Is It Legal to Lower Basic Salary Percentage During Compensation Restructuring?

Dear Members,

I need your advice on whether it is possible to reduce the basic salary of an employee during any compensation restructuring exercise. For example, currently, the employee's basic salary as a percentage of CTC is 50%, and with the new structure, the organization wants to bring the basic salary as a percentage of CTC to 40%. So, is it legally possible to bring all the employees to 40%?

Thank you.

Hi Sdix,

The company can change it to 40% on its own will. However, you have to make sure that you do not violate statutory compliances like PF, ESIC, minimum wages, bonus, etc.

For example, if the basic salary of an employee is Rs. 7000 (in the present structure), you can exempt him from 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 an increase in CTC as the employer also has to contribute!

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,

The basic salary for an employee cannot be reduced as it has an impact on PF, Gratuity, ESI, etc. There have been cases along the same lines where when the case went up to the Supreme Court for a hearing, the reduction in basic was restored as it impacted PF, Gratuity, ESI. Hence, it can't be done. If you do this and the employee goes to court, then the decision will not be in your favor.

Regards, Nilendra

Dear Nilendra,

The basic salary for an employee cannot be reduced as it has an impact on PF, Gratuity, ESI, etc. There have been cases along the same lines where when the case reached the Supreme Court for hearing, the reduction in basic salary was restored as it impacted PF, Gratuity, ESI. Hence, it can't be done. If you do this and the employee goes to court, then the decision will not be in your favor.

Thanks, Nilendra, for your input. This was the response I have heard from many of my friends and some PF experts. The main issue to understand is that the company needs to approach the PF commissioner with a solid case for approval. I have also heard that the request is usually turned down. Could you please help me with any case or court case reference where this issue has been taken up?

Regards,

[Your Name]

Raga, thank you for the insights. However, I understand that it's not very easy. It has to be proven, and a lot of statutory approvals are required. If your offices are located at different places, there are even more hassles as you need approval from multiple PF Commissioners' offices.

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 a 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 has a basic salary of 5000 and a Dearness Allowance (DA) of 2000, how do we calculate Provident Fund (PF) and Employee State Insurance (ESI)?

Please provide me with similar cases as I am 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 program.

Please, folks, guide me on the best inexpensive way to establish a reduction in cost for the enterprise and the methods to measure the training program so that both the company and the employees benefit.

Thanks in advance and hoping to hear from you asap.

Kate.

Hi,

You can reduce the basic pay as a percentage of CTC from 50% to 40%. However, ensure that the actual amount of basic pay does not decrease, as it impacts the PF contributions, 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 the provisions of the PF Act, you cannot reduce the basic salary. Please refer to Section 12.

Dave D. M.

Hello Vijay,

Ideally, this is not practical (salary can never decrease in an organization) but if the change is taking place for the entire organization, then there is no legal restriction to it. Even if you do it for an individual, there is no legal obligation or law for it, but the employee will face problems in his future jobs.

Hi Ashi, I am MMRAO,

I would like to clarify that 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, Rs. 600/- will be the contribution from the employee's side. Another Rs. 600/- should be contributed from the employer's side. There is one more thing to note. Here, the employer's contribution, i.e., Rs. 600/-, will be divided into two parts: one towards PF @ 3.67% and the other towards 8.33% for the Pension Scheme. So, a total of Rs. 1200/- will be credited to the employee's PF account at the EPF Office by way of the R1 monthly challan.

Hope this clarifies things. Please revert back if you have any further questions.

Regards,
MMRAO

Hi All,

I am also looking at working on restructuring salary break-ups for my employees to ensure more in-hand pay for them. Can you please guide me on the formalities I need to complete to get this approved by the PF Commissioner? All employees in my company are white-collar employees and earn beyond Rs. 7501. Any insights from your end would be greatly appreciated.

Thanks in advance.

Regards,
Karuna Ahuja

Hi,

Yes, the company can change the basic amount at any time, but considering that the member should not incur significant losses, the reduced basic amount can be compensated by increasing other allowances such as Con, HRA, LTA, special bonuses, etc. This way, employees can anticipate growth in their total household pay. It is important to note that statutory requirements need not be altered.

Thank you.

Regards,

Debajit Roy

Hi XXXXX,

A company cannot reduce the basic once it has been fixed because it affects PF, ESI, Gratuity, and all other elements. The employee may lose certain benefits because increments are based on the basic amount.

