Tsivasankaran
Consultant
Mukul Mathur
Human Resource
Bmnandakishore
Hr Sr Executive
Ashi.gurjar
Recruitment, Training And Development
Rajat Joshi
Hr Consulting ,trainer -creative Thinking
Jayachandran
Manager - Finance
Nilendrachand
Human Resource
Adewang17
Hr Proffesionanal
Maheshkk
Manager - Finance & Hr
Nilay.mehta
Recruitment Executive
Kate23
Student
Mruthyanjayarao
Hr-cum-admn Executive
Gopu.s
Executive
Rama Bs
Manager
Dhanuindian
Sr. Executive Hr
Dinesh.dhiman
Sr.hr Executive
+7 Others

Dear Members
Need your advice on whether it is possible to reduce the basic salary of an employee during any compensation restructuring exercise?. e.g. currently the employee basic as % of CTC is 50% and as per the new structure organisation wants to bring the basic as % of CTC to 40%, so is it legally possible to bring all the employees to 40%?.
Hi Sdix,
The company can change it to 40% on it's own will.
However you have to make sure that you do not voilate statutory compliances like pf, esic, minimum wages, bonus etc.
For example, if the basic salary of an employee is Rs. 7000 (in present structure), you can exempt him for PF contribution(limit being 6500). But, after making 40% as the basic salary, it would become 5600 (14000*40%) . So, PF contribution becomes mandatory. In turn, this may lead to increase in CTC as the employer also has to contribute!!:icon1:
Also, make sure that because of this change, minimum wages payable are not affected.
Let me know if i can clarify more...
Regards,
Hi Sdix,
One can increase or reduce the Basic. However, care should be taken that it is standard for all the employees. Lesser Basic also helps the employee to get more take home salary as the PF contribution will be reduced to that extent. This is generally more helpful for employees who are in the low income group as they are more interested in their Take home and not their CTC.
Regards,
raga
Dear,
Basic salary for an employee cannot be reduced as i has impact on PF, Gratuity, ESI etc. there has been cases on the same lines where when the case went up to supreme court for hearing the reduction in basic was restored as i impacted on PF, Gratuity, ESI. hence, it cant be done.
If you do this and employee goes to court then the decision will not be in your favour
Regards,
Nilendra
Thanks Nilendra, this was the reply i had heard from many of my friends and some PF experts, the main issue is understand is that the company needs to approach the PF commissioner with a solid case for approval. Also heard that the request is usually turned down. Could you please help me with any case / court case, reference where this issue has been taken up.
Raga, thanks for the inputs, but i understand its not very easy, has to be proved and a lot of statuatory approvals are required, and if you have your offices at different locations all the more hassles as you need approval from multiple PF commissioners office.
Hi Sdix,
I agree with Nilendra.
At the same time, it also depends on the kind of workforce you have. If it's a factory with a union, you have to be very careful.
However, if it's an industry like IT, where employees understand these things, you can give a letter for revised salary structure to the employees and take their acceptance on the copy of the letter. Also, it depends on the number of employees.
This should suffice your requirement.
Request seniors to comment...
Regards,
ash.pgdm
please let me know if one employee having 5000 - basic and 2000 - Da then how we do the calculation for PF and Esi Please provide me similar cases i m very confused Regards Ashi
Hello people!
I am in dire need to complete my task (project) on Reduction in cost on recruitment and to evaluate the training programme.
Please folks, guide me which is the best inexpensive way to establish a reduction in cost to the enterprise and the methods to measure the training programme whereby both the company and the employess benefit.
Thanks in advance and hoping to here from you asap.
Kate.
Hi!
Can u tell me how to reduce expense on recruitment methods and how to evaluate training programme, these are my project topic, please do provide inputs...ne info is welcum @
Thanks!
Hi You can bring down the basic pay as a percentage CTC from 50% to 40%. However, make sure that the actual amount of basic does not get reduced, since it affects the PF etc. Surendra
Mr. Vijaygk

