Is It Legal for Companies to Adjust Salary Components Without Changing Gross Pay? Seeking Advice on Tamil Nadu's Wage Orders

Dear Members,

I'm working in a private leather tannery in Tamil Nadu, and I'm posting this question to seek guidance regarding the salary structure of my company. When the Government Orders (G.O's) are passed by the Tamil Nadu Government for the revision in minimum wages or Dearness Allowance (DA), the company is making changes to components of the salary, but the gross salary remains the same. I would like to know if this is legally correct or not.

Example of salary components before and after the Government Order

For example, the previous salary components were:
- Basic+DA: 13,000
- Bonus: 1,400
- Leave Encashment: 714
- Other Allowances: 1,886

After the Government Order, the salary components were changed to:
- Basic+DA: 14,000
- Bonus: 1,400
- Leave Encashment: 588
- Other Allowances: 1,012

Here, the gross salary remains the same; only the components are affected.

I'm asking this question for my legal awareness.

Thank you for sharing your knowledge and expertise with us.

Best Regards,
Shameem

Impact of Changes in Basic Salary and Dearness Allowance

When the basic salary and dearness allowances change, the bonus and leave encashment, which are based on the basic and DA part of the salary, should change. You cannot reduce these. The revised salary does not offer any increase in bonus or through leave encashment. When the bonus is a certain percentage (say 8.33% or any percentage between 8.33% and 20%) of basic and DA, an increase in Basic and DA should only increase the bonus, and it will never reduce or remain constant. Similarly, leave encashment is also based on the basic and DA at the time of encashment. However, other allowances, being outside the purview of statutory minimum wages, can be reduced, but it is a clear violation of industry standards and against business ethics.

Reasons for Salary Increase

There are two reasons why an employee should be given a salary increase: first, to compensate for the increase in the cost of living, and second, to reward the performance of the employee. The former is met by increasing the dearness allowance, which is done by the government itself by adjusting the DA according to changes in the Consumer Price Index. The change in the DA will be uniform for a particular industry and a particular locality because the effect of price change will be common for all people. The latter is to be done by the employer, and under normal circumstances, they will increase the basic salary or any allowance like a performance allowance. The amount of increase will depend on the performance, and accordingly, good performers will get a good increase. When the government revises the minimum wages, they will bring in new basic wages applicable to the industry. This is done once in five years or even after that.

In your case, the employer, in order to comply with the legal requirements, has increased the DA part but has reduced the other allowances to make the end result negligible. This is unfair.

@Madhu.T.K, sir, thank you for your response in clarifying my doubt. For clarification, I have posted this issue that I learned about from a friend who works in the same field at another reputable organization.

Unfair Practices in Salary Structure

Definitely! Due to these unfair practices, employees get exploited by employers. This could also be happening in many other private companies. Does the government confirm with private companies to ensure that they abide by the new orders related to wages? Won't they be checking that the gross salary is not getting affected despite the revision in the wages? This is not purely to complain about any company, but if this issue is brought to the attention of the government, they may issue orders so that the employees get fully benefited and this unfair practice can be eradicated.

Possible Solutions

Are there any possible ways?

Clarification on Leave Encashment and Bonus

One more thing I would like to share with you is that you mentioned in your response that "the bonus and leave encashment are based on the basic and DA part of the salary." Here, the company is calculating leave encashment as 4.2% of the gross salary. For example, if the gross salary is Rs. 20,000, then the leave encashment is Rs. 842, and if the gross salary is Rs. 30,000, then the leave encashment is Rs. 1260. Additionally, the bonus is fixed to an amount, irrespective of the gross salary. Is this practice correct?

First of all, let me clarify that we have labor law enforcement officers in the state. Their duty is to ensure that no employee is paid less than the notified minimum wages. It is true that the employer can have different heads for the salary and need not necessarily follow the same patterns with basic wage and dearness allowance in the same amounts as prescribed. However, it must be ensured that the total (gross) salary at any point in time should not be less than the basic and DA as prescribed by the government.

In your case, there is no increase in the gross salary. This is not fair, especially for employees for whom minimum rates of wages are fixed. I can also say that, in respect of managers, they should follow a more employee-friendly salary structure, which should be much above the minimum salary fixed for them. Please note that minimum wages are fixed not only for workers but also for managers. From my experience, I have observed that managers are paid ten times more than the statutory wages, but for those who really work, they struggle to bring even parity to the one fixed by the state. This will make the workers discontent, and they will think of a possible way to get their rights by joining hands in collective bargaining by forming a trade union. Once a union is formed, then the entire blame will be on the workers. The employers will turn hostile and will do anything they can against the workers, including the closure of the undertaking!

However, the above situation will not arise in a locality where a good labor law enforcement officer is available. He will step into action and see what actual benefits are extended to the workers. If he identifies anything wrong and illegal, he will book the employer and ask him to be fair. This will improve industrial relations. At the company level, we should also have a Personnel Manager/HR Manager who can be sympathetic towards the employees and can advise the management on the sentiments of the shop floor employees, their grievances, and probable disputes which may arise if not addressed and solved. He is expected to be a bridge between the employees and the employer, and his advice should be valued by the employer. Then more than half of the disputes could be solved.

Bonus and Leave Encashment

Now, coming to the matter of a bonus, I would say that a bonus is not a gift that the employer can offer on the occasion of Diwali or Pongal. It is a right for those whose salary does not exceed Rs 21,000 per month. There is a formula to calculate the bonus, and the employer should follow it. The rate of the bonus, which will depend upon the profitability of the organization, shall vary from 8.33% to 20% of basic wages and dearness allowance that an employee was paid during the last financial year. When the salary increases due to an increase in the DA, the bonus will also increase.

The same applies to the calculation of leave encashment. Leave is actually for availing and not for encashment. As such, the practice of showing it in the salary lacks legal backing. When you say that it is part of the salary, it should be interpreted that no employee will be allowed to take leave, but at the end of the year, the employer will pay cash equivalent of leave. Again, when you encash it, it should not be a fixed sum but should be equal to the basic wage and DA. Suppose you encash 15 days' leave, the employee should get wages equal to 15 days, and that should not be less than the 15 days' daily average of basic and DA. For an employee with a salary of Rs 20,000, the daily average wage should be Rs 769, and this should be multiplied by the number of leaves encashed. For example, if an employee surrenders 10 leaves, he should get Rs 7,690, and so on. You cannot fix the leave encashment without reference to the number of leaves. The relevance of 4.2% is not understood.