Hello,

Basically, terms and conditions are governed by the appointment letter, and for the unionized category, the Industrial Disputes Act will also guide. I do not know why the PF Act is being discussed here.

1. One can reduce the basic salary of management/supervisory staff (don't reduce too much) as a restructuring exercise and get the revised terms and conditions duly accepted by him by getting the duplicate copy signed "read and accepted."

2. In the case of unionized staff, notice under section 9 of the Industrial Disputes Act needs to be given. Then discussion will take place before the Commissioner. An agreement needs to be arrived at. Whether you have a 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 referred to in one post was about not reducing the basic salary to adjust the Management's Contribution. They cannot take up this issue, and even if they do, if you could prove that no adjustment has been made to recover the employer's contribution, they will not proceed.

4. There was another post inquiring 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 need to change it immediately.

Siva

Hi,

It is legally not tenable to reduce the basic of a person. It is violative of labor laws as per Sec 12 of the PF Act and Sec 72 of the ESI Act. You can adjust other components that don't have a direct bearing on PF, ESI, and Gratuity.

Regards,
Srira

Dear Srira,

Employment terms and conditions are governed by the appointment letter and the Industrial Disputes Act.

The PF Act and ESI are social security legislations and have no scope in terms. The sections you are referring to are to protect the employees from the employer recovering their contribution from the employees.

Consider the variable Dearness Allowance. There have been months in which the 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 deduct based on the higher DA and contribute on higher DA? They cannot.

The 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 the case of employees not governed by the 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 governed by the 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 the gross, i.e., on basic and D.A.

Thanks & Regards,
Dinesh
09816545630

Hi Sdix, This issue would lead to statutory implications. One way we can approach this is by not requiring lower salaried employees (below 6500 basic+DA) to reduce their basic, and for higher salaried employees, we can reduce their basic. However, it is important to ensure that their basic does not fall into the PF class, as mentioned earlier. Accordingly, we can make the necessary changes.

Hi Sdix,

Please note that the basic salary of an employee cannot be reduced from the existing percentage 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 does not 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 the employee. Hence, any negative change in the basic would lead to a 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; the rest is up to the discretion of the employer.

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

Regards

Hi,

The salary structure is the one that is more specific to each org. The management can have any salary structure, but the proposed structure should be in the interest of employees. If the basic salary is high, the PF contribution will also increase accordingly. This is beneficial for any person in two ways:

1. The taxable income will be reduced to the extent of the PF contribution.
2. The investment base of a person will go well without any cash flow problems.

Over time, the employee would have saved a good amount. Here, you can have a high basic salary along with reimbursement components to reduce the taxable salary. Reimbursements are liable for FBT at 6.732% as opposed to the normal tax slabs.

Should you require more information, please do not hesitate to ask.

Regards,
Jay

Dear Siva and others,

As mentioned earlier, Basic cannot be reduced as it has an impact on a few other statutes.

Siva, when you are talking about variable DA, then the essence of DA is to protect against economic instability. Hence, it doesn't contravene the provisions of the law. In any case with VDA, you also have FDA. You cannot only have VDA, and I hope you will also confirm to it.

Normally, companies whose income is much dependent on the $ rate or similar factors have a component typically called Variable Pay. You can include such things as part of compensation with a clause stating that this payout will depend on the company's performance and can vary, taking a signature from employees.

If you obtain signatures from employees on any document where you have stated that you are reducing basic salary for any reason, it will not have any impact on the court, and the decision will not be in your favor.

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

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

In the case of a reduction in basic salary, when the PF commissioner audits your books, you will have a really difficult time as these people are challenging to handle in case of default.

Regards, Nilendra

Dear,

Read case studies. You will gain more understanding of these issues and also when you deal with these things.

Regards,
Nilendra

Dear All,

Is it mentioned anywhere that the basic salary should be 50% of the Gross Salary, or is it a standard policy that we can keep it as 50% of the Gross Salary?

Dear Nilendarchand,

I can only tell from my experience and understanding of the 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 are not in favor of workmen.

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

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

I have at least four or five times in my career reduced Basic salaries of Management Staff.

With the unionized category, I have not done so as it involves negotiation. But I know of companies which gave Notice of Change under the ID Act and changed the basics to a 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 an opinion, I will get it free of cost.!

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

It is not illegal.