Say per your post, you said that DA will be part of BAsic for PF calculation, but just now i gone through the PF Act, which say that DA doesnt inclueds in PF calculation, and extract of the same is below,

{ “basic wages” means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include-
(i) the cash value of any food concession;
(ii) any dearness allowance that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;
(iii) any presents made by the employer;}

can any body gives any inputs regarding this, becase i am calculating PF on the basis of Basic (not included the DA)??

regards
dear sir As per proviosn of PF Act you can not reduces Basic Salary Refere Section 12 Dave D m
Hello Vijay,
Ideally this is not practical (Salary can never decrease in a organization) but the if the change is taking place for the entire organisation than there no legal restriction to it. Even if you do it for an individual there is no legal obligation or law for it but the the employee will face problems in his future jobs
Hi Ashi, I am MMRAO,
I would like to clarify your PF will always be calculated on basic pay only. In your case, the basic pay is Rs.5000/-. The statutory rate of PF is 12%. Hence, 600/- will be the contribution from employee side. another 600/- should be contributed from employer side. There is one more thing to know. Here,the employer contribution i.e. 600/- will be divided into two parts. One is towards PF @ 3.67% another one is towards 8.33% towards Pension Scheme. So total Rs.1200/- will be credited to the employee PF A/c. at EPF Office by way of R1 monthly challan.
Hope you got clarification.
Pl.Revert back if any.
Regards,
MMRAO
Hi All,
I am also looking at working on restructuring on salary break-ups for my employees to ensure more inhand for them. Can you please guide me as to what kind of formalities I may have to get into to get this approved by PF Commissioner. All employees in my company are white collar employees and beyond Rs. 7501/- mark.
Any inputs from your end would be of great help.
Thanks in advance.
Regards,
Karuna Ahuja
Hi
Yes company can change basic any time but takin in view that the member should not lose much,
the reduced amount in basic can be raised into other allowences like Con, hra, lta spl.bonuse etc., and alo in this way you employee can expect a growth in thp. statutory requirements need not to be changed.
Thank you
Regards
Debajit Roy
HI XXXXX A company cannot reduce the bAsic once it has fixed bcoz it effects PF , ESI, Also Gratuity and all otheer elements vr the Employee may loose certain benefits bcoz incremnet r based on Basic
Hello

Basically Terms and Conditions are governed by Appointment letter and for unionised category, Industrial Disputes Act will also guide.. I do not know why PF Act is being discussed here.

1. One can reduce basic salary of management/ supervisory staff ( Dont reduce too much) as a restructuring exercise and get the revised terms and conditions duly accepted by him by geeting the duplicate copy signed "read and accepted"

2. In case of unionised staff Notice under section 9 of the industrial Disputes Act need s to be given. Then discussion will take place before the Commissioner. Agreement need to be arrived at. Whetrher you have union or no union, if the employees are workmen under the Industrial Disputes Act, then , my advice would be not to reduce the basic

3. PF Authorities have no role here. The concerned section which was referred to in one post was about not reducing the basic salary to adjust the Managements Contribution. They can not take up this issue and and even if they take up, if you could prove that no adjustment has been made to recover employers contribution, they will not proceed.

4. There was another post enquiring about Basic and DA and PF. The Member has reproduced the definition of Basic salary and says Basic salary does not include DA. That is obvious Basic does not include DA. But I would request the member to read Section 6 of the Act which talks about contribution. If you are not contributing PF on DA, you are in real trouble and change it immediately

Siva
Hi,
c
It is legally not tenable to reduce the basic of a person. It is violative of labour laws as per the Sec 12 of PF Act and Sec 72 of ESI Act. You can adjust other components which doesn't have direct bearing in the PF, ESI and Gratuity.
Regds,
Srira
Dear Srira

Employment terms and conditions are governed by appointment letter and Industrial disputes act.

PF Act and ESI are social security legislations and have no scope on terms.

The Sections you are referring to is to protect the employees from employer recovering their contribution from the employees.

