Can We Remove DA from Our Salary Structure While Staying Compliant? Seeking Clarification

We are under Shops and Establishment. We are paying EPF, ESI, and PT. One of our auditors said, "Why are we showing DA (Dearness Allowance) and is asking to remove DA and to show only Basic (40%) and take other amounts as other allowances. Is it possible to remove DA from the salary structure? Please give clarification.

Dear Satya, I am not sure about the actual intention behind the auditor's so-called suggestion to remove the existing component of D.A from the salary structure of the employees in your industrial establishment, which falls under the State's S&E Act as well as other allied laws viz., ID Act, 1947, MW Act, 1948, PB Act, 1965, and PG Act, 1972, in addition to the ESI and EPF Acts. It may be out of his interest in minimizing the indirect financial commitment of his client towards bonus, gratuity, subscription to EPF, etc. However, I am constrained to state that the auditor might have glossed over the negative legal implications of such a sudden change. They are:

(1) You cannot do away with the existing component of D.A without issuing a notice u/s 9-A of the ID Act, 1947, as it amounts to a change in service conditions stipulated at serial nos. 2 and 3 of Schedule IV of the Act.

(2) Removal of D.A may result in proportionate addition to other components so that the amount of contribution to EPFS gets reduced. It is an indirect reduction and prohibited u/s 12 of the EPF Act, 1952.

(3) Since the MW fixed by the government under the MW Act, 1948 includes V.D.A linked to the Cost of Living Index, you have to be constantly vigilant and ensure that your industry wages do not fall short of the minimum wages due to the periodic hike in V.D.A.

(4) Since the deletion of the component of D.A from the salary structure would reduce the bonus and gratuity of the employees, certainly, they will oppose such a change.

Therefore, in my opinion, it is not advisable.

Dear Mr. Uma,

The auditor should have been aware of the rule position before passing such a remark. Instead of DA, probably they need to change their auditor?? His suggestion would create legal issues and labor issues.

I always appreciate your comments on the post. This situation seems absurd on the auditor's part to give such foolish advice. There is a lot more to learn here and contribute towards better HR practices. We know DA is a variable allowance announced by the government from time to time to compensate for the cost of living. Our other benefits like PF, ESIC, BONUS, GRATUITY, etc., are also dependent on the value of DA. How can the auditor say to remove this component?

Companies should ensure that employees are given their rights, privileges, and entitlements properly if we want them to sustain and perform at their peak.

Thank you, Sir.

Dear HR colleague, while I fully agree with my learned colleagues, I would like to share a point of view. Before I come to that, is your D.A linked to CLI or a flat amount? I presume it is a flat amount, and perhaps the Auditor is suggesting merging it into the basic. I also assume that your total wages are well above applicable minimum wages, which fully cover future increases in VDA under Min. Wages.

Reason for merging DA into basic

The reason why the Auditor is perhaps suggesting merging DA into the basic is to arrest future consequential wage costs on account of Bonus, Gratuity, leave encashment, etc., that generally occur due to a rise in VDA. As long as current wages are kept at levels well above the minimum wage law by not depriving workers of raises in VDA from time to time, I do not see anything wrong in making this change by adhering to notice of change requirements under the ID Act and proactively taking care of other labor implications if any.

Regards,
Vinayak Nagarkar
HR Consultant

Dear Mr. Vinayak Nagarkar,

Your point is taken, but if you read the query, it is not very clear. It is always that basic and DA are mentioned or minimum wages mentioned towards the calculation of statutory compliance. As you said, wages are being kept well above minimum wages; therefore, it is to arrest future consequential wage costs on bonus, gratuity, etc.

My point is if the standard practice is followed right from the beginning, then the question won't arise at all.