Clarity in compensation

Compensation packages are one of the key reasons for driving or even derailing performance, especially in the corporate sector. Designing a lucrative compensation structure is complex. While a high CTC may look appealing, the in-hand salary may be less impressive.

CTC is a term that represents the total cost incurred by the company on an employee. It includes various components such as basic salary, allowances, performance-based incentives, retirement benefits, etc. It involves direct benefits, i.e., the sum paid to an employee on a yearly basis, which is the take-home salary, subject to government taxes; indirect benefits such as the amount an employer pays on behalf of the employee, saving contributions; social security to which an employee is entitled, fringe benefits, and other components, etc.

Salary structures are generally bifurcated into various components such as basic, dearness allowance, special allowance, city compensatory, conveyance, LTA, HRA, and so on. Nowadays, companies also have the concept of a flexibasket, wherein a flexible benefits plan is designed with the objective of saving tax. For instance, certain elements such as petrol, car lease, children’s education, medical, travel, food coupons, etc., are put into a flexible basket, dividing it into a certain percentage. Employees may choose these ingredients as per their requirements and even present invoices to avoid tax benefits to a large extent.

Companies often ponder on the amount Provident Fund should be deducted and deposited. At times, businesses keep basic and DA at a very low percentage of the total salary package to avoid Provident Fund under the Employees Provident Fund and Miscellaneous Provisions Act, 1952. This provides only short-term benefits. The matter becomes high-stakes and complex when statutory authorities issue notices at the time of inspection, seeking a backlog of the principal amount, interest, and damages, terming the bifurcation as camouflage. It is pertinent to note, close perusal of the Employees’ Provident Fund Scheme and certain judgments of the Supreme Court have pronounced that if PF is deposited on Rs 15,000, which is the threshold prescribed under the PF Scheme, then authorities cannot seek deposition on a higher amount, even if basic goes beyond the said level. In case authorities raise demands for deposition of PF on other allowances, which are beyond Rs 15,000, the same can also be defended. However, all this is to be seen on a case-to-case basis. It is worthwhile to add that the New Labour Codes, which are yet to see the light of the day, have defined at least 50 per cent of the wage structure to be basic. Gratuity, as per the law, can be capped at the statutory limit. Furthermore, as per the statutory provisions, an employee is required to complete five years of service before being entitled to gratuity. Of course, in case the companies wish to pay more than the cap or even before completion of the statutory period, they can always do so. All this, however, should be clarified in the contract or CTC rather than leaving scope for interpretations with ambiguously drafted CTCs.

The number of leaves, carrying forward of the same to subsequent years, leave encashments, etc., should also be clarified in company policies. The clause for notice/notice pay on resignation, termination, etc., should also be clearly drafted. This cannot be less than statutory provisions such as the Shops and Establishments Act, Factories Act, or other such enactments as per applicability.

If an employee is seconded to another company, the best option is to issue a fresh appointment letter from the new entity after taking resignation from the current one and up-to-date clearing of all dues. Alternatively, carry forward his dues to the seconded entity with a confirmation letter from the said entity. There can also be a tripartite agreement between the old employer, new one, and the employee. Generally, transfer from one entity to another has to be done only with the consent of the employee.

Decisions about pay have an impact on businesses and the economy as a whole. When compensation is defined and managed carefully, it positions employee performance with the company's strategy and generates better performance. It is important to correctly and clearly lay down the amount and perks. There should not be any scope for ambiguity. Accurate knowledge of provisions and clear terms can avoid litigations between employer and employee. Not only this, companies will also be on a strong legal footing before statutory authorities, some of whom are well known for their "Inspector Raj".

The writer is a practising Advocate in Supreme Court and High Court of Delhi. Views expressed are personal