Is Our New Salary Retention Plan Legal? Seeking Advice on Implementation and Agreement Drafting

Hi Seniors, The Director of my company plans to have 10% of the salary of the new joiners credited to a new account, where it will accumulate for 4 years. If the employee leaves within that 4-year period, the amount will be transferred to the company's account; otherwise, it will go to the employee. Instead of imposing a bond, which is against the law, the management is considering this as a retention measure.

Please advise whether the management can implement this policy. Is it legally enforceable? If so, could you provide guidance on drafting an agreement format?

Regards,
Deepa

I don't know whether this is enforceable by law or not, but of course, the company can do it. However, the tenure decided is too long. You cannot expect someone to stay with your company for 4 years. The tenure should be either 1-2 years.

Alternative Approach

Why don't you give your director a reverse idea? Instead of deducting the 10%, why don't you give that 10% as a joining bonus to the new joiners with a condition that if they do not stay with the company for 2 years, the 10% amount given as a joining bonus will have to be returned or adjusted during the F&F.

Regards,
Chitra

Thank you so much for your valuable suggestion. But what if the employee absconds after receiving the joining bonus? Please suggest.

Regards,
Deepa

You can try giving a contractual bonus that will only be payable at the end of the contractual period.

Dear all,

Few companies keep original documents, which is not legal, and our HR fraternity should oppose these kinds of policies. Do the companies provide in writing that they are retaining your original certificates, and are they responsible in case of loss, theft, or fire?

You cannot deduct retention amounts from an employee's salary; it is illegal.

Implementing a Retention Bonus

To implement a retention bonus for staff, you can start depositing the bonus from the company or a personal account into the employee's account monthly or annually, depending on your policy. After completing four years, provide the employee with the retention bonus.

Regards,
Shish Ram Uniyal Compliance Consultant [Phone Number Removed For Privacy Reasons]

Unethical and Illegal Salary Deductions

Except for the post of Shish, the rest is illegal and unethical. No amount can be deducted or retained from the salary of an employee other than the statutory deductions and advances. Nothing can be imposed on an employee to subscribe to anything without his/her implied consent. Such actions are punishable.

Retaining documents from an employee and forcing him/her to stay against their wishes is despotic, unfair, dictatorial, overbearing, autocratic, authoritarian, high-handed, repressive, unjust, tyrannical, domineering, cruel, and illegal. It is akin to reverting to slavery and treating employees as bonded labor, which is a despicable action.

Keep employees content with good working conditions and better pay in the industry.

Dear All,

Retention of original documents and recovering 10% of the salary every month for 4 years will all be illegal.

Alternative Retention Strategies

Maybe you can suggest to your employer that, if he wishes, he can pay a higher rate of Gratuity for those employees who stay in the company for more than 5 years. Instead of 15 days' wages for every completed year of service, he can pay 30 days' wages.

The calculation will be Basic + DA x 15/26 x 30 days (instead of 15 days as per law) x Number of years of completed service or part thereof in excess of 6 months.

Superannuation Scheme

Another option is to consider extending a Superannuation scheme promoted by LIC of India. If your employer wishes, he can contribute a maximum of 15% of the employee's Basic Salary + DA to the Superannuation account that will be maintained by LIC, with interest being paid as declared by them from time to time. You can add a clause in the Superannuation scheme stating that the amount accruing will be payable only if the employee completes 5 years of service.

Upon completing 5 years, if the employee wishes to leave, the employer can recommend to LIC to process his claim.

The employee has the option to commute 1/3 of the amount accrued (15% contribution paid each year by the employer with accrued interest) and choose to receive a pension from the various options laid before him.

While fixing the employee's salary, you can include and show 15% of his Basic Salary + DA as Cost to Company (CTC). This way, you will eventually be paying 15% less to him in CTC, as this amount will actually not reach the employee every month but will be deposited in his account in the Superannuation fund at the end of each year. However, if the employee quits without completing the 5-year period, this amount can be adjusted by the employer while making the payment for the rest of the employees the following year. The decision to pay or withdraw still rests with the employer. By promoting the scheme, it will not be permissible to make the scheme admissible only to a few employees in a particular category. If you intend to cover employees from the Assistant Manager's cadre, then all employees from the Assistant Manager's cadre have to be covered. For example, you cannot exclude 2 or 3 people even though they fall into the specified category.