Siva

T. Sivasankaran MA (TISS) LLB

I am not adding these qualifications to say that what I am saying is 100% correct. Many times, people will look at the views from a different perspective. This is a very important topic, and I do not want any newcomers to the field to go with information that 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., unionized members, as long as 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 by reducing the basic from 50% of CTC to 40% or 45%, thus increasing the take-home salary by way of a reduction in the contribution to PF. There should also be a nominal hike (at least 10-15%) over the earlier CTC before the revision. This should be explained in the increment letter, showing the figures on the erstwhile CTC vis-a-vis the revised CTCs.

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

3. As rightly pointed out, one needs to obtain a copy of acceptance of the revised letter.

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

In all, in the above initiatives, HR needs to be proactive and ensure that rumors or grapevine networks are handled well.

Best Regards,

Rajat Joshi

Thank you 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 variances 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 a reduction in basic for the employees, especially if an employee goes to court. Yes, we can have the employee sign the revised compensation and implement the new structure, but in case of PF scrutiny and PF being a sensitive issue for the government, 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 that have not been updated with time. In a way, they do not reflect the new economy in many cases, and I presume that the reduction/restructuring salary is one such issue.

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

It would really help if any of the members could provide a case study/court case on this matter. This would help in bringing this discussion to a logical conclusion.

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

Regards,

Santosh

I hope that the reduction of basic wages is not acceptable by the PF Act and authorities, and the basic wages can be increased or maintained as it is.

Hi Sdix,

You can always restructure the compensation package in the company. If you are looking to make changes to the basic salary, then the ratio of every component needs to be adjusted accordingly. This is because every component would be based on the basic salary in order to keep the CTC unchanged.

Regards,
Archana Dewang

Dear Friends,

I am requesting you to understand one basic issue: Reduction in basic has nothing to do with PF. If a settlement is signed with the Union reducing wages, what can PF Authorities do?

In my career span of nearly 35 years, I have reduced the basic salaries at least 4 to 5 times. Many organizations have done the same. I repeat, I am not talking about its desirability; I am talking about legality.

I really do not understand why one should refer to the wrong legislation. Terms and conditions of employment are not governed by the PF Act. If any experts say so, I would like to discuss this issue seriously.

I saw Rajat Joshi's post and thought it had reached a logical conclusion. Now, members are again talking about the PF Act concerning the reduction of basic.

We do not go to a Dentist for a Cardiac problem, do we? We do not refer to the IPC for implementing Standing Orders, do we? We do not refer to the Factories Act, 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

Dear Siva and others,

As mentioned earlier, Basic cannot be reduced as it has an impact on a few other statutes.

Shiva, when you are talking about variable DA, the essence of DA is to protect against economic instability. Hence, it doesn't contravene the provisions of the law. In any case, with VDA, you also have FDA. You cannot only have VDA, and I hope you will also confirm to it.

Normally, companies whose income is much dependent on the $ rate or similar factors have a component that is normally called Variable Pay. You can have such things as part of compensation with a clause stating that this payout will depend on the company's performance and can vary, taking a signature from employees.

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

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

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

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

Regards,
Nilendra

Hi Nilendra,

I second your views. PF authorities will really give organizations a 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 the employer nor the employees have the right to breach the said contract, which has been agreed upon in the offer of appointment, without the mutual consent of both parties.

So, if your management has decided to reduce the basic wages, please obtain written consent from the employees to avoid future litigation.

Regards,
Karuna Kumar

Dear Siva,

Please refer to my reply below:

The whole discussion is to bring clarity to our understanding and learn from others. I am sorry if I have hurt anyone.

Regards,

Nilendra, if the basic and DA are decreased without affecting the PF contribution, as the company may be limited to the slab of Rs. 6500, it has an adverse effect on the annual bonus. The annual bonus is calculated considering 8.33% of Basic and DA.

For example, if the Basic is Rs. 6000 and DA is Rs. 4000, the annual bonus with the minimum requirement of 8.33% for the whole year will be Rs. 8330. When the Basic is reduced to Rs. 5000 and DA to Rs. 2000, and Rs. 3000 is added as HRA, the annual bonus with the minimum requirement of 8.33% for the whole year will be Rs. 6997. This results in a decrease in CTC, but your take-home pay will increase.

Nilendra, are there any rules regarding the reduction of Basic or DA during annual appraisals or in any other cases?

Dear Nilendra,

The basic salary for an employee cannot be reduced as it has an impact on PF, Gratuity, ESI, etc. There have been cases along the same lines where, when the case went up to the Supreme Court for a hearing, the reduction in basic salary was restored as it impacted PF, Gratuity, ESI. Hence, it can't be done. If you do this and the employee goes to court, then the decision will not be in your favor.

Regards,
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