Is It Legal to Deduct Salary for Missed Targets? Seeking Advice on HR Policy Compliance

I want to deduct the salary of the marketing employee who is not achieving targets. We have included a clause in our HR policy and even in the appointment letter that if he/she is not able to achieve the targets, their salaries would be deducted to an extent of 40%. Is this against the law? Please provide the act and section in support of the same.

You have included in the policy and even in the appointment letter a clause stating that if the salespersons are not able to achieve the targets, their salaries would be deducted by up to 40%. To seek advice from the forum members, you could have approached this forum before doing this and not after.

As per the provisions of the Payment of Wages Act, you cannot keep varying the monthly salary. You could have mentioned a certain fixed salary. Salespersons were to get that remuneration irrespective of target attainment. The other portion could have been variable, and it could have been linked to the achievement of the targets.

Even now, you can issue the backdated appointment letter by removing this clause. You may mention that for the variable pay, the individual will be issued a separate letter.

Thanks,

Dinesh Divekar

Normally, salesmen receive a fixed salary plus incentives. Cutting their salary for not achieving targets is irregular and violates the Payment of Wages Act. You should reconsider your plans to reduce their salary. Keep in mind that the company's product may be defective or less competitive, making it difficult for the salesmen to sell them. Analyze the reasons for not meeting targets to find a specific solution.

To put the cat among the pigeons and do a bit of technical hair-splitting, which section of the Payment of Wages Act says you cannot cut wages? There is a clause against illegal deductions, but not cutting wages. Nothing in the act actually stops someone from reducing the wages or salary of any employee.

That being said, it is difficult to implement now what Dhruvic wants, especially since we don't know the exact wording of the appointment letter or HR policy. If the wording has been properly made, and this is shown as variable pay, then this is fine. If the total is shown as gross pay, then deductions would be illegal.

Making a backdated appointment letter when the employee already has the original letter has a high level of risk.

Dear Mr. Saswata Banerjee, Dhruvik, in his post, has clearly stated that the "appointment letter mentions that if he/she is not able to achieve the targets, their salaries would be deducted to an extent of 40%."

Drafting the Appointment Letter

When drafting the appointment letter, it must be clearly worded. It should specify the fixed component and the variable component. The variable portion depends on the targets achieved, company performance, etc. Whether or not an employee attains certain targets, there must be a fixed amount referred to as the take-home salary.

Explaining Salary Variations

Furthermore, how can we explain variations in salary during a labor officer's inspection? During my time in HR at a hotel, a Labor Officer praised me for maintaining uniformity in all salary components for all employees. We included an "incentive" section where salespersons, front office personnel, etc., were provided incentives.

Concerns About Reducing Basic Salary

Thirdly, Dhruvik is unclear on whether he intends to reduce the basic salary as well. Reducing the basic salary would also decrease the PF contribution, potentially drawing the attention of PF inspectors during inspections. The same applies to ESI if the employees are covered under it. As ESI is calculated based on the gross salary, any variations in the gross amount might attract the scrutiny of ESI inspectors.

In many companies, a supplementary letter is issued that outlines the method of calculating variable pay, performance bonuses, sales incentives, etc. It is not advisable to include these terms in the appointment letter itself. I recall a case of a software professional whose fixed salary is Rs 20L, and variable salary is also Rs 20L per annum. For the latter part, a separate letter was issued.

Thank you,

Dinesh Divekar

Appreciable views, though it's on the contrary, add value to the discussion.

I would like to highlight Section 9 under the Payment of Wages Act, 1936, where various deductions are legally acceptable. However, one can't deduct from the basic/fixed wage in the name of performance. Performance has its own connotations that can't be linked with minimum wages, and it is void in the eyes of the law.

Thank you for your suggestions. The phrase "if he/she is not able to achieve the targets, their salaries would be deducted to an extent of 40%", clearly shows that 60% of the salary is fixed and the rest is variable. So from the discussions above, I concluded that it will be better to use the word variable instead of deduction. Right???

No, Dhruvik. You are drawing the wrong lesson from the post. The wording of the appointment letter is incorrect. It does not imply that the employee has variable pay. Instead, it signifies that his salary will be deducted for failing to achieve the target.

Permissible Deductions Under the Payment of Wages Act

The Payment of Wages Act provides a list of permissible deductions from salary in sections 6 and 7. Please refer to it. Deducting for failure to achieve the target is not one of the clauses. Any deduction apart from those specified is unlawful. Also, consider the impact Mr. Divekar has explained on PF and ESIC.

Certainly, the Payment of Wages Act is applicable only to individuals earning a salary up to ₹18,000 per month. However, the regulations are often viewed as a standard for others, even though not explicitly mandated by law.

Revising the Appointment Letter

You need to revise the appointment letter. Reduce the salary itself to 60% of its current value. Ensure that the basic + DA is above the minimum wage. Then introduce an incentive component that will be granted upon reaching targets. It's advisable to have a tiered target system, with portions of the incentive awarded for achieving various milestones.

The issue is not the choice of words while deducting the money. It's the phrasing used for deductions. It's the wording that authorizes the deduction.