Is Merging Allowances and Reducing HRA Fair? Seeking Advice on Labor Concerns

Dear Sir, I have a query regarding the HR department: suppose in the laborers' salaries, the following accounts were included: basic, HRA, education special allowance, and allowance (DA), and at that time, HRA was given at 15%. However, through some internal policy, the management has merged the education allowance into basic and special allowance, and reduced the HRA to 5%. Could there be any issues with this, considering that the workers have benefited in PF due to the increase in basic?

Secondly, the laborers have complained to the labor office about the merging of allowances. The labor officer believes that this should not have been done.

Questions Regarding Allowance Merging

(1) Did the management do the right thing or wrong thing?
(2) If it was wrong, in which act does it say that merging cannot be done?
(3) And if merging is not allowed, in which act is it stated that merging cannot be done?

Please give me suggestions.

Sanjay

Merging Allowances into Basic Salary

Normally, merging allowances into the basic salary should be welcomed by employees and their unions because it is on the basic wages that retirement benefits like gratuity are calculated. When companies try to increase the House Rent Allowance (HRA) and reduce the basic pay, the policy of your company is a positive employee welfare activity.

Legal Requirements for Salary Structure Changes

However, legally, whenever such changes are made, the employer is expected to issue a formal notice under Section 9A of the Industrial Disputes Act. This is because the salary structure, being one of the conditions of service, requires a 21-day notice when changed to be given to the employees. Otherwise, there is no illegality, especially when there is no reduction in the take-home pay or contributions payable by the employer towards bonuses, Provident Fund (PF), gratuity, etc.

In this case, the take-home pay might have been reduced as allowances were merged with the basic salary, resulting in the workers' contribution to PF also increasing. The take-home pay of the workers should have been protected.

Sir,

What I understand is that I have calculated the salary of laborers before and after the merger.

Before Merger:

Basic Pay: Rs 100
PF: Rs 8.33
Education special allowance (5%): Rs 5
HRA (15%): Rs 15
DA (50%): Rs 50
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Gross salary: Rs 170.00
Deductions: Rs 8.33
Net Salary: Rs 161.67

After Merger:

Basic Pay: Rs 105
PF: Rs 8.75
HRA (5%): Rs 5.25
DA (50%): Rs 52.50
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Gross Salary: Rs 162.75
Deductions: Rs 8.75
Net Salary: Rs 154

Is there any mistake? After the merger, the take-home salary is less than before the merger. For calculations, I assumed a 5% education allowance and 50% DA.

Please let me know if you require any further clarification.

Impact of Merger on Gross Salary

With this merger, the gross salary is reducing, and that is not permissible. I have already said that there is no illegality as long as the salary does not reduce. But in this case, though the basic pay increases, the gross salary comes down because of a drastic reduction in the HRA. HRA was 15%, which is now made 5%. That should be retained. How is it possible for an employee who is paying 15% of his wages as HRA to get accommodation at 5% rent? No, that is not possible. You can increase the basic salary, and that is welcomed. But at the same time, you should either increase the gross salary or maintain the gross salary. Even if the gross salary is maintained (it can be maintained by putting the same HRA and dearness allowance not as a percentage but as an amount), there will be a reduction in the take-home salary, but that is not an issue because along with their contribution to PF, the employer will also make an increased contribution to PF, and ultimately, it will only benefit them.

Consideration of Allowances for PF Contribution

Let me ask another question. Why are DA and Education and Special allowances not considered for deduction and contribution to PF? If Education and Special allowances are not paid to all employees, then they can be excluded for PF, but you cannot exclude the DA from the PF contributing salary.