I work for an MNC in India in middle management role. In my organization there is a policy called productivity linked wage in practice for workmen. In other words a person has to deliver certain fixed output per shift which is agreed between the management and employee union. If any person fails to give the agreed production in a month (less than 5%), then his salary will be deducted accordingly. My query is that is it legal to do so? By the way all the workmen's salaries are far more than minimum wages act?
From India, Hyderabad
Dear Phanikrishnan
Instead of having a "negative" incentive policy, it could have been a positive incentive policy.
What it means is to have a fixed and a variable component.
The variable component could be linked with the production output.
So whomsoever fulfills the laid out criteria, gets incentive to the extent envisaged in the scheme; and those who don't, don't get the incentive.
Such a policy would not be fair but also appears to be fair to all and thus prevents any heart-burn.
Warm regards.,

From India, Delhi
I think a deduction from salary for not meeting the production level would be a violation of payment of wages act. It lists the deductions which are allowed. All other deductions are illegal.
Instead of deduction, you have make your salary structure have an incentive amount which will come into effect only on reaching production target. There needs to be a fixed salary that will be payable irrespective of production levels. That can be at minimum wages level.
Further, your statement "salary will be deducted accordingly" indicated the full salary is variable. In that case opt for a piece rate system. Ofcourse then the workers who are efficient will get more than you are paying now. You can not have a piece rate and also put a salary cap.

From India, Mumbai
Dear Raj Kumar, Appreciate your reply. The policy I mentioned is in practice for 25+ years now. My query is "Is such deduction legal?"
From India, Hyderabad
Mr.Phani Krishnan
In my view, a deduction caluse may be controversial and disputable, since it implies that you are reducing wages which you have ageed to pay to a workman. There may be issues with the language of the agreement.

From India, Mumbai
- *-Fixing the Salary and deduction from it for not acheiving the target is ILLEGAL.
-*- Instead, fix the salary matching minimum wages, fix the target and corresponding incentive amount. So the question of deduction will not arise.
- *- Deduction can be made only for misconducts and not otherwise. Procedure has to be followed for deduction. Morever your proposal does not fall under authorized deductions.

From India, Tiruchchirappalli
The company policy may not have been challenged by default in spite of its being in vogue for 25 years, but if the affected people decide to pursue the legal path, you may not be surprised with the decision to pay with retrospective effect. Therefore, it may be wise to break up each worker's salary into two distinct parts: (i) Fixed wages & (ii) Variable Pay or Performance linked incentives. The 'Fixed wages' can not be lower than the 'Minimum Wages' payable to workers of different categories & have to be revised as & when an increase is announced by the State Govt.
From India, Delhi

I seem to have a totally different opinion!

If the wage settlement contains such a clause (of deduction for not meeting the "norms") there is NOTHING WRONG about it per se`!

If the wage settlement with such a condition is binding due to the nature of the settlement, and if the "norms" of work are also agreed to by and between the parties to that settlement then not achieving "agreed norms" would amount to "breach of settlement" liable to other possible actions aside of deductions.

Under such conditions Payment of Wages Act will not come in the way!

Just as unauthorized absence is liable to pro-rata deduction of wages, non performance also merits(?) pro-rata deduction of wages and Payment of Wages will not be able to intervene or interfere if the wage settlement is properly constructed and the binding nature of the same is explicit.

Talking about "illegality" of such an arrangement, I will state that this arrangement does not amount to contracting out of law and to that extent the illegality fears are unfounded.

After all employer pays wages for attendance and for work. If either does not happen for any reason, where is the justification to claim or to pay wages? But one caution, if the non performance or non achievement of norms is not due to any fault or short coming on the part of the workman then the deduction can be easily challenged! And if all the wherewithal was available for the performance and the employee does not perform despite having agreed to (in the wage settlement) the action of deduction of wages as provided for in the settlement is perfectly in order.

To some one who has spent a life time in manufacturing industry, this really is a non issue!



January 29, 2013


From India, Pune
Dear phanikrishnan

Hope you got the answer you were looking for, from the responses of our members.

I would just like to add here, that on the part of someone looking for an answer; sometimes it is too naive to ask whether an action is legal or illegal.

