Salary Freeze in India: Is It Legal and Are There Any Exemptions?

Dear All,

I would appreciate your comments, suggestions, and views on whether a salary freeze is legal in India. My question arises in the context of the current gloomy economic and financial conditions prevailing in the country and globally.

Are there any exemptions for a salary freeze, and to whom are these exemptions made? It would be helpful if your views are supported by appropriate laws and acts.

Many Thanks,
Pete

The Payment of Wages Act, 1936 deals with authorized deductions from the salary. The Act also mandates that the employer must make payments within a specified period, i.e., within 7 days for companies employing less than 1000 employees and within 10 days for other companies.

According to the Act, an employer is not supposed to make any deductions from the salary other than those specified under Section 7 of the Act. Authorized deductions include those for absence (leave without pay), fines, damages caused to the company, EPF/ESI contributions, approved housing loans, LIC, etc.

Freezing of salary can be interpreted as non-payment of salary or payment of salary with unauthorized deductions, which goes against the provisions of the Payment of Wages Act.

The Industrial Disputes Act, 1947 also does not seem to support the act of an employer freezing the salary of employees solely based on economic crises. Section 25 FFF of the ID Act, which deals with compensation for employees retrenched due to the closure of an undertaking beyond the management's control, does not consider financial losses or crises as justifiable reasons. Similarly, when addressing the waiver of damages for non-remittance of EPF dues on time, financial crises are not accepted as an excuse.

Therefore, I believe that freezing salaries due to economic crises should not be permitted under the law. While employees may agree to deductions due to good industrial relations, the employer cannot proceed with them if any objections are raised.

Regards,

Madhu.T.K

Dear Sowmya,

I did not understand your reference to a "separate letter indicating compensation (revised downwards)." Can you please explain it in detail? I am an old man, more traditional or conventional in HR (Personnel Management of the past), and therefore not well-versed in many new theories developed and implemented by the new generation of HR professionals. Concepts like CTC, displaying employer's contribution to PF as part of the salary, showing gratuity due after 5 years of service at the rate of salary applicable upon leaving service after at least 5 years, etc., are unfamiliar to me. With my 20 years of experience in Personnel Management, I rely on Labour Laws and reference them when faced with situations, rather than modern HR theories. In practical HR, I believe decisions should be tailored to each unique situation.

My concerns are aligned with labor laws in India. As mentioned in my sentences, "I believe that freezing of salary due to economic crisis shall not be permitted by law." I also mentioned that "due to good industrial relations, employees may agree to a deduction." In such cases, your role is crucial in convincing employees. Would you be willing to forgo your pay during India's troubled times? I am not. When no government employee (who are expected to be more concerned about economic crises) is willing to agree to a salary freeze, why should only those in the private sector?

Regards,

Madhu.T.K

First of all, we need to consider the applicability of the Payment of Wages Act. This act applies to all employees working in commercial establishments, factories, etc., who earn Rs. 6,500 or less as their monthly salary. Does the question pertain to these employees?

Regarding Sowmya's answer, you can reduce the salary by cutting perks and other benefits. However, you must then adjust the terms of employment and notify the employee about the salary components' reduction. It is at the employee's discretion to either accept the changes or leave the job.

Further, there is no law that makes freezing a salary or not disbursing a salary a lawful activity. The employer cannot freeze the salary of the employee; it is totally against the intention of the legislations that provide for the benefits of the labor.

Additionally, when we discuss the management and employees of a cadre to whom most labor laws do not apply, they are governed by the Shops and Commercial Establishment Acts of their respective states. There is no provision regarding 'salary freeze' mentioned therein. Therefore, the very concept of salary freeze is illegal.

Moreover, the employer cannot deduct anything from PF and Gratuity, which are compulsory components of the salary given at a prescribed percentage of the salary.

Lastly, I would say that if a company is facing such a crisis, the solution is to reduce manpower or close the shop and stay at home.

Dear Members,

I also totally agree with Mr. Madhu regarding the views on freezing the salary. No law will say that the salary can be frozen or reduced. What is meant by a separate letter? As per Somya, if you are freezing the salary, it means you are deviating from the law.

Even in the PF Act, it says that no contribution should be reduced; if the contribution is reduced, it means that proportionately the salary or wage is decreased.

I also posted some comments and views on the Payment of Gratuity Act, 1972. I also mentioned in the comments that as a responsible HR personnel, they should not misguide the management regarding the fixation of CTC; the gratuity component should be part of CTC as it is payable only after five years. It means that we can't include it. Otherwise, it should be paid proportionately, which is not possible.

I request Mr. Madhu to contribute such views and comments to the forum to explore the subject.

M. Srinivas
Asst Manager - HR
Ramky Group of Companies
Hyderabad
[srisu2412@rediffmail.com](mailto:srisu2412@rediffmail.com)

I agree totally with Mr. T.K. Madhu. Pay freeze, as I understand it, means that the salary is frozen, and no further increment will be forthcoming. In the absence of any such prior commitment on the part of the employer, the employer is under no obligation to give a salary hike, unless the salary is pegged to the minimum wages, which include a DA component.

A downward revision of salary, which the present discussion revolves around, cannot be made unless the employees agree to cooperate. Mr. Madhu's views are on point. In the event that the "Separate compensation letter" is challenged in a court of law, the verdict will be based on the statutory provisions as interpreted by the judiciary.

Patrick Ryan

Dear All,

Thank you so much for your contributions; it's very helpful even though the comments/views are diverse.

Let me further add, especially in light of Patrick's comment. The fixed salary components are: Basic, HRA, City Compensatory Allowance (CCA), Travel Allowance & Medical Allowance.
And as rightly interpreted by Patrick, salary freeze means no increments in the forthcoming year; will the issue still be interpreted as illegal considering there is no DA?

Pete

I am sorry, I interpreted the subject in a different way. Yes, the interpretation of Mr. Patrick is correct. Thanks a lot for letting me correct.

Now, when it comes to freezing of increments, if the increment is shown in the pay scale (for example, a scale of 5500-150-6100-200-6900-250-7900), it is implied that the employee gets the increment every year at the prescribed rate. Normally, stoppage of an increment will be initiated as a measure of punishment. However, any additional increment based on performance is not a right of the employee, and as such, the same can be withheld for the time being. At the same time, if there exists no scale of pay, the company can very well go for a stoppage of an increment in view of an economic depression. As pointed out earlier, the attitude of employees and the trade unions which lead them will be a determining factor in any policy decision.

Regards, Madhu.T.K

In case an employer freezes or holds the salary of an employee, what should the employee do? How can he/she get his/her salary?

It is good to know that a thread started in 2008 is still live for discussion. As already pointed out, freezing a salary without any reason or informing the employee well in advance, and without giving them an opportunity to be heard—especially if it is an act followed by disciplinary action—means non-payment of salary. In cases of non-payment of wages, the employee can approach the labor officer for help following Section 15 of the Payment of Wages Act or raise it as a dispute under the Industrial Disputes Act.

Regards,
Madhu.T.K