Is It Legal for My Employer to Cut Salaries? Seeking Advice on Pay Reduction Concerns

Salary Reduction Concerns in a Limited Company

We are working in a limited company where the employer has reduced our monthly gross pay by 20%, and 25% for top management. We want to know whether an employer has the right to reduce the salary of an employee; is it legal?

In total, 19 people were fired in April 2015, reducing our total employee strength to 85. It has been more than 5 years since I started working in this company, and I am skeptical that if I leave the company, they would pay the gratuity based on the reduced monthly amount, which would again be a loss for me.

When I appear for an interview, I will have to present the reduced monthly salary slip, which would once again put me at a disadvantage. The reduced amount of 20% is nowhere reflected in the salary slip; what could be the repercussions?

Friends, please suggest a way out as the employer has become completely adamant.

Thank you.

The company may be in a financial crisis, planning to change business, or even wind up. There is no real way to stop pay reduction; the law can provide any amount of legal protection for labor welfare. Look around for greener pastures.

Dear Dazler,

Reduction in remuneration is common when a company faces rough weather. Nevertheless, I find two contradictory statements in your post. These are as follows:

"When I will appear for the interview, I will have to put up the reduced monthly salary slip which would turn out to be a loss for me again.

The reduced amount of 20% is nowhere reflective in the salary slip, what could be the repercussion."

I wanted to ask a simple question. If the reduction in wages is not reflected in the salary slip, then how do they manage the reduced pay? Are you paid by cash or what? Secondly, if the reduced salary does not reflect in the salary slip, then is it not a boon to you? You may not have to disclose that your salary was reduced.

As far as gratuity is concerned, no company can turn down the claim. You can sue the company for non-payment of the rightful dues.

Thanks,

Dinesh Divekar

Well, the statement does look contradictory. Let me provide a clarification.

Supposing initially I was getting X amount as my take-home salary. Now it has changed to (X - 20%X), so the effective take-home salary now is (X - 20%X), i.e., 80%X. This 80% of X is reflected in the salary slip now.

Now, coming down to the question of gratuity, the employer will not deny the gratuity claim but may pay at 80% of X (as basic + DA component), which was earlier X. This reduction of 20% from the take-home salary will have a direct impact on the total gratuity amount.

Hope the concerns are clear now.

Legal Implications of Salary Reduction

There is no legal way to contest if the reduced salary is higher than the prescribed minimum wages; you cannot sue the employer. Gratuity will also be reduced because, as per the Gratuity Act, the salary is considered as the last month's salary (as if paid for the complete month). If the company is facing a loss, they are likely to take such measures. Wait until the company returns to profitability, or you can search for a new job.

Communicating with Prospective Employers

You should be honest with prospective employers about your salary reduction, explaining that it was due to financial losses in your organization and not because of job performance. Justify your answer clearly.

Regards.

Clarification Needed on Salary Reduction

You haven't clarified the common query of the members: why did the company reduce the salaries? Was it, as Suhas Khambe mentioned, due to losses? Also, there's a fallacy in the clarification you mentioned regarding Dinesh's query about contradictory salary statements.

In your first posting, you mentioned "reduced our monthly GROSS pay by 20% and 25% for top management," while your posting today says "my TAKE HOME salary now has changed to (X - 20%X)."

Regards,
TS

Hi TS,

The first query is whether the company is at a loss. The answer is "NO"; it's just that they want to improve their operational income.

For the second part, the monthly take-home salary has reduced to 0.8X from X. They have played wisely by keeping the basic the same and reducing the special allowances.

Hope the above is clear now.

"It's just that they want to improve on their operational income."

Cutting pay to improve the bottom line is a foolish move. Employees will not apply their full mind and spirit at work, and that could impact the company more than anything else. The company should review its finances as a whole on a holistic basis and not make short-cut decisions.

You are correct, but employees are left to languish as they cannot do anything about it.

My prima facie motive of raising the question was, do we have anything (rule, act, law) to fight the injustice....

As Nathrao mentioned, such steps—cutting wage bills to increase the bottom line—are not just foolish but also counterproductive in the long run. However, I guess that's not your problem... let the company face the consequences.

Addressing Your Concern

Suhas Khambe has already given the legal position: "If the reduced salary is higher than the prescribed minimum wages, then you cannot sue the employer." However, this situation raises another point—how come you or the other employees didn't notice this trait/nature of the management in all these years (you worked here for over 5 years)? Usually, such mentalities don't develop overnight. There sure would have been some situations that would be giveaways of this trait. Or did the management control change?

Options for Employees

As for the options open to you or other employees: move as soon as possible from here. This is a classic situation where you need to "cut down the losses" rather than see ways of getting what you ought to get. And don't bluff your way in the interviews... give the factual picture of the salary differences vis-a-vis what's mentioned in your appointment letter and the salary slip.

All the best.

Regards,
TS

As suggested by TAJSATEESH, this is the right time to move from the company, and it reveals that you have not yet started to look for another opportunity. None of your employees know what the employer's next step will be. Suppose they close the business and declare bankruptcy; then it will be very difficult for you to even get your last salary, let alone the gratuity.

There are many examples of organizations acting in this manner, leaving employees with 10 years of experience jobless with no compensation at all. Do you have a strong financial backup to handle such a situation? If you spend time waiting for salary improvements and gratuity, you may face a tragic situation in the future.

If you are optimistic, all employees should meet with the employer to discuss the situation. This may provide a clearer picture of their future plans. We can only offer suggestions; the decision is yours to make.

Working in the company, one can always know the financial situation well. What are the inflows, order position, etc.? Employees can always know the inner workings and decide whether it is doomsday for the company or a temporary crisis. Accordingly, they can plan their next step - alternate job. Do things in a thoughtful and careful manner, taking due care in decisions.

Thanks to all the seniors for sharing the enlightening knowledge and experience. I would like to shed some light on why, after being in this company for more than 5 years, we were unable to acknowledge the situation.

Initial Company Setup

Initially, our company started as a project company for establishing a plant where the pay perks were high. Of course, they wanted to retain the people for project execution. The story flipped after the completion of the project and plant operations came into the picture.

Even then, for a period of 1 year, everything went well. The cash flows were good, and the company did make some profit in the previous financial year.

Sudden Changes and Impact

Suddenly, the greed of the employer surfaced (I use this word because I am aware of all the technical and financial situations in the company), and they sacked 19 employees in April 2015. For the remaining employees, there was a special reduction of 20%-25% of the take-home salary.

These developments were so sudden that employees didn't get any chance to think about it.

Legal and Moral Implications

However, one thing we have understood very clearly is that there is no way we can sue the employer for this insane activity. You, all seniors, are correct that it would definitely affect the bottom line by reducing employees' morale and productivity, but that is not our concern now. Why spoil our time on someone who has cheated us?