On the contrary, one should enquire in terms of whether an issue/policy is good or "bad in law".

Similarily, there should be sufficient caution on part of the person giving the answer, to pronounce ANY ACT as LEGAL; for there is a responsibility placed on that person.

If one says it is LEGAL and the other person keeps COMMITTING the ACT with IMPUNITY and later on it is declared as ILLEGAL and hence PUNISHABLE by a Court of Law; then in such circumstances who shall be CONSIDERED AS GUILTY ?? The person who COMMITS the Act or the one who who says it is LEGAL ?? The suggestor can not escape his vicarious responsibility.

I hope you understand what I mean to convey.

Moreover, our laws define what are the DOs and the punishment for non-compliance or commitment of an act. There can be hundreds of situation which can not be covered, spelled-out or mentioned.

Therefore;if you want to know specifically, then I would only say; irrespective of whether the practice has been going on for several decades in your company;

Please refer to Sec. 7 under the Payment of Wages Act,1936; wherein you will find that ONLY the following types of deductions are permitted :


a) An employed person can be fined only for acts and omissions which are specified in a list which is approved by the State Government or the prescribed authority.(section-8)

b) Before the fine is imposed on an employed person , he must be given an opportunity for explanation. (section-8)

c) Fines should not exceed 3% of the wages in a month. (section-8)

d) Fines shall not be recovered by installment or later than 60 days of the date of imposition. (section-8)

e) The paymaster shall maintain a register of Wages, Fines, Damages, Deductions and Advances in Form VI(PW) (Rule 3,4 &17 )

2. Deductions(section-9 to13)

i) Deductions for the absence from duty.

ii) Deductions for damages to or loss of goods expressly entrusted to the employed person for custody ,or for loss of money for which he is required to account, where such damage or loss is directly attributed to his negligence or default.

iii) Deductions for house accommodation.

iv) Deduction for amenities as authorized by the Govt.

v) Deduction for recovery of advances and interest, and for adjustment of over payment of wages.

vi) Deductions for recovery of loans from any fund constituted for the welfare of labour approved by state Govt.

vii) Deductions for recovery of loans for house building or for purpose approved by Govt.

viii) Deduction for income-tax.

ix) Deduction on orders of a court or other authority.

x) Deductions for subscription and repayment of advance from any provident fund.

xi) Deduction for payments to cooperative sectors.

xii) Deduction of premium for LIC policy or for post office saving scheme on written authorization of the employed person.

xiii) Deduction for contribution to any fund constituted by the employed or trade union for welfare of employed person with the approval of state govt.

xiv) Deduction for payment of membership fee of trade union with written authorization of employed person.

xv) Deduction for contribution to Prime Ministers' National Relief Fund or to such other fund as notified by Central Govt. with the written authorization of the employed person

Total amount of deductions should not exceed 75% of wages of the employed person in any wage period if whole or part of the deduction are meant for payment to cooperative societies, In other cases it should not exceed 50%.

(a)The advance may be recovered in installment by deductions from wages spread over not more than twelve months. No installment shall exceed one third or where the wages for any wage period are not more than 20 rupees ľof the wages for the wage period in respect of which deduction is made.

(b)Recovery of advances of wages or loans or payment to cooperative societies and insurance scheme shall be subject to any rules/conditions of the State Govt.

Law does not allow an employer to make any type of deduction out of the wages of a worker except those authorized by this Act.

Hope the above clarifies the matter for you.

Warm regards.

From India, Delhi
Hello Phanikrishnan,
You must have got the clarity you were looking for from the responses of the members.
You have also mentioned that this practice has been in-vogue since 25 yrs. However, I don't think this needs to be a benchmark for any improvement in the overall policy--as long as you are able to 'sell the idea' to the Unions. Why not consider implementing what Raj Kumar suggested--"Instead of having a "negative" incentive policy, it could have been a positive incentive policy............the variable component could be linked with the production output"?
Many industries now have this policy in-vogue--taken from the practice in the IT industry. The Best thing for the worker would be 'what he/she earns is NOW mostly in his/her control'. And the Management too shouldn't have any trouble accepting it, since it enhances the overall output...and consequently the profits.

From India, Hyderabad

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