Salary Adjustment Dilemma: Should Demotion Affect Basic Pay? Seeking HR Insights

Salary Adjustment During Employee Demotion

I am new to HR and I want to know whether the basic salary can be reduced at the time of demotion of an employee or not. For example, if an employee was skilled before the demotion and is being demoted to a semi-skilled position, should we adjust their basic salary to meet the minimum wage provisions for semi-skilled employees, or should we maintain their previous basic salary?

Please help clarify this issue.

Thank you.

Considerations for Demotion and Salary Adjustment

As demotion is the opposite of promotion, and just as with a promotion an employee's basic salary is increased, on demotion, it should naturally decrease. However, in the case of workers, when demoting an employee, there are some basic considerations to take into account.

Performance Appraisal System

Firstly, you should have a performance appraisal system in your company that is specifically designed for that category of workers. If available, it should be applicable to that specific category of employees and must have been communicated to them either through a provision in the certified Standing Orders or via a separate communication.

Record of Employee Performance

Secondly, there should be a proper record of the employee's performance, either as accepted by the employee or you should have communicated to them regarding their poor performance.

Issuing a Demotion Memo

Thirdly, you should have issued a memo stating that they have been demoted based on the results of the performance appraisal. In the absence of these steps, the act of demotion and a reduction in salary will be considered a change in the service conditions or simply a punishment for poor performance. It is illegal to demote an employee and reduce their salary without giving them the opportunity to be heard.

Regards,
Madhu.T.K

There is no specific link for this issue, but there are many court verdicts stating that without giving an opportunity to be heard, the salary of an employee should not be reduced. As already stated by me, there is nothing illegal in demoting a poor performer and thereby reducing their salary. Often, as a punishment, we also reduce salary, such as the reduction of one increment, but that should be done after following certain procedures. Without any reason, if you reduce the salary, it will lead to an industrial dispute, and you will have to prove that sufficient opportunity was given to the employee before their salary was subjected to reduction and principles of natural justice were followed.

Similarly, you will have to give clarification to the appropriate authorities under the Employees Provident Fund and Employees State Insurance Act, under which an employer is not expected to reduce the salary of an employee unless there is a specific requirement as a part of a change in service conditions of the employee. Please refer to Section 12 of the EPF Act and 72 of the ESI Act.

Regards,
Madhu.T.K

If the demotion is part of disciplinary action, certainly his basic pay has to be reduced to the new grade. In such cases, normally, his service may also be considered. It will seem that the employee is awarded two punishments, namely: (1) Demotion to a lower post and (2) Reduction of salary (basic pay), but in fact, only one punishment is given, i.e., demotion. Salary reduction is a consequence of demotion and not actually a punishment.

Dear Yuva,

Understanding Standing Orders and Penalties in Industrial Establishments

There is a Certified Standing Order in all good industrial establishments. Where it isn't, the Model Standing Orders are followed. There is a mention of punishments to be imposed in case of disciplinary proceedings, which are classified under two major categories: Major Penalty and Minor Penalty. Demotion or lowering of basic pay comes under the "Major Penalty" category.

Promotion/Demotion Policies in HR

As per the promotion/demotion policy in most industries' HR Policies that I have been acquainted with, it has come to my knowledge that the Basic Pay of an employee can only be reduced if there is a mention to this effect in the Penalty Imposing Order passed by the Disciplinary authority. If there is no such mention, then the employee will continue to draw the Basic pay that he was drawing prior to demotion. Only his designation, grade, and status will be reduced to match with the next lower grade.

Impact of Increment Withholding Penalty

There are instances where the employee is imposed with the penalty of "One annual Increment is withheld, with or without cumulative effect." In such cases, the employee continues to hold the present designation and status, but the next annual increment which is due after the passing of the penalty order is held up until the date as mentioned in the Penalty Order. (Explanation: If it is with cumulative effect, it is held up for a lifetime; if it is without cumulative effect, it is held up for the period of one or two or more years as mentioned in the order, and thereafter, it is released. Thus, the employee suffers one increment loss for the number of years mentioned in the order and not thereafter).

Regards,
AK Jain

Importance of Fair Opportunity Before Decision Making

When addressing any situation where you need to make a decision to reduce or change something significantly, the initial step should always involve providing the individual, whether it be a person or an employee, with a fair opportunity to express themselves and be heard. This is crucial before any determination is made that could impact someone's livelihood.