Can Employers Stop Your Pay Raise and Allowance Without a Reason or Notice?

We inquire whether an employer has the authority to halt an employee's increment and dearness allowance without providing a valid reason or prior notice.

Under an incremental time scale, the employer cannot hold increments of an employee without reason. However, if there is justification, he can do so. Still, holding increments of Dearness Allowance is not legally maintainable.

Why should an employee be given an increment?

There are two reasons: one is to reward the performance of an employee, and the other is to compensate for the increase in the cost of living. The former is evidenced by an increase in the basic salary and other allowances, whereas the latter is to be given as an increase in the DA. If the performance of the employee is not up to the mark, then the employer can withhold increments on the basic salary. It should be communicated to the employee that there are certain areas where improvements are needed and, therefore, no increment can be given. However, since the second reason, the increase in DA, is a legal responsibility based on the cost of living index, holding it may have consequences. The employee may struggle to sustain themselves, leading to decreased productivity.

Halting increments and DA without notice or sharing reasons is a bad HR practice. At the same time, an increment is not a matter of right unless the rules state that the increment is drawn as a matter of course and won't accrue if there is a specific order to that effect. The matter has to be examined further based on your rules.

DA Withholding

Is DA being withheld wholly, or is it only the DA consequent to the increment? Total DA withholding is illegal and inhuman.

If an employee's basic pay plus DA is more than the minimum wages and DA, should the increased DA portion still be paid in that case? In our pay scale, we maintain basic and DA levels much higher than those prescribed by the government. Every year, we conduct a review at the time of increments.

The Logic of Paying DA

The logic of paying DA is to ensure that the employee will not suffer due to the increase in the cost of living. Suppose an employee is earning Rs 100, while the wages fixed by the government are Rs 90. If the government declares an increase in the DA to Rs 95, you are still above the statutory salary. However, the worker should already be budgeting based on earning Rs 100. When there is a rise in the cost of living, the employee may have to compromise on other priorities, which could impact productivity. This should not be allowed.

Thank you, Madhuji, for your kind reply. But herein lies the practical issue: if the present Basic + DA is, say, 12,500/-, and the employer is paying 15,000/-. Normally, DA increases between 300-500 half-yearly. Under these circumstances, what does the law say? Does the employer need to pay the increased DA?

According to me [practical approach], when salaries/wages are paid only as per government guidelines, i.e., minimum wages and DA, in that case, whenever it increases, the employer has to act accordingly. Even considering such an increase, if the basic and DA are already more than that, there is no need to give increased basic/DA. At the time of annual increments, employers normally make such decisions to avoid lapses in statutory compliance by framing the salary structure based on the last year's review.

Legal Considerations in Pay Reductions

Legally, what you say is right, but it is a legal issue. When you award a punishment of a pay cut, it should not reduce the DA part, though you can stop increments for two or three years (with cumulative effect or without cumulative effect as decided by you). However, when it comes to fixed DA, which is always a percentage of the basic pay, it would reduce to the extent the basic pay is reduced. I still doubt if the variable Dearness Allowance, being a compensatory allowance to compensate for price increases, can be denied to an employee even if the total emolument is above the statutory salary.