However, you have the option to restrict it to certain cadres alone. You can exclude employees below the Assistant Manager's cadre.

Bond Execution

Another option is to suggest to him to ask the employees, provided they are willing, to execute a bond with a surety for a specified period, say 3 years. The bond will cease after the expiry of the 3-year period. Let the bond amount be 12 times the monthly take-home pay. By bond, I do not mean the deposit of money by the employee but a bond on a stamp paper for the equivalent amount.

We have been able to execute this successfully. However, you need to clearly explain to him what the employee is likely to get as emoluments for the 3-year period before he signs the bond. Unless the increase offered by you each year is substantial, the chances of his signing the bond are bleak.

Regards,
M.V. KANNAN

Legal Guidance on Salary Deductions

See Sec 7(2) of the Payment of Wages Act. Your Director's direction does not come within the purview of the law. The law is as follows:

(2) Deductions from the wages of an employed person shall be made only in accordance with the provisions of this Act and may be of the following kinds only, namely:

- (a) fines;
- (b) deductions for absence from duty;
- (c) deductions for damage to or loss of goods expressly entrusted to the employed person for custody or for loss of money for which he is required to account where such damage or loss is directly attributable to his neglect or default;
- (d) deductions for house-accommodation supplied by the employer or by the government or any housing board set up under any law for the time being in force (whether the government or the board is the employer or not) or any other authority engaged in the business of subsidizing house-accommodation which may be specified in this behalf by the State Government by notification in the Official Gazette;
- (e) deductions for such amenity services supplied by the employer as the State Government or any officer specified by it in this behalf may by general or special order authorize.

Explanation: The word "services" in this clause does not include the supply of tools and raw materials required for the purposes of employment;

- (f) deductions for the recovery of advances of whatever nature (including advances for traveling allowance or conveyance allowance) and the interest due in respect thereof or for the adjustment of overpayments of wages;
- (ff) deductions for the recovery of loans made from any fund constituted for the welfare of labor in accordance with the rules approved by the State Government and the interest due in respect thereof;
- (fff) deductions for the recovery of loans granted for house-building or other purposes approved by the State Government and the interest due in respect thereof;
- (g) deductions of income-tax payable by the employed person;
- (h) deductions required to be made by order of a court or other authority competent to make such order;
- (i) deductions for subscriptions to and for repayment of advances from any provident fund to which the Provident Funds Act 1952 (19 of 1952) applies or any recognized provident funds as defined in section 58A of the Indian Income Tax Act 1922 (11 of 1922) or any provident fund approved in this behalf by the State Government during the continuance of such approval;
- (j) deductions for payments to cooperative societies approved by the State Government or any officer specified by it in this behalf or to a scheme of insurance maintained by the Indian Post Office;
- (k) deductions made with the written authorization of the person employed for payment of any premium on his life insurance policy to the Life Insurance Corporation Act of India established under the Life Insurance Corporation 1956 (31 of 1956) or for the purchase of securities of the Government of India or of any State Government or for being deposited in any Post Office Saving Bank in furtherance of any savings scheme of any such government;
- (kk) deductions made with the written authorization of the employed person for the payment of his contribution to any fund constituted by the employer or a trade union registered under the Trade Union Act 1926 (16 of 1926) for the welfare of the employed persons or the members of their families or both and approved by the State Government or any officer specified by it in this behalf during the continuance of such approval;
- (kkk) deductions made with the written authorization of the employed person for payment of the fees payable by him for the membership of any trade union registered under the Trade Union Act 1926 (16 of 1926);
- (l) deductions for payment of insurance premiums on Fidelity Guarantee Bonds;
- (m) deductions for the recovery of losses sustained by a railway administration on account of acceptance by the employed person of counterfeit or base coins or mutilated or forged currency notes;
- (n) deductions for recovery of losses sustained by a railway administration on account of the failure of the employed person to invoice, to bill, to collect, or to account for the appropriate charges due to that administration whether in respect of fares, freight, demurrage, wharfage, and cranage or in respect of the sale of food in catering establishments or in respect of the sale of commodities in grain shops or otherwise;
- (o) deductions for recovery of losses sustained by a railway administration on account of any rebates or refunds incorrectly granted by the employed person where such loss is directly attributable to his neglect or default;
- (p) deductions made with the written authorization of the employed person for a contribution to the Prime Minister's National Relief Fund or to such other Fund as the Central Government may by notification in the Official Gazette specify;
- (q) deductions for contributions to any insurance scheme framed by the Central Government for the benefit of its employees.

