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Section 38: Application of Chapter to newly set up establishments

The Code on Wages, 2019 (Act No. 29 of 2019) • Official Statutory Text & Plain English Practice Guide

Statutory Mandate
Chapter IV: Payment of Bonus
Competent Labour Forum
Act No. 29 of 2019
Section 37 All 67 Sections of Code on Wages, 2019 Section 39

Legal Commentary & Landmark Judgments: Section 38

Section 38 of the Code on Wages, 2019 establishes a restricted statutory right of equitable set-off, empowering an employer to lawfully deduct proven financial losses caused by an employee's established misconduct from the bonus payable under Chapter IV, strictly circumscribing such deductions to the bonus due for that specific accounting year only, while preserving the employee's absolute entitlement to receive any remaining balance.

  • Substantive Requirement of Proven Misconduct & Quantifiable Loss: The statutory right of deduction cannot be exercised arbitrarily; it requires a conclusive finding of misconduct arrived at through a regular domestic inquiry conducted in strict conformity with natural justice. The employer bears the evidentiary burden of proving actual, quantified pecuniary loss directly resulting from the employee's misconduct, distinct from normal operational or business depreciation.
  • Rigid Temporal Limitation to Single Accounting Year: The deduction is statutorily restricted 'in respect of that accounting year only' in which the misconduct occurred and the loss was sustained. An employer is legally prohibited from carrying forward unrecovered financial losses to deduct against bonus entitlements of subsequent accounting years, or from adjusting such losses against unpaid bonus accrued in preceding years.
  • Preservation of Balance and Distinction from Total Forfeiture: Unlike Section 29, which imposes total disqualification and forfeiture of bonus for grave misconduct (fraud, violent behavior, theft, sabotage), Section 38 operates as a compensatory set-off mechanism. If the quantified loss is less than the total bonus payable, the employer is legally obligated to disburse the remaining surplus to the employee within the statutory payment timeframe.
Key Landmark Precedents:
  • Glaxo Laboratories (I) Ltd. v. Presiding Officer, Labour Court (1984) 1 SCC 1: The Supreme Court held that misconduct must fall squarely within enumerated standing orders or statutory provisions; penal consequences and financial deductions cannot be visited upon an employee for acts falling outside the defined matrix of misconduct.
  • Delhi Cloth and General Mills Co. Ltd. v. Ludh Budh Singh (1972) 1 SCC 595: The Supreme Court ruled that domestic inquiries must strictly adhere to principles of natural justice, establishing that any punitive deduction or forfeiture based on defective, biased, or unproven inquiry findings is null and void ab initio.
  • Workmen of Dewan Tea Estate v. Their Management AIR 1964 SC 1458: The Supreme Court established that employers possess no inherent or common law power to effect unilateral wage or bonus deductions absent explicit statutory authorization and strict evidentiary substantiation of loss.
Courtroom Practice & Strategic Litigation Guidance:

In industrial and corporate practice, employers must never execute unilateral bonus deductions under Section 38 without first concluding a domestic inquiry that specifically charges the employee with misconduct causing financial loss and records an explicit finding on the exact quantum of loss. The charge-sheet must articulate the precise causal link between the delinquent act and the monetary damage. The final deduction notice must clearly detail the gross bonus computed under Chapter IV, the audited quantum of financial loss deducted, and the net balance credited to the employee's bank account. Default in following this procedure exposes the employer to claims under Section 45 and exemplary penalty compensation up to ten times the deducted amount.

Section 37 All 67 Sections of Code on Wages, 2019 Section 39