Article (May-2020)


Reducing employee cost post Lock down: Legal options

Deepanjan Dey

Designation : -   General Manager-HRM

Organization : -  Tata Steel BSL Ltd., Angul, Odisha


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Corona Virus (Covind19) has generated a phase of uncertainty and anxiety in business all-around. Even before the onset of this pandemic, the global economy was witnessing turbulence on account of disruptions in trade flows and attenuated growth.  The pandemic has aggravated the situation and now the survival of many industries are at stake. As per the report of the KPMG "the shape and speed of recovery in the US and China will be key factors determining the nature and traction of Global economic recovery". According to this report India real GDP has decelerated to its lowest in over six years in 3Q 2019-20 and due to the outbreak of this Covind 19 the "three major contributors to GDP - private consumption, investment and external trade will get affected". The report estimates under various scenarios the GDP of India can range in between 5.3 to 3 percent. Hence, industries small, medium, big all need to think out of box during this unprecedented time in order to survive and generate cash flow to stay afloat during these trying circumstances. Apart from innovating, reducing cost in all aspects including wage cost will be the focus of the industries. Cutting or reducing wages of the employees is not a healthy scenario for any industry. However, especially the small and medium scale industries might not be able to insulate from this grave and challenging situation the pandemic has inflicted. These industries might not have any other alternative but might be perforce to reduce the wages of their employees or cut down on jobs till the economy recovers from the onslaught of the global recession which got further aggravated by the pandemic. Reduced wages will be a better option rather than job loss and this viable option can be win-win for both the industry and its employees. This article attempts to explore legally viable option before the industries to tide over the situation without cutting down on jobs. Hence options like retrenchment, termination simpliciter are not discussed. The objective is to explore options for cutting employee cost without such harsh measures like retrenchment, discharge or termination simpliciter. Rather than getting into the aforesaid harsh measures the employer can explore the following legally viable options:

Lay Off- Lay-off in terms of the provisions of the ID Act can be one option to reduce employee cost.

Lay Off is defined in section 2 (KKK) which reads as follows:

"lay-off" (with its grammatical variations and cognate expressions) means the failure, refusal or inability of an employer on account of shortage of coal, power or raw materials or the accumulation of stocks or the break-down of machinery or natural calamity or for any other connected reason to give employment to a workman whose name is borne on the muster rolls of his industrial establishment and who has not been retrenched;

There is an explanation to this proviso but not being reproduced as the same is not required for the purpose of our discussion. A bare reading of the proviso makes it clear the reasons on what ground the employer may refuse to give work. However, employers need to keep in mind that financial stringency cannot be the ground for lay off (ref Hope Textile Ltd. Vs. State of Madhya Pradesh 1992 LLR 795). In terms of section 25 C of the ID Act a person who has been laid off will be eligible for fifty percent wages which comprises of basic and dearness allowance. The person name should be borne in the muster roll of the Company and should have worked for a period of one year.

However, this is a viable option for employers employing less than hundred workmen but more than fifty as they are not required to obtain prior permission from the appropriate Government.  Some State Government has amended the Industrial Disputes Act and has increased the number to three hundred for which no permission is required to be obtained from the appropriate Government. Hence, respective state amendment, if any, should be referred to before deciding. Industries to whom chapter V B applies cannot take the advantage of this proviso without obtaining permission from the appropriate Government in terms of section 25M (1) of the ID Act. In Papnasam  Labour Union Vs Madura Coats Ltd 1995 1 SCC 501: AIR 1995 SC 2200: 1995 LLR 97 the Supreme Court has held that permission for laying off the workers by an establishment employing above 100 workmen will be mandatory under section 25 M of the Act. History bears testimony to the fact that governments are reluctant to grant approval to lay off. The Trade bodies and Associations will do well to give written representation to Governments to grant permission for lay off application under the prevailing unprecedented situation and help industries to survive.

Notice under section 9A- Issuing a notice under section 9A of the ID Act for reducing wages can be the other option for employers. Section 9 A of the ID Act stipulates to give notice of 21 days by the employer who intends to effectuate change in service condition specified in the fourth schedule of the Act. The fourth schedule item 1 of the said Act deals with wages including the period and mode of wages. In Smita Yohan Godbole V The state of Maharastra , 2015 LLR 880 it was held by the Bombay High Court that notice under section 9A of the Industrial Disputes Act is imperative on reduction of salary. (Also refer T. Rajamanickam V Binny Ltd. (B& C Mills) Madras, 2009 LLR 323 Mad HC & Sikh Educational Society V Presiding Officer, Industrial Tribunal cum Labour Court 2011 LLR 159). Hence, putting a notice under the said section is sine qua non for any reduction in wages and can act as a defence in case of any legal challenge from any statutory authorities or disgruntled section of workmen.  The other option is to engage workmen on a rotational basis intermittently so that all remain engaged, but the wage outflow will be reduced. The workmen can be allotted job thrice or even twice in a week in a shift depending upon the situation on ground and this may continue till the business is put on track. However, such arrangement ideally needs a notice under section 9A of the ID Act as item 6 in the fourth schedule of the Act reads: " Starting alteration or discontinuance of shift working otherwise than in accordance with standing Orders".

