Is Our Retention Bonus Strategy Legal and Effective for Keeping Employees?

I need some help/advice. We have a startup company. We have noticed that people leave the organization without serving the notice period. To retain employees, we have added a retention bonus in the CTC, but it doesn't seem to be effective. We have included the retention bonus as one component in the monthly salary structure, deducting some amount from the gross salary. For example, if the salary is 20,000, we are paying 19,000, and one thousand is shown as a deduction. This amount will be paid after a year, with the employer contributing the same amount as well. So, the total retention bonus will be 24,000 upon completion of the year.

Is this approach acceptable, or could there be legal issues? Please advise.

There will be no legal issue if both parties (employer and employee) agree. The only request is to make a proper agreement with clear conditions and ensure the same is communicated to employees as well.

No, legally, you cannot withhold any part of wages/salary earned by workers/employees just to retain them in service. It is not a statutory component; however, as per the Payment of Wages Act, the entire wages/salary should be paid to the employee within 7 days after the completion of the month if the employee strength is below 1000. If the employee strength is 1000 or above, the salary should be paid within 10 days after the completion of the month. Additionally, for existing employees, this component may cause a dispute as per Sec 9A of the ID Act, as it is a change in service condition. Therefore, including such a component is not legally valid.

Understanding Employee Retention Issues

First, you need to figure out why employees are not being retained in their service for long; there must be a reason for this. In case an employee/worker leaves the job without serving the notice period, you can demand the money in lieu of the notice period as stated in your offer letter/certified standing order. Also, you can withhold their Full & Final settlement. Always remember, employees are free to work anywhere after providing the notice period and completing the period of notice. No employer can force any employee to remain in the service by executing a service bond and deducting some part of the employee's salary; hence, such a component cannot legally stand.

Thanks & Regards,

Devesh Chauhan

Practicing in Accounts, Finance, Taxation & Labour Laws

Dear Mr. Jugnu,

Please find attached a copy of sub-section 6 of Section 1 of the Payment of Wages Act, 1936. According to this section, the Act is applicable only to persons employed and receiving wages up to Rs 10,000/= (please note that I am not certain about the latest amendment). Therefore, I suggest retaining good employees through your innovative methods and systems.

Regards,

N. Nataraajhan
Sakthi Management Services
Hp: +919483517402
Email: natraj@sakthimanagement.com

Understanding Employee Retention Challenges

First of all, you need to find out the reasons behind employees leaving the organization and not sticking to their jobs. Of course, you have a remedy if they leave you without giving notice or pay in lieu thereof, as there always exists a clause or condition in their appointment letter. I agree with Sh. Devesh Chauhan that such deduction shall not be in order. Such deduction shall also violate the provisions of the Payment of Wages Act, 1936, as it shall be taken as an illegal deduction under the Act. You can add anything from your side to motivate the employees but can't deduct from their salary without their written consent.

Gathering Employee Feedback

You can make a questionnaire and take feedback from the employees leaving the organization about their likes and dislikes of the organization and suggestions for improving the work environment.

Regards, BS Kalsi

You have the option of showing a $24K bonus in his CTC payable at the end of the calendar/financial year and showing his salary as $19K. By doing this, you do not dishonor any act (if the employee agrees).

Secondly, you can hold the employee's F&F settlement until the completion of the notice period or the salary for the notice period as mentioned in the appointment letter. In case you have such a trend in your organization, make sure you increase the notice period slightly to control it. Strictly follow the notice period clause of the appointment.

Moreover, by doing this, you are not addressing the root cause. Have a proper "Employee Engagement Survey," which will cost you hardly anything and reach the actual cause of employees leaving you. If that is addressed perfectly and the correct preventive actions are taken, you will not need to seek such loopholes. Consider that 10% of employees are disengaged at any time in the organization, but addressing this can work for 90% of the remaining employees.

Instead of recovering Rs. 1000/month, if you pay the company's share of Rs. 1000 x 12 = Rs. 12,000 on completion of a year as ad hoc (not as a retention allowance), I think this supports a goodwill gesture, and employees will appreciate it.

The problem of attrition should be analyzed and corrected, as other members emphasized above. While recovering from monthly dues is not legally correct, you should instead find a permanent solution to your attrition based on a diagnostic study.

Regards, RDS Yadav Labour Law Advisor

Retention Bonus Policy

On the same topic, we have framed a Retention Bonus Policy, which we want to start from 1/4/2019. To retain employees for at least 3 years, specifically Fresh Trainee Engineering Diploma or graduate Engineering, we propose adding Rs. 3000/- to their salary every month. This amount will be deducted as R.B. (Retention Bonus), and Rs. 1,08,000/- (3000 x 36 = 1,08,000) will be paid after three years. During this period, we will set aside this amount as R.B. If an employee leaves within three years, they will forfeit this amount. We want to understand the legal status of this R.B. and whether we can implement it, or if we need to use another name. We are displaying this deduction on the payslip as R.B.

For example, we are offering a Trainee Engineer Rs. 11,500/- per month as a gross salary. Deductions will include P.F./E.S.I./P.T., but we will not show any deduction for R.B. - Rs. 3000/-. What heading can we use if R.B. is not legal? Suggestions from the Higher Committee of CITEHR would be appreciated. Can you help me? This policy is not for experienced employees, only for freshers, as my company is a channel partner of an international company. Trainees receive good training as a channel partner of an international company, which often leads them to leave the job within a year or two, hence this policy.

Regards, Jayant Nisal [Email Removed For Privacy Reasons] [Phone Number Removed For Privacy-Reasons]