Can Employers Legally Cut Your Salary to Keep Costs Down? Let's Discuss!

Can an employer reduce the gross salary of a working employee?

For example, if the ESIC limit increases to 21K and an employee is currently earning 16K as gross salary, will the gross salary be affected?

Is there any law that prevents employers from reducing the gross salary to maintain the CTC?

For instance, if a contractor is working for a principal employer who does not want to increase the CTC despite minimum wage hikes or the new ESIC limit, what should the contractor do?

Dear Krishna, I am at a loss to understand your question, most probably because of the way it is drafted.

Effect of Wage Ceiling Hike on Employee Coverage

The effect of any hike announced in the existing ceiling of wages/salary by way of a statutory amendment for the purpose of extending the coverage of employees under a particular Labour Enactment would be the application of the Act to more employees.

In effect:
(a) There cannot be any reduction in the net salary of the employees already covered.
(b) The employees not covered previously but brought under the scheme of the Act due to the enhancement of the salary ceiling will receive less net salary to the extent of their contribution.
(c) In any case, there cannot be a reduction in their gross salary.
(d) The Cost to Company (CTC) in respect of the newly covered employees will certainly increase due to the employer's contribution. Therefore, where is the question of the employer reducing the gross salary on this score? If you meant a reduction in salary to avoid the application of Acts like ESIC or EPF, it is not possible, as no employee would accept such a reduction in their existing salary. Furthermore, CTC is just an accounting aid to calculate the overall financial commitment of the employer to retain the individual employee. It has no statutory force or flavor.

"No" is the answer to your last question. Every statutory hike applicable to the wages, both direct and indirect, of contract labor has to be included in the charges payable to the contractor by the principal employer.

Dear Krishna, Answers for your queries are as below:

Employer's Obligation on Gross Salary

1. The employer is not supposed to deduct any amount from the gross salary. The CTC will increase, and there is no other choice for the same. However, the employee may be affected in their net salary.

Wages Act and Gross Salary

2. According to the wages act, you cannot decrease the gross salary of the employee just to meet any statutory requirements.

Statutory Amendments Applicability

3. Every statutory amendment is applicable to all establishments falling under its purview. Whether it's a principal employer or contractor, the rules are the same and should be applied accordingly.

Employer Restrictions on Salary Reduction

1. Irrespective of any situation, an employer cannot reduce the salary of an employee who falls under the category of workmen under section 2(s) of the Industrial Disputes Act.

The Concept of CTC

2. The law does not recognize the concept of CTC. It is a commercial concept adopted by companies to deceive employees by showing them a bigger package.

Impact of Salary Reduction on Statutory Deductions

3. A reduction in monthly gross salary will impact statutory deductions, which is an offense punishable with a fine and/or imprisonment under various labor laws like the ESI Act, EPF Act, Payment of Gratuity Act, etc.

@Bharat Gera Sir,

Thank you for your reply. Can you share any notification where it is mentioned that a decrease in gross may lead to a fine or imprisonment?

For example, an employee's gross was 17k in December 2016, now in January 2017, ESIC raised its limit to 21K. Now, ESIC deduction is mandatory. In this scenario, what will happen to the gross salary?

Please study the Payment of Wages Act. This Act allows certain deductions from the employee's salary. Additionally, you need to study the EPF Act, Payment of Gratuity Act, and the rules made thereunder. Furthermore, there are court judgments as well.