Is there any legal aspect for Notice pay? As per our HR policy we consider basic salary of one month in lieu of one month notice. Some companies are following gross salary. In our company rotation is on higher side so we decided basic salary. Please advice.
Notice pay is as per the exit clause of appointment letter. It is a compensation given by one party (Who broke the contract) to other party because of the breach of contract. Law regarding breach of contract is given in section 73 of Indian contract Act 1872.
Section 73 is declaratory of the common law as to damages. The basic purpose of damages is to put party whose rights have been violated in the same position, so far as money can do so, as if his rights have been observed. When compensation sum is named in a contract as the amount to be paid in case of breach then it is know as liquidated damages. Example in the employment contract. When it damages are not given in contract then it known unliquidated damages in these damages will be defined by court on the bases of reasonableness and facts of the case.
Section 74 contract of contract act deals with liquidated damages and penalty. Whether they compensation amount mentioned in contract is liquidated damages or penalty will be defined by court. Compensation amount mentioned in contract will be maximum damages if court found that amount is not reasonable then it can reduce it because compensation is only given for losses not for penalty but court can not increase compensation amount.
By keeping section 73 and 74 of contract act in view organisation should put reasonable and clear amount in exit clause of appointment letter to avoid legal hassle. It is general law that whenever there is any ambiguity in terms of contract then benefit of doubt will given to party who don’t make the contract. (i.e. party who make the term of contact will suffer) As you know in Indian law there are many definition of wages or salary. Wages defined differently in every act. So it is advisable to clear in appointment letter that whether Salary means basic or gross as a notice pay. If you don’t make it specific and clear than whole purpose of putting liquidated damages in appointment letter is nullified.