Can Basic Be Decresed ? Is It Legal ? - DOC Download

Our organization is undergoing a revision in the salary structure. Under the new system, there is a probability that for a few employees, the basic salary may decrease from their present basic salary, though their gross will either not change or may increase. The employees so affected are also okay with the change.

I want to know whether this is okay as per the law or not because PF/Gratuity etc. will be affected. Can there be any problem from the PF authorities, or will it violate the law? In this regard, please be informed that in the appointment letters of all the employees, it has been mentioned that there may be changes in policies, including compensation & benefits policy of the company from time to time, and the same will be binding on the employees.

Please shed some light on it.

Thank you.

Regards,

Soma.

Hi Soma,

As per PF Law, your monthly contribution should not be reduced in any month (except for absences). Doing so will lead to a PF inspection, based on which you will be considered a defaulter and asked to pay the difference amount with a penalty. This may also cause issues when calculating bonuses, leave encashment, gratuity, and their submission.

Companies often include clauses in the appointment letter that favor their system, however, compliance is not just a policy but a legal requirement that must be followed by all individuals, firms, and proprietors.

Regards,
Nilesh CB

Mr. Nilesh,

Thank you very much for the response. Will the same be applicable if the employee is on a fixed-term contract and we issue him a fresh contract with the revised structure where the basic comes down?

Regards,
Soma.

Dear Somadas,

Section 72 of the ESI Act and Section 12 of the EPF Act restrict employers from reducing wages, which results in a reduction of contributions. The best way is to treat the amount of difference in basic as personal pay at par with the basic for the purpose of EPF, ESI, Bonus, Gratuity, etc., until the next revision or compensation policy.

VARGHESE MATHEW
09961266966

Dear Somadas,

If I understood correctly, your employer is "restructuring" your salaries, "reducing the Basic" but without reducing the overall Gross Salary. Am I correct? If yes, there is nothing wrong, except for caution where certain benefits are calculated based on a certain percentage of the "Basic Pay," and some seniority issues may arise when based on Basic pay. If these are taken care of, it's okay only when you are not losing anything that is already in vogue. Probably we can judge impacts better if you can provide us with the pre-revised and revised structure for a juxtaposed study of the proposal.

Kumar.S.

Dear Soma,

In case of, and only in the case of Fixed Term Contract employees, a change in wage structure may not pose any problems. However, ensure that both parties have agreed to it willingly, and that the new contract has been drawn up in lieu of the earlier one which stands terminated upon mutual consent.

Warm regards.

Please note that reducing basic salary is not legally acceptable. Basic salary is an important component of total compensation, as all statutory deductions are calculated based on the basic salary amount.

Jayaraman

Dear Soma ji,

I endorse the response by Nilesh ji, Varghese ji, and Jayaraman ji. I do not agree with the views of Kumar ji and Raj Kumar ji, with all due respect to them.

You cannot reduce the basic component of any employee, even if they agree to it willingly. The basic component cannot be reduced under any circumstances, except in the case of a decrease in DA due to a fall in CPI, which is very rare.

You may want to try increasing only the Special/Other Allowance component and NOT changing the basic salary going forward while increasing the CTC, until the basic salary percentage of the gross salary comes down to the percentage you have decided now.

Dear Keshav,

Thanks for your input, and accordingly, I stand corrected.

My comment was ONLY restricted to Fixed Term Contract employees, wherein the tenure and the emoluments are totally based on negotiations.

I do not have any first-hand experience of any situation where there has been a reduction in basic pay of employees (except a few cases by way of PUNISHMENT by the Competent Authority consequent upon departmental enquiries and findings). Such cases are there aplenty in PSUs and Government service also.

However, I know of a case of an FTC consultant whose contract was terminated midway. Later on, a new contract was drawn up with much lesser emoluments.

Therefore, I request you to please reconsider your statement:

"You cannot reduce the basic component under any circumstances except in decrease of DA due to a fall of CPI which is very rare."

Moreover, DA is an entirely different component and not a part of Basic Pay. That is the reason one finds both of these mentioned separately but together, like Basic Pay plus DA.

However, I agree with the gist of you and others' statement on the reduction of basic pay. The exceptions are only there to prove the General Rule.

Warm regards.