How Can We Restructure Salaries to Include Allowances Without Cutting Basic Pay?

Kindly suggest how a company can reduce the basic salary of employees. Our management wants to change the salary structure of workers. Currently, there are no allowances included in the workers' salaries. Therefore, we aim to modify the salary structure by including allowances such as HRA, DA, education, etc.

Please help me.

Regards,
Dashrathsinh Jhala
Executive HR & Admin

In terms of Section 9-A of the Industrial Disputes Act, the employer needs to give 21 days' notice to the workmen if he effects any change in their wages, especially when the change adversely affects the workman.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Restructuring Salary: Key Considerations

If you have not restructured so far, and this is the first time you are restructuring, care needs to be taken. The law does not say that management cannot reduce salary. The ID Act says that conditions can be changed by giving notice under Section 9A. The following needs to be examined before giving proper advice.

1. Have you ever signed a settlement?
2. Do you have a union? If so, how many?
3. If you do not have a union and have not signed a settlement, how do you manage changes every time?
4. How many workmen are there?
5. What is the present structure?
6. What structure do you follow for management staff?
7. How old is your unit?
8. Are you covering them under PF and ESI?
9. What is the bonus percentage you pay now?
10. What structure is being followed in your area?
11. What is the reason to restructure now?

A few questions may be added to the list. Write down all and specify two objectives for restructuring now.

If you have a union, you need to discuss with them. If you have signed a settlement, a 9A notice needs to be given. If you do not have any such thing like a union or a settlement, legally you need to give a 9A notice. However, you can manage internally, and if all employees sign accepting the changes, you can proceed.

I suggest you jot down all details, and if necessary, consult a local IR expert and implement.

It is not correct to say that the basic cannot be reduced. It is a misconception. You need to follow certain procedures and also work out a good strategy for convincing people.

Thanks,

Regards,
T. Sivasankaran

It is not correct to say that the basic salary cannot be reduced. It is a misconception. You need to follow certain procedures and also work out a good strategy for convincing people. There are some points:

1. Do you have a fixed limit of PF contribution as per the PF Act, i.e., ₹780 on a wage ceiling of ₹6500? If yes, then no problem. The basic salary can be reduced, but if your company is deducting PF more than ₹780 per month, i.e., more than the wage ceiling, then you cannot reduce the basic salary of the employees without informing the PF authority because PF cannot be affected (less than the previous month's contribution). PF deduction may be less than earlier from the new return period, not in between April to March.

2. The basic salary cannot be less than the current minimum wages.

3. Workers should be informed by the management as per Section 9A, i.e., Notice of Change (ID Act 1947).

Thank you.

With due respect, I must submit here that the PF or ESI Acts have no bearing on the fixation of wages. Wages are primarily guided by the Minimum Wages Act and the ID Act for any changes.

Regards,
T Sivasankaran

Thank you very much for your suggestion. We have faced a problem with gratuity payment because the current basic salary is less than the previous one. Therefore, how can we pay gratuity when the employee is demanding it based on the previous basic salary? We have obtained the signatures of our employees on the revised salary structure, which includes allowances.

Please reply...

Thank you.

It is always better to give proper notice to all employees concerned or obtain their consent/sign a bipartite agreement, notwithstanding whether or not there is enough provision in the law. This is especially required to satisfy the provisions of the "Law of Contracts" as everyone is governed by certain terms and conditions, whether oral or written, implied or explicit. Moreover, any attempt to tinker with the basic pay would automatically attract EPF/ESI/Gratuity and other Acts. Therefore, proper notice and consent are necessary to disprove any mala-fide intentions, if any.

Nevertheless, it is beneficial to bifurcate the emoluments into acceptable components such as Basic, DA, HRA, CCA, Bonus, Pensionary benefits, and so on. Different Acts define salary/wages/remuneration with different connotations. A caution - Employees/Unions should study the proposals with utmost care, sensing repercussions.

Regards,
Kumar S.

I have quoted the same provision which you have shown in the link. Even assuming that the total wages an employee is paid are not reduced because you are granting him other allowances like conveyance to compensate for the reduction in basic pay, the employee may still contend that he has been adversely affected. He might bring up issues like gratuity, which you just cited, or any benefits linked to basic pay, and try to overturn your action as being violative of Sec. 9-A.

Since you have taken the signature of the employee in token of having consented to the change, it should not cause any problem now as far as gratuity is concerned.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai