section 7: Deductions
Section 7 of the Payment of Wages Act, 1936, lays down the conditions under which an
employer can make deductions from an employee's wages. The section specifies that
deductions can be made only for the following purposes:
1. Fines (Section 8)
2. Absence from duty (Section 9)
3. Damage or loss (Section 10)
4. Recovery of advances (Section 11)
5. House accommodation (Section 13)
However, there are certain conditions that must be fulfilled before any deduction can be made
under these sections. The employer must provide a written notice to the employee specifying
the reasons for the deduction, and the amount of the deduction must not exceed the prescribed
limits.
Deductions for Fines (Section 8)
Section 8 of the Payment of Wages Act, 1936, allows an employer to make deductions from
an employee's wages for fines imposed on the employee. However, the following conditions
must be fulfilled before such deductions can be made:
1. The employee must have been found guilty of an offense
2. A proper inquiry must have been held
3. The deduction must not exceed an amount equal to the wages of the employee for two
days in a month
In the case of Saroj Kumar Mukherjee v. State of West Bengal, the Calcutta High Court held
that any deduction made for a fine must be based on a valid inquiry and must not exceed the
prescribed limit.
Deductions for Absence from Duty (Section 9)
Section 9 of the Payment of Wages Act, 1936, allows an employer to make deductions from
an employee's wages for absence from duty. However, the following conditions must be
fulfilled before such deductions can be made:
1. The absence must be without reasonable cause
2. The deduction must not exceed an amount equal to the wages of the employee for the
number of days they were absent

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LABOR LAW PROJECT,
CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”
In Burmah Shell Oil Storage and Distributing Co. of India Ltd v. Its Workmen, 1the Supreme
Court of India held that an absence from duty must be without reasonable cause to justify a
deduction, and the employer must prove that the employee was absent without reasonable
cause.
Deductions for Damage or Loss (Section 10)
Section 10 of the Payment of Wages Act, 1936, allows an employer to make deductions from
an employee's wages for damage or loss caused by the employee to any goods or property of
the employer. However, the following conditions must be fulfilled before such deductions can
be made:
1. The damage or loss must be a direct result of the employee's neglect or default
2. The deduction must not exceed the amount of the damage or loss caused
In Indian Iron and Steel Co. Ltd. v. Their Workmen2, the Supreme Court held that a deduction
for damage or loss must be made only if it is directly caused by the employee's neglect or
default, and the employer must prove that the employee was responsible for the damage or loss.
Deductions for Recovery of Advances (Section 11)
Section 11 of the Payment of Wages Act, 1936, allows an employer to make deductions from
an employee's wages for the recovery of advances made to the employee. However, the
following conditions must be fulfilled before such deductions can be made:
1. The employee must have given written consent for such deductions
2. The deduction must not exceed the amount of the advance
In Hindustan Steel Ltd. v. Presiding Officer3, Labour Court, the Supreme Court held that an
employer cannot make deductions from an employee's wages for the recovery of an advance
unless the employee has given written consent. The Court also held that if the employer has
made an advance to the employee without obtaining written consent, the employer cannot make
any deductions from the employee's wages for its recovery.
Deductions for House Accommodation (Section 13)
Section 13 of the Payment of Wages Act, 1936, allows an employer to make deductions from
an employee's wages for the provision of house accommodation. However, the following
conditions must be fulfilled before such deductions can be made:
1. The employer must provide house accommodation to the employee
2. The deduction must not exceed an amount equal to the value of the house
accommodation provided
In Madras Fertilizers Ltd. v. Its Workmen, the Madras High Court held that an employer can
make deductions for the provision of house accommodation only if the employer has actually
provided the accommodation to the employee.

1
Burmah Shell Oil Storage and Distributing Co. of India Ltd v. Its Workmen,1971 AIR 922
2
Indian Iron & Steel Co. Ltd. v. Their Workmen, [1958] SCR 667
3
Hindustan Steel Ltd v. The Presiding Officer, 1977 AIR 31

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LABOR LAW PROJECT,
CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”
CASE LAWS :-

