Reduction in wages or working days for cost reduction - Not legally tenable

wages and workSalary being a major expenditure for any company, during financial crisis they usually opt for means like pay cut or job cut for cost reduction. Pay cut is a more preferred option as the company while reducing the expenditure can retain its valuable employees. Pay cut is also preferred by companies to avoid payment of retrenchment compensation in event of job cut. Also, employee’s morale is maintained as they are protected against adversities that may follow due to job cut in case of retrenchment. Such salary cut may be through direct reduction in wage/salary of employees or reducing the salary in accordance with reduction in working hours or working days.

But are such salary cuts or reduction in payment on account of reduced working hours or work days, legally tenable?

In India, the Industrial Disputes Act, 1947 (the Act) governs such arbitrary reductions in salaries/wages of employees. Section 9A as read with Schedule IV attached to the Act provides that any such reduction in salary/wages or work time or days will amount to change in conditions of service. As per the Act, no such change can be effected without furnishing concerned workers with 21 days notice prior to such change.1

Even if such notice is provided the employees likely to be affected do have an option to refuse to accept such changes. They can raise an industrial dispute challenging such change in condition of service. However, a better alternative here could be convincing the employees to accept such change after appraising them regarding the unpleasant financial conditions of the organization. To provide it a legal sanction any such reduction in salary and working hours should be effected only after working out a mutually beneficial agreement between employers and employees.


- Palak Lotiya (views expressed in the article are that of the author)


1It is to be noted that these provisions are not applicable where such reduction of salary/wages follow as penalty in pursuance of any settlement award.


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