How Can We Legally Reduce Salaries Due to Low Production Without Losing Staff?

Salary Reduction Due to Reduced Production Capacity

We have paid full salaries for the month of March to all employees. Considering the present situation and the fact that for another 3-4 months the company is not expecting even 50% of our production capacity, the orders may not be executable. It will be very difficult to manage running costs and also to pay full salaries. We would like to retain all staff, but paying full salaries will be a great concern.

Legal Considerations for Salary Reduction

If we reduce the salary for employees or some employees in writing for 4-5 months, is it legal or illegal? Please advise.

Hi Mohan, the current tussle between the judiciary and the government/legislators on withholding salaries and reducing salaries is itself an example that this is illegal, but given the circumstances, it is non-verbally considered an accepted practice.

With an alarmingly reducing rate of investment and rising unemployment, the government is in a tough spot to take action against such companies, and they know it. The right way for a company to proceed with such practices would be to openly present the losses being incurred and the lack of funds. These could be approved by the labor authorities, and then proceedings could be taken forward as per the law. But obviously, we can see that this is not the case.

So, with a catch-22 situation, what seems good enough is to explain to the employees the losses that the company is incurring and then discuss with them salary reduction factors or any other alternatives to avoid or reduce unemployment or loss of revenue. This creates a degree of fairness or the perception of a degree of fairness.

Well said, Nelson. A "Catch-22" in industry and employment matters indicates a "lose-lose" situation which demands mutual sacrifices from all those involved. Interestingly, everyone placed involuntarily in such a situation has to be content with a lesser evil or necessary evil for the sake of survival. Therefore, the current universal lockdown and its inevitable impacts in the long run compel every stakeholder of societies to think in terms of survival only.

The employers stand only to choose between immediate closure or sustained break-even; the employees between unemployment or reduced earnings; the consumers between scarcity or rationed supplies at affordable prices; and the governments between economic bankruptcy or depression.

Hence, the need of the hour is the realization of the gravity of the situation and taking concerted efforts to recognize the difficulties of one another and act accordingly.

Defering some part or portion of due wages/salary until your finances stabilize can be discussed with wage-earners as equal partners as a tide-over solution.

Harsh K Sharan, Kritarth Team

5.5.20

The impact of lockdown on employers and employees

This is an unexpected situation. Employers are not in a position to pay expenses without having revenue. Employees are also in a very difficult condition. However, when we weigh the hardships of both, the situation of employees is more severe than that of employers. Moreover, if the objective of the lockdown is to make people stay at home, this can only be achieved by offering a salary for the days not worked. Therefore, the lockdown period should be treated as paid days. Once the lockdown period is over, discussions with employees can be held to reach a solution for the upcoming months.

Possible solutions for salary management during the lockdown

Deferring a portion of the salary would be an ideal solution. Reducing the salary of some employees is not proper, but you can consider reducing the salary of all employees.

Also read:

[Madhu T K: Liability of employers to pay salary during COVID-19 lockdown period](http://madhu-t-k.blogspot.com/2020/04/liability-of-employers-to-pay-salary.html)

Thank you to all for the information and for sharing knowledge.

The current situation is definitely leading to a financial crunch for companies that produce as per customers' requirements and not standard products. Most of the orders cannot be executed as customers are in a dilemma, which can lead to more losses for the company. There is also a preference to withhold/retain a portion of the salary, but it raises the question of how long this situation will last and when we will stabilize. At that time, when employees claim the retained salary, the company may not be in a position to pay the full retained amount. However, when the company starts doing well, it can provide good incentives to all employees.

Legal Implications of Reduced Salaries

In agreement with the employees, if reduced salaries are being paid, could there be any legal implications?

Regards, Mohan