Can Basic Salary Be Reduced? Insights on Employee Compensation and Statutory Compliance

Dear HR Friends,

Our company is planning to reduce working days from 6 to 5. We intend to designate Saturday and Sunday as the weekly days off. Given that employees will be spending less time in the office, is it possible to decrease their basic salaries? If so, what would the ratio be? Please advise.

Regards,

Dev

Dear Dev,

Does it mean that your employees are ready to reduce their current earnings?

Prashant
09011070437

No, you cannot reduce the base salary under some judgment given by the court. Sorry, I couldn't recall the case, but I will come back to you soon with the case.

No, you cannot reduce the base salary of an employee. This is based on a judgment given by the court. Sorry, I couldn't recall the case, but I will come back to you soon with details of that case.

But you should consult the legal advisors of your company; there could be some circumventing solutions to it.

You cannot reduce the basic salary of any employee. Please understand that all the statutory deductions like PF, gratuity, superannuation are based on it. The quantum of deduction cannot come down from a given level.

Hi,

According to the Minimum Wages Act, which is determined by the state, you must pay a higher amount. So, it is not necessary that you work from 6 to 5 or 6 to 3. What is necessary is that you must follow the Minimum Wages Act rule.

BR/ Sudhir

Thank you to all of you for responding.

Can anyone out here give me some reference like any court decision or definition given by any legal authority in this regard? Please reply.

Regards,
Dev

No, I don't think it is a good idea to reduce the workload and cut the package of the employees. Instead, consider reducing the manpower and exploring other ways to generate revenue for the company.

Khan/ KCS Recruitments.

Dear Dev,

The first question to be answered is how the company is going to substantiate squeezing working days from 6 to 5. Whether it would fall under 'Lay Off' or 'Block Closure'. If the company declares it as only a normal reduction of working hours/days, then it has no right to deduct from the employee's basic salary. As you mentioned in your post that it would be a weekly off, there is no chance of reducing the salary.

In the case of Layoff and Block Closure, it may lead to the deduction of salary. However, in both cases, you must take care of the relevant laws and rules defined under the ID Act.

Regards,
Anshu

Hi,

If your company is paying PF for all employees, then it cannot be possible. If it is not, then it can be possible subject to employee's agreement. Hope this clarifies.

Rgds,
Venkat

Dear Dev,

I believe your company is considering reducing employees' salaries to address the challenges posed by the recession. In addition to cutting costs on administrative and other overheads, you are also planning to reduce the number of working days. It may be possible to decrease employees' salaries by 10% or any other percentage if your employees are informed about the company's difficulties and are willing to cooperate. I suggest engaging in discussions with the employees to communicate this decision and implementing the changes accordingly.

Regards,
Reebi

Hi Reebi,

Most of the members suggested that it is not possible. Nonetheless, you say that it can be done. May I know the basics of your answer, please?

Thanks with regards,
Dev

Dear Dev,

You cannot reduce the basic salary resulting in a reduction in PF contribution. This would be a contradiction and non-compliance with Section 12 (not to reduce wages) of the EPF & MP Act - 1952, wherein an employer shall not reduce the wages that would result in a reduction in EPF contribution. Furthermore, reducing the basic salary will also impact leave encashment, gratuity, and the notice period.

Thanks,
Mohd. Arif Khan

Dear Dev,

Reebi is correct; you can reduce allowances with the mutual consent of the majority of employees affected by this decision. However, you cannot reduce the Basic, which is the basis for PF, Gratuity, Leave Encashment, Notice period, etc.

Most of the members suggested that it is not possible. Nonetheless, you say that it can be done. May I know the basics of your answer please?

Thanks with regards,
Dev

I think before making any deduction in the basic salary, employees should be taken into confidence. Discuss with them. I think you can make a deduction if they agree to this formula. Make an agreement and get their signature on that.

Dear Ning Khan,

I don't think it is a good idea to reduce the workload and decrease the package of the employees. Instead, consider reducing the manpower and explore other strategies to generate revenues for the company.

Reducing manpower can lead to increased recession in today's market, where job opportunities are scarce. Providing job security by implementing slight salary reductions can help in cutting costs without contributing to the recession. I have observed that individuals who have been laid off are willing to return at reduced salaries, sometimes as low as 50% of their previous earnings.

Viewing the situation from this perspective and contemplating a salary reduction of 10-20% may be a more viable option. It is important to have open discussions with your employees regarding this matter and take into account the current market conditions.

Khan/KCS Recruitments

Dear HR Friend,

You can increase working hours from Monday to Friday and keep the minimum lunch break. Please do not take tea or coffee breaks to compensate for the Saturday holiday.

Regards,
Sudhir

Reducing salaries would mean digging our own (I mean the company's) grave. It entails cultivating discomfort and a sense of insecurity in employees, posing a potential risk to the company's reputation. Instead, the focus should be on cost-cutting measures such as halting or reducing travel expenses, streamlining operations, and addressing other overhead costs that are often overlooked.

Dear Concerned,

You cannot reduce the basic salary of the employees, but you can increase the working hours of weekdays to adjust the loss of one extra holiday (Saturday).

Dear HR Friends,

Our company is planning to reduce working days from 6 to 5. We are considering keeping Saturday and Sunday as the weekly off. Since employees would be spending less time in the office, can we reduce their basic salaries? If yes, what would be the ratio? Please help.

Regards,
Dev

If the employees belong to the workmen category, provisions of the Industrial Disputes Act, particularly the Notice of Change (Sec. 9A) and those of layoff (Sec. 25 F/N, etc.), would need to be complied with.

