Demoting an Employee: Can We Cut Salary and What Are the Legal Steps?

Hi, if we demote an employee because of performance, then:

Question 1: Can we reduce the salary of the demoted employee?

Question 2: In the demoted salary, will he be a part of PF and ESIC? So, can we start PF midway in the job? What about the date of joining of the employee for PF records?

Question 3: Is there any specific compliance-related process to be followed in the case of demotion?

Can someone in this forum help me with the answers?

Regards,
Leena Lopez

Q.1 Answer: Yes.

Q.2 Answer: Yes, and mention the EPF joining date from when EPF contributions started.

Q.3 Answer: Keep a copy of the demotion letter in his/her employment file.

Dear Leena, Avinash has taken a somewhat simplistic view of your case. Anyway, the replies to your questions are as below:

Question 1: Can we reduce the salary of the demoted employee?

Reply: Yes, you can reduce the salary of the demoted employee. The definition of demotion is "to assign to a lower position or reduce in rank." It would be inconsistent if you only reduce the rank but not the salary.

Question 2: In the demoted salary, will he be a part of PF and ESIC? So, can we start PF midway in the job? What about the date of joining of the employee for PF records?

Reply: Despite demoting the employee, he/she continues to remain on the company's rolls. Therefore, the date of joining will remain the same. There is no question of starting PF midway in the job as you should have been deducting the PF from his salary even before the demotion. However, please do not reduce the basic salary. If you reduce the basic salary, the PF contribution will also decrease, and in that case, the PF Enforcement Officer may raise observations against the reduction in the PF contribution.

Question 3: Is there any specific compliance-related process to be followed in the case of demotion?

Reply: "Demotion" is a form of punishment. Before imposing this punishment, you need to conduct a domestic enquiry. During the enquiry, the accused employee must be given a chance to defend his/her case. If misconduct is established during the enquiry findings, only then can the punishment be given. Demotion is a severe punishment and cannot be awarded based solely on the reply that the accused gave to the show cause notice issued earlier.

Thanks,
Dinesh Divekar

I'm afraid that demotion may not be the correct move here, as there are too many complications or there is an objective for gradual constructive discharge of the employee.

Check the Appointment Letter

The first point to be checked is whether, as part of the employee appointment letter, it had been mentioned that demotion could be executed as part of the performance management plan. Normally, companies only mention that a performance improvement plan would be initiated, and if it is not satisfactorily closed, then exit formalities would be initiated. If demotion is an option, this needs to be mentioned as well.

Company Policies on Performance Management

Another area to be checked is whether the company policies on performance management reflect any details on demotion on account of poor performance. If both the appointment letters and company policies do not have any details on demotions, then it is strongly advised that demotion be dropped as an option.

Justification for Demotion

The reason here is that when demoted, justification is required as to which position the demotion has occurred and whether the employee is fit for that position. If the scenario is one where the employee had been promoted earlier and then is demoted now, then more complications arise on whether there had been any changes in the job specifications over a period of time or as to why the employee is suddenly considered a non-performer.

There are a lot more details to be considered, but to keep this short, my opinion is that it is not easy to prove the justification for a demotion in a labor court if the correct paperwork is not in place.