One major case law that led to a significant amendment in the Payment of Wages Act, 1936, is
the case of Unichem Laboratories Ltd. v. The Workmen4. In this case, the Supreme Court of
India held that an employer cannot make deductions from an employee's wages for a period
exceeding three months unless the employee gives his or her written consent.
Prior to this case, there was no specific time limit on the period for which deductions could be
made, and employers could make deductions indefinitely. The Supreme Court's decision in
Unichem Laboratories Ltd. v. Prakash U. Shah led to the amendment of the Payment of Wages
Act, 1936, in 2017, which introduced a new provision (Section 7A) specifying that deductions
from an employee's wages for any reason shall not exceed 50% of the employee's total wages
in a wage period.
The amendment also introduced a time limit of 12 months for making deductions, except for
deductions for damage or loss and for recovery of advances, which are limited to a period of 6
months. The amendment also requires employers to obtain written consent from employees for
deductions beyond these time limits.
The decision in Unichem Laboratories Ltd. v. Prakash U. Shah and the subsequent amendment
to the Payment of Wages Act, 1936, has provided greater protection for employees against
unfair deductions from their wages. The introduction of a time limit on deductions and the
requirement for written consent has helped to ensure that employers cannot make deductions
indefinitely without the consent of their employees.
Here are some more significant cases related to deductions under the Payment of Wages Act,
1936, in India:
• Jitendra Nath Biswas v. M/s. Empire of India and Ceylon Tea Co. Ltd.5: In this case,
the Supreme Court held that deductions from an employee's wages for alleged
misconduct must be made in accordance with the principles of natural justice. This
means that the employee must be given a fair hearing and the opportunity to defend
himself or herself before any deductions can be made.
• Air India Statutory Corporation v. United Labour Union6: In this case, the Supreme
Court held that the Payment of Wages Act, 1936, applies to all employees, whether they
are permanent, temporary, or contract workers. The Court also held that employers
cannot make deductions from an employee's wages for any reason other than those
specified in the Act.
• Tata Iron and Steel Co. Ltd. v. Their Workmen7: In this case, the Supreme Court held
that an employer cannot make deductions from an employee's wages to recover a debt
owed by the employee to the employer. The Court held that such deductions would be
illegal and unfair.

4
Unichem Laboratories Ltd. v The Workmen, 1972 AIR 2332
5
Jitendra Nath Biswas v. Empire of India & Ceylon Tea Co., 1990 AIR 255
6
Air India Statutory Co. v. United Labour Union, AIR 1997 SC 645
7
Tata Iron and Steel Co. Ltd. v. Their Workmen, AIR 1967 Pat 397

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LABOR LAW PROJECT,
CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”

CRITICISM

While the Payment of Wages Act, 1936, provides a framework for making deductions from an
employee's wages, the concept of deduction itself has been criticized on various grounds. Here
are some of the common criticisms of deductions:
1. Lack of Clarity: The provisions related to deductions in the Payment of Wages Act,
1936, are often criticized for their lack of clarity. The Act does not provide a clear
definition of what constitutes reasonable deductions, and there is a lack of clarity on
the amount that can be deducted for each purpose. This lack of clarity can lead to
confusion and disputes between employers and employees.
2. Exploitation: Deductions can sometimes be used as a means of exploiting employees.
For example, some employers may impose fines on employees for trivial offenses and
deduct a disproportionate amount from their wages. This can lead to financial hardship
for employees, particularly those who are low-paid.
3. Adversely Affects Low-Paid Employees: Deductions can have a disproportionate
impact on low-paid employees, who may already be struggling to make ends meet.
Even small deductions from their wages can have a significant impact on their finances.
4. Inadequate Safeguards: The Payment of Wages Act, 1936, provides some safeguards
to protect employees from unfair deductions, such as the requirement for written notice
and limits on the amount that can be deducted. However, these safeguards are not
always effective in practice. Employers may not provide adequate notice or may ignore
the prescribed limits, leaving employees vulnerable to unfair deductions.
5. Administrative Burden: The process of making deductions can be time-consuming and
administratively burdensome for employers, particularly for smaller businesses. This
can lead to errors and disputes, which can be costly to resolve.
Overall, while deductions may be necessary in certain circumstances, they should be made with
caution and with due consideration to the impact on employees. The provisions related to
deductions in the Payment of Wages Act, 1936, should be reviewed and updated to address
some of the criticisms mentioned above.

