Can We Lower Salaries Without Impacting ESI and EPFO Contributions? Seeking Advice

We are running a factory with 500 employees. Is there any chance to reduce an employee's salary without affecting their ESI and EPFO contributions? For example, if XYZ's salary is 60,000 and we revise it to 50,000, will there be any issues? (There will be no effect on ESI and PF contributions). Please suggest if there are any options as per the act.

Salary Reduction and ESI Contributions

Your query does not specify the facts correctly. How can you reduce salary but keep the ESI contributions at earlier levels?

Before affecting a change in the wage structure, a 21-day prior notice has to be given to affected employees. The notice must be given as per the first item of the Fourth Schedule (under section 9A) of The Industrial Disputes Act, 1947. If you make changes without giving prior notice and if labor authorities come to know about it, you could be in trouble. After all, reducing wages is serious; not many do it.

The correct legal way is to reduce the employee compensation in proportion to salary and keep the employer contribution as it is, if you are willing to keep the contribution constant.

Mr. Pagepoint,

You cannot reduce the salary of workmen. Please read the Payment of Wages Act. Reduction of salary is a deduction of salary, and you can deduct everything that is allowed as a deduction.

How would you like to reduce your own salary? I presume you are in HR.

There is no law preventing the reduction of salary, except where it is done to lower or reduce the incidence of tax or to force the employee to absorb the same. However, the salary reduction cannot be done unilaterally. You need the concurrence of the concerned employees. You need to follow the rules laid down in the Industrial Dispute Act, standing orders, etc.