How to Transition from Daily to Fixed Salaries Without Upsetting Employees or Legal Issues?

Respected Seniors & Colleagues, this company, in which I have been working for the last 2.5 years, is a 34-year-old MSME organization. Since its inception, they have been paying a 'per day salary' to all senior employees, operators, and even new joinees on contract labor.

For example, one senior operator's salary is Rs. 751/- per day without any breakup or bifurcation of Basic+DA, HRA, etc. Therefore, his monthly basic salary is a lump sum of Rs. 751*26 = Rs. 19,526/-. The management, which has been running the company for the last 35 years, has changed, and now the younger generation is heading all the operations and various departments. If Rs. 19,526/- is the basic monthly salary, then paying a bonus based on this will be quite costly to the company, even if we pay at 8.33%.

The same will be the case when paying gratuity to left or retired employees. Even in leave encashment, this will be a costly overhead. Thirdly, the Provident Fund contribution cost to the company is also comparatively high if it is calculated on the whole monthly salary instead of just the basic part of that salary.

Therefore, as a solution, they are thinking of shifting everyone to a 'fixed' or 'CTC' salary structure, wherein the basic salary will be around 40%-50% of the monthly gross salary. For example, in the case of Rs. 19,526/-, the basic will be 40% of 19,526 = Rs. 7,810/- as the basic monthly salary. This will directly control and reduce the company's cost on payables like PF, bonus, gratuity, leave encashment, etc.

Now, management is of the opinion that all those on a 'per day' salary should be shifted to a 'monthly' salary structure as soon as possible so that the company cost can be reduced on other perquisites as well, along with the salary.

But my concerns are as follows:

- All senior employees are receiving salaries according to the 'per day structure,' and so are their salary slips. It would be difficult to convince them to accept a 'fixed salary' structure as this might not be acceptable to them.
- Once they hear about the fixed salary structure, they might immediately oppose it because their yearly bonus will ultimately be affected.
- In terms of the Provident Fund, they might also oppose it as their contribution (actual savings) will decrease comparatively. I even doubt whether the PF department will allow this decrease in the contribution of the Provident Fund.
- What will be the legal implications or after-effects of making this change in salary structure?

All these questions run through my mind whenever I think of starting to create a 'fixed salary' structure for all. Therefore, I request members of this fraternity to kindly share their thoughts on the above queries and please provide a solution or guidelines in this matter.

Dear Harshavardhan, whatever the mode of calculation, either per day or per month, you might have paid it in one instance per month, right? Having a perception of per day salary is okay for costing or calculating productivity.

- All senior employees are getting salary according to 'per day structure,' and so are their salary slips. It would be difficult to make them ready for a 'fixed salary' structure as this might not be acceptable to them.

Reply: Were they told the daily structure or monthly structure? Even if they were told the daily structure, now it is made a monthly structure, which can be convinced.

- Once they get the news of a fixed salary structure, they might straight away oppose it because their yearly bonus will get affected ultimately.

Reply: Universally, the bonus/gratuity, etc., are calculated on Basic + DA only, so your management has made a mistake and now it is correcting itself by fixing a basic component in gross. You need to talk to the employees about this.

- In terms of Provident Fund, they might oppose as their contribution (savings in actual) will decrease comparatively. Even I doubt whether the PF department will allow this decrease in the contribution of the Provident Fund.

Reply: The PF organization should have verified your salary structures earlier as yours is a 34-year-old company, and even other audits/CA should have suggested on the PF component. I do not think this should be a problem in EPFO.

- What will be the legal implications/after-effects of making this change in salary structure?

Reply: As far as you are following minimum wages to employees and paying all statutory dues like PF, ESI, Medical insurance, Bonus, Leave Encashment, Gratuity, etc., there is no problem legally.

All these questions are running through my mind whenever I think of starting to make a 'fixed salary' structure for all.

Reply: The only option available is to tell your management that since the Basic/DA concept was not followed for a long time, let the computation in salaries be done after a proper view is taken considering the precedent set in per day salary as it was a total consolidated pay and no split up was there. In other words, management can take the per day salary into the basic component, if it is feasible for them, to avoid the feeling of employees that their bonus amount/PF contribution gets reduced.

Dear Harshavardhan, mention might have been made in your post about the total number of workmen in the industry likely to be affected by the proposed change and whether any trade unions exist for them. That apart, any change in service conditions listed in the Fourth Schedule of the Industrial Disputes Act, 1947 requires the issuance of a 21-day prior notice under Section 9-A of the Act since the proposed changes fall under the conditions enumerated at serial numbers (1) and (2) of the Fourth Schedule. However, proviso (a) to Section 9-A further clarifies that where the change is made in pursuance of any settlement or award, no notice shall be required. Therefore, it is imperative that you negotiate with the workmen or the unions beforehand, reach a mutual consensus, and effect a settlement accordingly.

As you have rightly observed, the proposed change from the existing consolidated wages to different components such as Basic, D.A, and other allowances would have adverse effects on the fringe benefits of the workmen like EPF, Bonus, gratuity, etc., and may not be easily accepted by them. Simply choosing to go ahead with a notice under Section 9-A may lead to industrial unrest. Even the Labor Department, whose intervention would be certain upon receipt of the 9-A Notice, would advise you to either refrain from implementing the proposed change or modify it while protecting the existing indirect/fringe benefits.

Therefore, effecting the change may not be a cakewalk.

Dear Umakanthan Sir, thank you very much for the apt and precise reply. As I mentioned earlier, we are an MSME organization, so the number of employees whose pay structure and fringe benefits will be affected by the proposed change is 35. However, this will constitute a majority of our total workforce.

Secondly, no trade unions exist in our organization as of today. Nevertheless, I agree that the proposed change should be communicated in advance and discussed with the individuals who will be affected by it. I have also conveyed this suggestion to my boss. Let's see how things progress.

Thank you once again!