Dinesh Divekar
Business Mentor, Consultant And Trainer
Saswatabanerjee
Partner - Risk Management
Nathrao
Insolvency N Gst Professional
Dhruvikshah
Accountant

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I want to deduct the salary of the marketing employee who is not achieving targets. we have included a clause in our HR policy and even in the appointment letter that if he/she is not able to achieve the targets, their salaries would be deducted to an extent of 40%. Is this against the Law. please provide the act and section in support of the same.
Dear Dhruvik,

You have included in the policy and even in the appointment letter a clause stating that if the salespersons are not able to achieve the targets, their salaries would be deducted to an extent of 40%. To seek advice from the forum members, you could have approached this forum before doing this and not after.

As per the provisions of Payment of Wages Act you cannot keep varying the monthly salary. You could have mentioned certain fixed salary. Salespersons were to get that remuneration irrespective of the target attainment. The other portion could have been variable and it could have been linked to the achievement of the targets.

Even now also you can issue the back dated appointment letter by removing this clause. You may mention that for the variable pay, the individual will be issued separate letter.

Thanks,

Dinesh Divekar


Normally salesmen get fixed salary+ incentive.
Cutting salary for non achievement of targets is irregular and falls afoul of Payment of Wages Act.
You can now review your plans to cut salary.
For all you know company product may be defective or less competitive and salesman unable to sell them.
Examine the reasons for non achievement of target specifically to get a solution.

Mr. Rao, Divekar,
To put the cat among the pegion and doing a bit of technical hair splitting,
Which section of the payment of wages act says you cannot cut wages. There is a clause against illegal deduction, but not cutting wages. Nothing in the act actually stops someone from reducing the wages or salary of any employee.
That being said it is difficult to implement now what dhruvic wants. Specially since we don't know the exact wording of the appointment letter or HR policy. If the wording has been properly made, and this is shown as variable pay, then this is fine. If the total is shown as gross pay, then deductions would be illegal.
Making a back dates appointment letter when the employee already has the original,letter has a high level of risk

Dear Mr Saswata Banerjee,

Dhruvik in his post has clearly stated that "appointment letter that if he/she is not able to achieve the targets, their salaries would be deducted to an extent of 40%"

While drafting appointment letter, it must be clearly worded. It should mention what is fixed component and what is variable. This variable portion depends on the targets attained, company performance etc. Whether employee attains certain target or not, there has to be some fixed amount that we call as take-home salary.

Secondly, how can we explain variation in salary during labour officer's inspection? During my HR days in a hotel, Labour Officer during his inspection, lauded me for keeping all the salary components uniform for all the employees. We had added one "incentive" section wherein salespersons, front office personnel etc were given incentives.

Thirdly, Dhruvik is not clear on whether he would like to reduce the basic salary also. If basic salary is reduced then PF contribution will also come down and it could attract attention of the PF Inspectors during their inspection. Same thing is applicable to ESI if the employees are covered under the ESI. Since ESI is calculated on the gross salary, variation in gross amount is likely to come under the scanner of ESI inspector as well.

In many companies, supplementary letter is issued that mentions method of calculation of variable pay, performance bonus, sales incentives etc. Inclusion of these terms in the appointment letter itself is not desirable. I know a case of software professional wherein her fixed salary is Rs 20L and variable salary is also Rs 20L per annum. For the latter part, she has been issued separate letter.

Thanks,

Dinesh Divekar

Appreciable views though its on contrary, but value- added to the discussion.
I just would like to highlight upon Sec 9 under PWA,1936 where various deductions are legally acceptable. However, one can't hit to the basic/fixed wage on the name of performance. Performance has its own cannotations which cant be liked with minimum wages and its is void in the eyes of law.

Thank you for your suggestions. The phrase "if he/she is not able to achieve the targets, their salaries would be deducted to an extent of 40%", Clearly shows that 60% of the salary is fixed and the rest is variable. So from the discussions above, I concluded that it will be better to use the word variable instead of deduction. Right???
No dhruvik

You are taking a wrong lesson from the post.

The wording of the appointment letter is wrong. It does not mean that the employee has variable pay. It means that you will deduct his salary for failure to achieve target.

Payment of wages act gives a list of allowed deduction from salary in sec 6 and 7. Please have a look at it. Deduction for failure to achieve target is not one of the clauses. Any deduction other than those listed is illegal. Also see the impact that Mr. Divekar has given on pf, ESIC.

Ofcourse, payment of wages act applies only to those with salary up to ₹18000 per month. But the rules are considered as benchmark for others also, though not technically required by law.

You need to revise the appointment letter. You need to Lowe the salary it's self to 60% of what it is now. Ensure that basic + DA is above minimum wages. Then add an incentive component that will be given on achieving targets. And it's better to have a graded target, with parts of incentive being given for reaching various milestones.

It is not a question of words used when deducting the money. It's the wording used for deduction. It's the wording that authorises the deduction.

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