Salary Deductions for Missing Targets: Is This Practice Legal or Fair?

Salary Deductions for Not Meeting Targets

My company is ruthless in cutting and holding back salaries of employees who do not achieve 100% targets month on month. Is it permitted, and are there any legal obligations attached to this kind of behavior?

Thank you.

It depends on the service rules drafted by your company. If the employment agreement states that the full salary is subject to the achievement of vested targets on an individual basis, then it is fair from the employer's perspective. However, everything should align with the terms outlined in the employment agreement between the employee and the employer.

"Forfeiture of Salaries and Wages" is a punishment awarded to an employee. However, this punishment is awarded only after conducting a domestic inquiry. Month after month, you cannot go on forfeiting the salary of the employees.

Secondly, any deductions made from the employee's salary have to be deposited to the Labour Welfare Fund (Karnataka State Labour Welfare Fund for the state of Karnataka). Are you doing that?

If a Labour Officer checks the salary rolls of the employees, how will you justify the deductions without an inquiry? How will you justify not depositing the deducted amount to LWF?

For this, I recommend revising the salary structure of the employees. Keep one component as fixed pay. The employee will get this even if he/she does not attain any target. Let the other component be an incentive. This incentive amount should be linked to the targets. Though I recommend this, I doubt whether it holds the scrutiny of the law. I recommend checking the provisions of the Payment of Wages Act. In addition to this, you may check provisions of the Factory Act or Shops and Establishment Act as applicable to your company.

Regards,
Dinesh V Divekar

Salary Deductions and Legal Obligations

Holding back the full salary of any employee is not advisable. As per the Payment of Wages Act, you are supposed to deduct only 50% of the salary, regardless of the basis. Moreover, no employment agreement supports such behavior.

Salary is the rightful claim of the employee. The employer cannot withhold the salary for any month; doing so is an offense and punishable. If the employee raises the issue with the Labour office, it will be taken seriously. Please advise your company against engaging in such practices.

Incentive-Based Compensation

If the company wishes to enforce strict targets, they can set a base salary and offer incentives for achieving them. If the targets are not met, they can withhold the incentives. However, under no circumstances should they withhold the salary.