Consider variable Dearness Allowance. There had been months in which Cost of Living Index will come down and the salary....Basic plus DA of an employee will come down from the previous month. This is not theoretical and we have seen these variations.
Then can the PF authorities demand that the employer to deduct based on the higher DA and contribute on hbigher DA? They can not.

Purpose and intention of the sections specified by you are different

The question raised was...

Can we reduce the Basic salaries of employees?

Legally it is possible

They are guided by
1. Terms of appointment
2. Industrial Disputes Act

In case of employees not governed by ID Act, change the terms and get it signed in token of acceptance Here the new terms of service will become applicable which is a valid contract in law

Those who are goverend by ID Act a notice under Section 9A is mandatory

Siva
In your case PF deduction will be made on 5000 and ESI will be deducted on gross i.e on basic and d.a. thanx & regards Dinesh 09816545630
Hi Sdix,
This issue would lead statutory implecations. One way we can do the same as those who are lower salaried employees (below 6500 basic+DA), not required to reduce their basic and the higher salaried we can reduce their basic, but make sure as told above their basic should not fall in to the PF class. accordingly we can make changes.
Hi Sdix,

Pls note that the basic salary of an employee cannot be reduced from the existing %age or amount during the continuity of the employment. However, if an employee happens to resign from one entity of the group and join another entity as a new joinee, it is very much possible and doesnot have any legal implications.

PF is a benefit offered to an employee MANDATORILY by an employer to ensure MINIMUM benefit to the employee. The 12% contribution of basic + DA further gets divided into EPF & EPS, which is a long term benefit for employee. Hence, any negative change in the basic would lead to decrease in associated benefits of the employee, which is ILLEGAL as per law.

Any organization may change the salary structure without compromising on the existing statutory benefits of an employee. Law always talks about MINIMUM Benefits, rest is upto the discretion of the employer.

Inclusion of DA for calculation of PF - DA i.e dearness allowance and Food allowance, if any, must be included for the purpose of calculation of PF as per the act. Pls note DA i.e DAILY ALLOWANCE is not same as DEARNESS ALLOWANCE.

Regards
Hi,
The salary structure is the one which is more specific to each org. the management can have any salary structure. But the proposed structure should be at the interest of employees. If basic is high, the PF contribution will also accordingly increase. this is beneficial for any person in two way.
1. the taxable income will get reduced to the extend of PF contribution.
2. The investment base of a person go well without any cashflow prob.
over a period of time, the employee would have saved a good amount.
here, you can have high basic along with reimbursement components so as to reduce the taxable salary. reimbursements are liable for FBT @ 6.732% as against the normal tax slabs.
should you require more info, please do not hesitate to post.
regards
Jay
Dear Siva and others,

As said earlier Basic cannot be reduced as it has impact on few other statutes.

Shiva, when you are talking about variable DA, then the essence of DA is to protect against economic instability. hence, it dosent contravene the provisions of law. In any case with VDA you also have FDA. You cannot only have VDA and i hope you will also comfirm to it.

Normally, Cos. whose income is much dependent upon $ rate or things like that, then they have a component which is nornally called Variable Pay. You can have such things as part of compensation with a clause that this payout will depend on Cos. performance and can vary and take signature from employees.

If you take signature from employees on any document where you have written that you are reducing basic salary for any reason, then also it will not have any impact on court and decision will be not in your favour.

One should keep reading case laws so that decision making in these situations become easier.

Again, if you introduce variable pay components then in that case you can reduce other allowance and that will have no negetive impact on law.

In case of reduction of basic, when the PF commissioner will come to audit your books then you will have a real diffcult time as these people are really difficult to handle in case of default.

Regards,
Nilendra
Dear, Read case studies. you will gain more understanings on these issues and also when you deal with these things Regards, Nilendra
Dear All Is any where mentioned that basic salary should be 50% of Gross Salary or is it a standard policy that we can keep it as 50% of Gross salary
Dear Nilendarchand

I can only tell from my experience and understanding of law that it is not illegal to reduce basic.

I would request you to look at the reasoning.

Where does the law say that the basic shall not be reduced??

Alternatively the Industrial Disputes Act provides for Sec 9A where an employer can give Notice of Change for altering terms which is not in favour of workmen.

As for as Managerial and supervisory staff are concerned, they are goverened by individual contract and we can alter the terms and if both parties agree, then it becomes a contract. In case of a Management staff, if he is not willing to agree to the change of condition, then the Management can always use termination clause.

Let me remind, that we are purely talking about legal position., I am not discussing whether this is the right method or whether it is ethical.

I have atleast four or five times in my career reduced Basic salaries of Management Staff

With unionised category, I have not done as it involves negotiation. But I kn ow of Companies which gave Notice of Change under ID Act and changed the basics to lower level

This is the legal position.

Since it is a very important subject, I would request any moderator to intervene at this stage, and if need be get an opinion.

I can always put my signature and give my opinion!!! If you need a better known person to give opinion, I will get it free of cost.!

Again I repeat... I am talking about legal position.

It is not illegal

Siva

T.Sivasankaran MA(TISS) LLB

*

I am not adding these qualification to say that what I am saying is 100% correct. Many a times, people will look at the views in a different perspective This is very important topic and I do not want any new comers to the field to go with an information which is not legally correct.

If there is any caselaw contrary to my views, kindly quote and I will examine
Dear all,

Yes, The company can reduce the basic especially for the staff viz on unionised members as long it is a restructuring exercise as mentioned by my colleagues here.

Here one has to take care of the following :

1. Preferably it should be done at the annual increments where reducing basic 50 % of CTC to 40 % or 45% which increasing the take home salary by way of reduction of contribution to PF as well as there should be nominal hike ( atleast 10-15%) over earlier CTC before being revised. This should be explained in the increment letter showing the figures on erstwhile CTC vis -a-vis revised CTCs.

2. There would be readily acceptance if the increased salary is put under the tax saving heads like LTA or Food coupons rather than under taxable allowance head!.

3. As rightly pointed - one needs to take the copy of acceptance on the revised letter.

4. In case of the unionised workers - it can done at the time of wage settlement & discussions. Here one needs to have a buy-in and possess the assertive and negotiation skills to push it through.

In all & all in above initaitives HR needs to be pro-active and ensure the rumours or grapevine network is handled well.

Best Regards,

Rajat Joshi
Thanks Rajat In fact your posting timing is after my posting timings If it is seen either before my posting or after my posting, there will be logical end to this discussion. Somehow it is recorded in between.
Anyway thanks once again
Siva
Thanks for all the inputs, this was my first post on citehr and i must say this is a very good forum with a lot of knowledgeable inputs. Yes, there are variance in views on this subject which was one of the main reasons for posting this query.

My initial understanding of this issue after consulting with many experts and my colleagues in the industry told me that it would not be easy to implement reduction in basic for the employees (Especially if an employee goes to court). Yes, we can have the employee to sign the revised comp and implement the new structure, but in case of PF scrutiny and PF being a sensitive issue for the governement, there might be a chance of attracting heavy penalties.

We would all agree that the definition of workmen, the PF and other associated employee benefit acts have very old definitions which have not been updated with time, in a way they do not reflect the new economy in many cases, and i presume that Reduction/ Restructuring salary is one such issue.

As one senior member has suggested, the best way to go about restructing and bringing down Basic as % of CTC is to add the increments in other allowances and keep the basic constant, over a period of time automatically Basic of % of CTC will come down to more acceptable levels.

It would really help if any of the members can provide with a case study/ court case in this matter, this would help in brining this discussion to logical conclusion.

Thanks once again to all the members for their valuable inputs, really appreciate the time and knowledge shared.