(3) Notwithstanding anything contained in this Act, the total amount of deductions which may be made under sub-section (2) in any wage period from the wages of any employed person shall not exceed:

- (i) in cases where such deductions are wholly or partly made for payments to cooperative societies under clause (j) of sub-section (2) seventy-five percent of such wages; and
- (ii) in any other case fifty percent of such wages:

Provided that where the total deductions authorized under sub-section (2) exceed seventy-five percent or as the case may be, fifty percent of the wages, the excess may be recovered in such a manner as may be prescribed.

(4) Nothing contained in this section shall be construed as precluding the employer from recovering from the wages of the employed person or otherwise any amount payable by such person under any law for the time being in force other than the Indian Railways Act 1890 (9 of 1890).

Therefore, such action will be construed as an unfair labor practice.

With Regards,

Advocates & Notaries & Legal Consultants [HR]

Email: [Email Removed For Privacy Reasons]

Mobile: [Phone Number Removed For Privacy Reasons].

I don't know whether this is enforceable by law or not, but, of course, the company can do it. However, the tenure decided is too long. You cannot expect someone to stay with your company for 4 years. The tenure should be either 1-2 years.

Alternative Approach

Why don't you give your director a reverse idea? Instead of deducting the 10%, why don't you give that 10% as a joining bonus to the new joiners with a condition that if they do not stay with the company for 2 years, the 10% amount given as a joining bonus will have to be returned or adjusted during the Full and Final settlement.

Regards,
Chitra

No, Chitra, still there are big companies with bond tenures of 3 years and more than 3 years, and bond amounts exceeding 3 lakhs+ like Reliance, Morgan Stanley, Citi Inc.

I am also of the opinion that the deduction of a certain percentage from the salary and setting it aside towards a bonus to be paid after 3-4 years of service is not right. As conveyed by M/s Rajan Associates, only certain deductions are permissible under the law, and we cannot do so as per your current practice.

No organization wants people to quit. There are different retention strategies being followed by different organizations. But those strategies must be in accordance with the law.

Please see attached a policy that we developed for retaining employees in our organization. Probably, you may think along these lines too. You can fine-tune the same to suit your organization.

Regards,
V. Balaji

Dear HR Fraternity,

I agree with Mr. Shish Ram Uniyal's suggestion. In North Chennai, in a reputable company, they set aside a certain amount as a retention bonus for a specific period (minimum and maximum of 3 to 5 years, respectively, as far as my knowledge goes). This amount is provided along with the Confirmation Order.

Once the employee fulfills the designated period, the retention bonus is promptly issued without any delays. This practice is not illegal and should not be deducted from the employee's salary. It should be given exclusively as a retention bonus, which should be based on the individual's performance. It can also be calculated as part of the Total CTC.

Regards,
K. Gopalakrishnan (Gopi)
Sriperumbudur
[Phone Number Removed For Privacy Reasons]

I am in total agreement with Mr. Uniyal. Holding on to original documents, retaining part of the salary for 4 years, etc., are very poor HR strategies. Instead, the organization should focus on creating a work environment that would promote employee retention and reduce attrition. Think of the best Employee Retention measures that would best suit your organization and implement them.

Best Wishes,
Vasant Nair

While I find merit in bonus provision, please see whether it can be part of CTC while negotiating salary. Otherwise, such a top-up management usually may not be comfortable with.