Settlement with the Union- In case of a unionised environment employers can explore the option of a settlement both under section18(1) or 18 (3) under the Industrial Dispute Act for reduction of wages or intermittent working on rotational basis for a short duration still the business is put on track. The Allahabad High Court in Uttar Pradesh State Sugar Corporation Unit Munerwa V. Ram Nain Singh 1999 LLR 41 has held that Settlements under ID Act, are sacred and bind the parties unless procured by fraud. The settlement under 18(1) are made at a bi-partite level and 18 (3) at a tripartite level. In case of multiple union, a settlement under section 18 (3) will be more effective. As the matter is sensitive the labour machinery of the state may not be willing to get involved in such settlement. On the contrary they may even discourage and question the veracity of such settlement. Further, getting the union to agree to sign such document is easier said than done. Nevertheless, in view of the unprecedented situation rational union may agree to logical proposal of the management for the survival of the industry which will be only beneficial to workmen. Even if the majority union signs the settlement under 18(1) it will also suffice. The Karnataka High Court in the case between Mysore Kirloskar Mazdoor Sangh V. Management of the Mysore Kirloskar Ltd 2000 LLR 872 kar. HC has held that a settlement with the majority Union will be binding upon the workers. In terms of the proviso laid down in section 9A of the ID Act, in the event of a settlement no notice is required to be given under said section.

4. Employees beyond the scope of the ID Act- Every industry does have a cadre whom they consider as executive or officers. For any pay cut for this cadre the best way is to make proper communication in order to instil confidence and keep the morale high. How we communicate and what we communicate is of prime importance as any pay cut will apparently going to hit the morale of an employee. Hence, a regular channel of communication to percolate the message how the company need the employee during the hour of crisis and make the employee feel wanted and important are very important to keep the engagement level of the employees high. It is very important to ensure that any proposal of pay cut should appear as a collective decision of all employees of this cadre rather than a unilateral decision of some person or board.

Caveat- It needs to be borne in mind that an employee who is in executive cadre will not be automatically be out of the purview of the ID Act. Any disgruntled executive owing to pay cut may lodge a complaint to the Labour department and the executive concerned might be treated as a workman under the ID Act. In terms of the section 2 A of the ID Act individual workman can raise a dispute only in case of discharge, dismissal, retrenchment and termination. Hence, individual complaint for pay cut will not fall within the ambit of Industrial Dispute. However, it cannot be ruled out that any union on behalf of the executives or a section of executive together can file a complaint before the Labour Directorate. In Kulwant Singh V. Reliance Petrochemicals Ltd 2000 LLR 895 (Bom HC) it was held that mere nomenclature of the post is not the crucial test to decide whether the employee is a 'Workman' or not. It is a settled principle of law that unless an employer proves that the employee is employed in supervisory capacity, the employee will be treated as a 'Workman' (ref Keshod Nagar Palika Vs Pankajgiri Javergiri, 2000 LLR 416 Guj HC). Hence, obtaining a written consent from individual executive on a revised wage format will be expedient as the employment of this cadre in general is governed by the terms and condition of the appointment letter and service rules, if any. Further, exploring option of putting a notice under section 9 A of the ID Act even covering the executive will be judicious enough to circumvent any legal action in future.

The other thing that the employer needs to bear in mind is to see that any pay cut of the workman should not fall below the minimum wages in case the industry is covered under the scheduled employment under the Minimum Wages Act. The Supreme Court in Bijay Cotton Mills Ltd vs The State Of Ajmer 1955 AIR 33 has inter alia held "the employers cannot be heard to complain if they are compelled to pay minimum wages to their labourers even though the labourers, on account of their poverty and helplessness, are willing to work on lesser wages". On similar lines the Apex Court in case between Crown Aluminium Works vs Their Workmen 1958 AIR 30 has inter held that "if an employer cannot maintain his enterprise without cutting down the wages of his employees below even a bare subsistence or minimum wage, he would have no right to conduct his enterprise on such terms." It will be interesting to note that in this judgment the Apex Court has also inter- alia held that "If the wage structure in question falls in a higher category, then it would be open to the employer to claim its revision even to the prejudice of the workmen provided a case for such revision is made out on the merits to the satisfaction of the tribunal".

While revising the salary or wages, another question that arises as to how to effectuate Provident Fund Contribution. In this connection if we refer to section 12 of the EPF and Misc Provision Act 1952 it reads as follows:

"No employer in relation to an establishment to which any Scheme or the Insurance Scheme applies shall, by reason only of his liability for the payment of any contribution to the Fund or the Insurance Fund or any charges under this Act or the Scheme or the Insurance Scheme, reduce, whether directly or indirectly, the wages of any employee to whom the Scheme or the Insurance Scheme applies or the total quantum of benefits in the nature of old age pension, gratuity provident fund or life insurance to which the employee is entitled under the terms of his employment, express or implied".

Now the moot question that arises as to whether Section 12 of EPF Act will act as bar for reducing the wages. In the case between Marathwada Gramin Bank Karamchari Sanghatana and Another Vs Management of Marathwada Gramin Bank and Others AIR 2011 SC 3567: 2011 LLR 1130 (SC) a similar question arose wherein the respondent bank, owing to huge accumulated losses, issued a notice of change under section 9A of the Industrial Disputes Act, 1947 expressing its intention to discontinue payment of provident fund in excess of its statutory liability but would continue to contribute towards Employees Provident Fund according to the statutory liability. The Provident Fund Commissioner issued a letter informing the respondent bank that it cannot withdraw the benefit of paying matching employer's share without any limit to wage ceiling and directed it to continue extending the same benefit as was granted prior to such reduction. Thereafter, the Central Government made a reference of the dispute to the Central Government Industrial Tribunal, Nagpur. The said Tribunal relied on Section 12 of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and held inter alia that the management cannot reduce, directly or indirectly, the wages of any employee. However, the High Court was of the opinion that Section 12 of the EPF Act, will operate as a bar in case the same is the term of employment expressed or implied. In the instant case, the express term of employment accepted by the employees is that contribution to the provident fund shall be in accordance with the provisions of the 1952 Act. The High Court thus observed that the bar of Section 12 will not operate as otherwise held by the Tribunal in the impugned award. The Supreme Court concurred with the judgement of the High Court and inter alia held Employer need not pay provident Fund higher than prescribed limit under the Act & the scheme.