Regards

Santosh
I hope that the reduction of basic wages not acceptable by PF act & authorities and the basic wages can be increased or to be maintained as it is same.
Hi Sdix,
You can always restructure the compensation pacakage in the company.
If you are looking for change in basic, then every components' ratio needs to be changed accordingly, because every component would be based on basic only in order to to keep the CTC unchanged .
Regrads,
Archana Dewang
Dear Friends

I am requesting you to understand one basic issue

Reduction in basic is nothing to do with PF

If a settlement is signed with Union reducing wages, what can PF Authorities do??

I have in my career span of nearly 35 years have reduced the basic salaries atleast 4 to 5 times Many organisations have done

I repeat I am not talking about its desirability

I am talking about legality.

I really do not understand as to why one should refer to a wrong legislation.

Terms and conditions of employment are not governed by PF ACT and in any experts say so, I really would like to discuss this issue seriously.

I saw Rajat Joshis posting and thought it has reached a logical conclusion. Now members are again talking about PF Act for reduction of basic.

We do not go to a Dentist for Cardiac problem Do we??

We do not refer to IPC for implementing Standing Orders>. Do we?

We do not refer to Factories Act or Shops Act or Plantation Act to discuss Permanent Status.

Then why quote PF on a subject on which it has no jurisdiction

Please understand

Siva
Hi Nilendra, I second your views..PF authorities will really give organizations tough time, if they happen to reduce the statutory benefits of employees. Regards
Dear Sdix,
First of all we should understand that there is a contractual obligation between the employees and employers framed in the offer of an appointment. Neither employer nor employees have right to breach the said contract, which has been agreed in offer of appointment without mutual consent of both the parties.
So, if your management has decided to reduce the basic wages, please take consent from the employees in writing to avoid future litigation.
Regards,
Karuna Kumar
Dear Siva, Pls refer to my reply below : The whole discussion is to bring clarity in our understanding and learn from others..I am sorry if I have hurt anyone.. Regards
Nilendra, if the basic and DA is decreased without affecting the PF contribution as the company may have limited to the slab of Rs. 6500.But it has an adverse affect on the annual bonus considered as it will consider 8.33% of Basic and DA
example:
If the Basic and DA is 6000/- & 4000/- respectively annual bonus with the minimum requirement of 8.33 % for the whole year will be Rs.8330/-
When the Basic and DA reduced to is 5000/- & 2000/- and added the same amount of Rs 3000/- as HRA then the annual bonus with the minimum requirement of 8.33 % for the whole year will be Rs.6997/- thus there will be i decrease in CTC, but your take home will be more.
Nilendra, are there any rules regarding that the basic or DA should not be reduced when annual appraisal is done or any other cases
Dear Nilendra, What u say i agree..... but can i find the same in any act mentioned for my reference would request you to suggest me Regds. Satya
Dear all,Let me clarify the issue related to the reduction of Base Salary. Let me take an example of the case – an employee draws a gross salary of Rs 4 Lacs p.a. and his basic salary Rs 10 k/m or Rs 1.2 lacs p.a.On this basic salary, a statutory requirement of provident fund (PF) contribution - 12 % is calculated on the basic salary. 2. As per the Act herein;Section 12 of Indian Provident Fund Act: Employer not to reduce wages etc No employer in relation to an establishment to which any Scheme or the Insurance Scheme applies shall by reason only of his liability for the payment of any contribution to the Fund or the Insurance Fund or any charges under this Act or the Scheme or the Insurance Scheme reduce whether directly or indirectly the wages of any employee to whom the Scheme or the Insurance Scheme applies or the total quantum of benefits in the nature of old age pension gratuity provident fund or life insurance to which the employee is entitled under the terms of his employment express or implied. Therefore, one cannot reduce the basic salary of the employee under the Act which affects the PF contribution ( 12%), however the employer can reduce the other salary components and EVA/bonus.Company can reduce the components like HRA, Conveyance allowance etc hence the gross salary ( Rs 4 lacs p.a. to Rs. 3 lacs p.a.) and not on the basic salary which has a direct bearing on provident fund contribution. If you need any further information/clarifications, please feel free to ask.Regards,Rajat Joshi
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