Effective Employee Retention Strategies: Avoiding Illegal Salary Deductions

Hi,

I'm deducting five days' salary as per the annual CTC every month for 6 months in order to retain employees. This amount will be given after three years of service or if they provide notice before leaving within the notice period after separation. However, some employees are asking for the deduction not to be made. Can you please suggest if this is acceptable?

Dear Member,

Are you deducting it from the monthly salary payable and under what head? Please remember that any deductions not duly authorized by the employee or not deductible under statutory provisions (e.g., PF, ESI, Income Tax, Labour Welfare Fund, etc.) are illegal, and stop it immediately. You can use other retention techniques like Retention Bonus, Long Service Awards, etc.

Regards,
Preetam Deshpande

Hi Preetam,

I am deducting 5 days' salary as per the annual package. For example, if the CTC is 200,000, then 2,740 is being deducted for 6 months in order to keep one month's salary with the company.

Instead of deducting salary, you can set aside a portion of CTC as a retention bonus while issuing the appointment letter itself. For example, if an employee is hired for a Rs 10L CTC, a retention bonus of Rs.1L may be kept aside, which can be paid after completion of one year of service or so. In this way, dissension can be avoided.

Can you please elaborate on this? I mean the process of communication and deduction. Are there any other alternatives?

Our actual intention is to retain employees for the long term and utilize this money for any emergency requirements of the employee, whether during their employment or during the gap between new employments.

Hello Anupama,

Like Preetam Deshpande mentioned, this practice isn't legal and could land your company into legal trouble if anyone goes to court. Many small IT companies in Andhra Pradesh who use this practice for retention may not be paying any interest over the deducted amount - whatever the quantum. Please note that I am not disputing your intent here, only the 'how' part.

Like Pon suggested, try to include this within the Appointment Letter itself in the form of a Retention Bonus. To explain, suppose a hiree wants a CTC of 6 L p.a., you can negotiate for 5.5 L for the monthly payout in the form of salary AND 50K to be payable after 6 months or 1 year as a Retention Bonus - whatever duration you have in mind. If the employee leaves before that period, then he/she stands to lose it - which will have to be mentioned clearly in the Offer/Appointment Letter. This is what Pon meant. That way, you neither have to make any deductions - complicating matters - and also maintain cordial relations with the employees. However, please note that, like every step/measure in HR, this too has its own set of downsides. You need to be on the watch around the time when the employee gets the Bonus - chances of an employee quitting AFTER taking the Bonus could be there. And, please ensure the Bonus IS PAID WITHOUT DELAY as soon as it's due - many companies which have the Retention Bonus scheme delay this payment leading to unwarranted HR situations.

All said and done, there's no replacement for long-term Good HR Practices - which minimize such situations. But if you are looking for an ideal situation that NO employee will LEAVE, those days are gone.

All the Best.

Regards,

TS

Dear Anupama,

An employee cannot be retained with this kind of policy. As well said by others, if the same is not done with the consent of both (employee and employer), it can put your company into trouble. An employee can be retained if he/she feels that they are not coddled or if they are satisfied with their work culture and the role they are in. One thing I must say is that all policies must be transparent and clear to every employee.

Good luck!