Regards,
Jayant Singh

Dear Dev ji,

Firstly, in your question, you have not given full details i.e. under what circumstances your company has to reduce the basics. Second, while changing the timings and weekly offs of the employee, have you obtained permission from the competent person as per the Shops & Estb Act or Factories Act? Thirdly, is there any understanding between the employee and employer on under what conditions the basic wages reduce?

Furthermore, according to the PF/ESI Act, you should not reduce the Basic/DA, etc. (PF/ESI ceiling limits should be kept in mind).

Regards,
PBS KUMAR

Reduction in Basic will mean a reduction in PF contribution, which is not acceptable. In one of my earlier companies, some employees' basic pay was reduced due to restructuring of salary components. We received a notice from the PF department regarding the reduced contribution. Whatever changes you make, reduce the other components and avoid reducing basic pay.

Hi friend,

Once you have fixed the salary, you cannot reduce the basic salary as you have to carry out the statutory compliance on the same. If you want to reduce the working days from 6 to 5, that is up to your Management's decision, but you cannot reduce the basic salary. As per any act, the working hours in the week are 48 hours. So depending on your industry, you can adjust those working hours in 5 days if required.

ThanQ K. Srinivasa Rao

You don't think that by reducing manpower, you are increasing recession in today's market. As far as my study goes, there are very few job opportunities. Instead, if you provide job security by reducing some amount of salary, you are just cutting costs and potentially reducing the impact of the recession. I have observed that people who have been laid off are willing to return today at 50% of their previous salary. If we consider this perspective and reduce salaries by 10-20%, it would be a better approach. However, it is also important to discuss this issue and the market conditions with your employees.

Dear Neeraj,

It's not possible to reduce one's basic salary once it has been increased. There is only one way to reduce it, though it is not practical: we would have to have the individual resign, and after that, it could be possible. Alternatively, we could create an agenda to restructure all of the employees, and in that scenario, it could be achieved.

Best regards,
[Your Name]

The basic salary can be reduced if there is a change in the terms of employment, e.g., a full-time employee has changed to a part-time worker. In other circumstances, the basic salary cannot be changed as it impacts social security contributions like PF, etc.

Ensure there is a single line break between paragraphs.

Related Info:

http://epfindia.nic.in <link updated to site home> (Search On Cite | Search On Google)

THE EMPLOYEES' PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952
(Act No. 19 of 1952)
Dated 4th March, 1952

12. 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.

Employer is not supposed to reduce wages (which refers to Basic Pay) to minimize any benefit.

Regards,
Mridula Venugopal

You can reduce leaves from your leave structure. Go through the Factory Act and Standing Order Act as well. Furthermore, if possible, review the "Practical Journal of HRM & Labour Laws."

I feel the basic salary cannot be reduced. By giving extra leaves, if we deduct more pay than usual, it will not be acceptable. It's not a good strategy.

Hi,

First of all, your question is incomplete. Do you want to reduce expenses or bring down expenses by reducing employee wages? Implementing a five-day workweek can help control both direct and indirect costs.

Reducing employee wages is not a wise decision. It is important to focus on controlling wasteful expenses.

Thanks,
Sunil

Dear friend,

It is quite possible to reduce basic wages; it all depends on the category of employees. If you have a union and have had prior discussions, you can do it. You cannot reduce total wages, but if you are adjusting the wages, it is possible. However, it should be discussed with the concerned employees; it is just a give and take.

Mr. Dev,

I have gone through your email and noted its contents. I do not understand why you initiated a pay cut and invited problems upon yourself. One should understand that receiving appraisals in this period of recession is difficult, and I would rather suggest undertaking to work on weekends and taking home your complete salary. Always maintain a positive mindset; perhaps this kind of arrangement of working on weekends could be a temporary phenomenon, and the company may revert back to its policy once things are in order.

Hi Dev,

Reduction in basic salary is not recommended. As indicated by one of our forum members, all applicable statutory deductions like income tax, PF, ESI, Gratuity, Bonus, etc., are deducted from it, and various statutory authorities will object.

Reduction in working days may be a good idea for your management, considering that there may be low workload at this moment. This approach could lead to administrative savings on electricity, water, office upkeep, air conditioning, pantry/canteen, etc.

As a survival strategy, certain or all official reimbursements and allowable perquisites may be reduced or dispensed with. Do not touch the basic salary or even the allowances as a first resort.

Cheers,
Rahul Kumar

Hi Dev,

Here is the exact extract of Section 12 of the Employees Provident Fund and Miscellaneous Provisions Act, 1952. You can access the entire act at Vakilno1.com - India Law, Online Legal Advice, Legal Documents, Legal News.

12. 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.

Best Regards,
Jitendra

I don't feel there is any statutory law binding which does not allow an employer from reducing the basic salary. In any case, reducing the basic salary will not be appreciated by any employee since there are certain benefits attached to the basic salary (PF/Gratuity, etc.) which also get affected.

Secondly, the basic salary should not be less than as prescribed by the Minimum Wages Act.

As a punishment, if the grade of an employee is downgraded, their basic salary in that grade becomes applicable. This affects PF deduction and contributions. Is this permissible by EPFO? How then can this be done?

Sara

The statutory aspect has been explained by many of them. But what was the purpose of making it a 5-day week in the first place? Is it to give work-life balance or reduction of costs? Or was it because there was less workload? Won't a reduction in salary (basic or whatever) kill the joy of giving a 5-day week? You need to decide based on what value you want to provide your employees?