Is It Legal to Shift to a 50/50 Fixed and Variable Salary Structure in India?

We have a workforce of approximately 400 employees at different locations all across India. We are following the minimum wages, PF, and ESI compliances. Now, our management wants to revise or reduce the salary structures in a 50% fixed and 50% variable ratio. For example, if an employee is getting a 10,000 CTC, 50% of his salary will be fixed, and 50% will be payable as an incentive based on his performance.

Please advise as soon as possible on what should be my plan of action to explain to my management. Above all, is it legal to follow the above-mentioned process?

Pankaj Sindri

Hi,

Since you are following minimum wages, PF, and ESIC, you need to ensure that the basic salary is not reduced. Minimum wages must also be adhered to. Therefore, you can reduce all other allowances except for basic and DA.

Regards,
Harshad

Restructuring of salary is your internal matter, but it should not be done with a view to reducing the net take-home salary of employees. It is clearly stated in the EPF Act and ESI Act that no reduction in salary so as to reduce the employer's liability towards EPF/ESI, as the case may be, shall be permitted. Similarly, the Minimum Wages Act gives protection to the wages/salary drawn by employees currently notwithstanding any changes in the salary structure. Therefore, I do not find any logic in restructuring the salary with 50% variable pay.

Regards, Madhu.T.K

Dear Madhu,

If a company does not fall under PF and ESI, can the salary be reduced? Secondly, in the current situation where the company does not want to remove the employee but has no option but to reduce the salary to sustain, whether they are covered under PF, ESI, or not, they should handle the situation where they need to reduce the salary.

Regards,

Harshad

A company that is not covered by ESI/EPF must have a workforce of less than 20. Even for such a small establishment, the provisions of the Minimum Wages Act will apply. If the company wants to sustain itself, it should explore other means of cost reduction, such as reducing the allowances of officers, cutting back on benefits other than statutory ones, withholding leave encashment temporarily, and minimizing electricity costs by turning off the ACs used by higher officials. Cost-cutting measures should not come at the expense of employees alone.

Regards, Madhu.T.K

Madhu,

Is it true that the basics of the salary structure should not be less than the minimum wages??

DM

No, it is not like that. The total fixed emolument should not be less than the minimum wages. You can have HRA, DA, or other allowances, but these should be fixed, and the total of basic + DA + HRA, etc., should not be less than the minimum wages fixed by the government. In many cases (I wonder why in new generation companies only) instead of a salary slip, they have CTC slips with a lot of variable elements in it. The sum of all these variable parts of the salary will not be taken as salary or wages but these are only benefits offered to employees.

Regards, Madhu.T.K

Just a little hint about something to think about:

Management... Will the managers and directors also have a reduction in their salary? If not, you will have a big problem with the employees. The directors, and not only managers, they have to serve as a model, and that implies that if they want to have respect and credibility, they will have to act the same way they want the employees to act.

Regards,
Yan

Dear Pankaj,

I am fully satisfied with Madhu. Instead of a salary cut, you can have general meetings with the employees and ask them to reduce unnecessary costs, like admin, etc.

Regards,
Sunil

Dear Pankaj,

Nowadays, many companies are having salary design. Total CTC of an employee is the fixed component plus variable component. The fixed component comprises Basic, HRA, Medical expenses, Conveyance Allowance, Executive Allowance coming under salary credits. PF, professional tax, income tax, and any other deductions come under salary debits. The variable component, called performance pay, will be paid annually based on the performance rating of the individual.

If a decision is to be made on salary cutting, it should happen throughout the organization. No one should be exempt from this. We need to look at the options of cutting down expenses as suggested by our friend Sunil. Currently, in my organization, we are keeping an eye on electricity consumption (ensuring PCs are properly shut down, monitoring of AC machines, refrigerators, etc).

Regards,
Seshu

Dear Sir,

Is it possible that if the company or organization provided the employee with EL and at the time of encashment it withholds the same or withdraws just to cut its costs? Is the same justified and legally have no implications?

Regards,

Postponement of EL encashment is not illegal but can be done with mutual consent. However, refusing to encash shall not be a good exercise even when the same is initiated as a part of cost reduction. The former is a temporary arrangement. In a similar way, a measure to encash only half the EL can also be adopted but for the time being.

Regards, Madhu.T.K

Is it possible that for fixed EL and CL, provided swapping can be done if either finishes, as this is followed by some organizations, or strictly the CL and SL be compensated for leaves taken from the same?