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LABOR LAW PROJECT,
CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”

SUGGESTION

The Payment of Wages Act, 1936, can be amended to address some of the criticisms of
deductions. Here are some changes that can be made to the Act:
1. Clearer Definitions and Guidelines: The Act can be amended to provide clearer
definitions of what constitutes reasonable deductions and guidelines on the amount that
can be deducted for each purpose. This will help to reduce confusion and disputes
between employers and employees.
2. Increased Safeguards: The Act can be amended to increase safeguards for employees
against unfair deductions. For example, the Act can require employers to provide more
detailed written notice to employees before making deductions and to obtain written
consent from employees for certain types of deductions.
3. Limitations on Deductions for Low-Paid Employees: The Act can be amended to limit
the amount that can be deducted from the wages of low-paid employees. This will help
to ensure that deductions do not have a disproportionate impact on the finances of these
employees.
4. Mandatory Reporting: Employers can be required to report any deductions made from
employees' wages to the relevant government authorities. This will help to ensure that
employers comply with the provisions of the Act and will provide a mechanism for
employees to report any unfair deductions.
5. Simplification of Administrative Procedures: The Act can be amended to simplify the
administrative procedures for making deductions. This will reduce the burden on
employers and help to minimize errors and disputes.
Overall, the Payment of Wages Act, 1936, can be amended to provide better protection for
employees against unfair deductions while balancing the interests of employers. The
amendments should aim to clarify the provisions related to deductions, increase safeguards for
employees, and simplify administrative procedures.

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LABOR LAW PROJECT,
CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”

DIFFERENCE BETWEEN PAYMENT OF WAGES ACT, 1936 AND THE THE PAYMENT
OF WAGES CODE, 2019

The Payment of Wages Act, 1936, was repealed and replaced by the Payment of Wages Code,
2019, which came into effect on September 8, 2020. Here are some key differences related to
deductions under the new Payment of Wages Code:
1. Time limit for deductions: Under the Payment of Wages Act, 1936, there was no
specific time limit on the period for which deductions could be made, and employers
could make deductions indefinitely. However, under the Payment of Wages Code,
deductions for any reason shall not exceed 50% of the employee's total wages in a wage
period, and deductions for damage or loss and for recovery of advances are limited to
a period of 12 months.
2. Written consent for deductions: The Payment of Wages Code requires employers to
obtain written consent from employees for deductions beyond the limits specified in
the Code. The written consent must be obtained before making the deduction and
should specify the purpose for which the deduction is being made.
3. Penalty for illegal deductions: The Payment of Wages Code imposes a penalty on
employers who make illegal deductions from an employee's wages. The penalty is a
fine of up to Rs. 50,000, which may be increased to Rs. 1 lakh for repeat offenders.
4. No deductions for absence due to strike or lockout: The Payment of Wages Code
prohibits employers from making deductions from an employee's wages for absence
from duty due to a strike or a lockout.
5. No deductions for recovery of employer's contribution: The Payment of Wages Code
prohibits employers from making deductions from an employee's wages for recovery
of their contribution to a provident fund, pension fund, or any other fund.
Overall, the Payment of Wages Code provides greater protection for employees against unfair
deductions from their wages and imposes stricter penalties on employers who make illegal
deductions. It also provides more clarity on the limits and purposes for which deductions can
be made, and requires employers to obtain written consent from employees for deductions
beyond the specified limit

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LABOR LAW PROJECT,
CRITICAL ANALYSIS OF THE CONCEPT OF “DEDUCTION”

CONCLUSION
In conclusion, the Payment of Wages Act, 1936, lays down specific conditions under which
an employer can make deductions from an employee's wages. The Act specifies the purposes
for which deductions can be made, such as fines, absence from duty, damage or loss,
recovery of advances, and house accommodation. However, the employer must follow the
prescribed limits and provide a written notice to the employee before making any deductions.
The Act also lays down specific conditions that must be fulfilled before making deductions
for each purpose. The case laws mentioned above provide further clarification on the
interpretation of the provisions of the Act.

REFERENCES
• Ministry of Labour and Employment, Government of India. (2021). Payment of Wages
Act. http://www.labour.gov.in/payment-wages-act
• Bhattacharya, S. (2017). Payment of Wages Act 1936 - An Overview. Journal of Legal
Studies and Research, 3(1), 52-55.
• B.D. Singh. (2019). Labour Law I - Industrial Jurisprudence. Allahabad Law Agency.
• S. K. Kapoor. (2020). Industrial Law. Central Law Agency.
• R.R. Shrivastava. (2021). Labour Laws - As Applicable in India. Universal Law
Publishing.

ARMY INSTITUTE OF LAW, MOHALI