Does Basic Salary need to be 60% of Total?

Terms like “Gross Pay”, “Cost to Company”, “Allowances”, “Deductions” etc get thrown around by folks in different circumstances during employment. Employees naturally get confused. In this blog, I will attempt to delineate the term “Basic Salary” and the legal provisions associated with the term in order to uncomplicate this unnecessarily complicated term.

Firstly, let’s understand the meaning of some terms used in the Labor Act and Bonus Act.

• Labor Act 2074, Section 2(Ka): Basic Remuneration means the basic remuneration for employment received by the labor and the term shall also include annual increment in remuneration.
  The amount of increment in remuneration each year shall be equal to the half day’s remuneration of the concerned worker or employee. Meaning, with every passing year, a grade of Rs. (Basic Monthly Salary/30)×(1/2) is added to the monthly basic remuneration payment under Section 36 of the Labor Act 2074.
• Labor Act 2074 Section 2(Jha): Remuneration means the basic remuneration received by the labor and the term shall also include allowance.
• Bonus Act 2030 Section 2(gna): Salary or Wage means any kind of remuneration receivable by an employee in cash for the work done in an enterprise. Provided that, this term does not include any other amounts to be obtained by an employee for electricity, water supply, medicine, travel, bonus, provident fund or subsidies.
  As per the definition provided in Bonus Act, Salary or Wage means remuneration but it excludes any allowance, bonus, or social security contribution. Essentially, Salary or Wage simply means Remuneration other than allowances.

The above definition tries to provide a technical definition of the term “basic salary” but what exactly is the spirit and concept of basic salary? Let’s take an example to understand this better. There is one office that provides vehicle facility to employees to pick them up during the mornings and drop them to their places at the end of their workshifts. Traveling to the office is a minimum cost that every employee has to bear so when the office is providing this facility to employees, the employees get benefits in kind. In a pure economic sense the cost of picking and dropping employees nearer to the factory is low whereas some from rather long distance may be higher. But the facility is not seen as non-equitable just because some employees live closer or farther from their factories. Let’s say the entity decides to drop the inhouse pick and drop facility and rather compensate employees in monetary terms. Obviously the transportation allowance that is given in this form would mean that employees closer to the factory will receive a transportation allowance that is lower than the employees living farther from the factory – despite having the equal basic salaries. In the example, let’s assume that the entity also in the past provided factory quarters to the families of the workers which they decided to drop and provide monetary allowance instead. In this case the workers living closer to the factory may have to pay higher rents than the workers living farther from the factories and their rent/housing allowance could differ potentially. But what about the basic difficulties that are borne by the workers living farther from the factory have to face due to transportation cost, market unavailability, remoteness etc. This may require the workers living farther from the factory area may need an additional dearness allowance to be provided to them. Again, what about the basic medical checkups and bills that workers living closer to the factory need to face as a reason for the waste of the factory? It’s only fair that they receive some basic medical allowance against those. So as we can observe, setting salaries and allowance is a very complicated task and more often than not these differences will lead to employee dissatisfaction because everyone has their own expectations and assumptions. This complicates further when we are dealing with workers working in different designations, levels and seniority. Due to these complexities we have seen employers resort to a rather simple approach of determining the allowance amounts as a percentage of the total salary – which actually defeats the purpose and meaning of the term “allowance” but this is a quick solution to avoid any employee dissatisfaction. This is also one of the main reasons why modern companies and economies compensate employees on an hourly basis or work based compensation, altogether avoiding the need to allocate the total compensation into basic salaries and allowances in most cases.

So it’s quite complicated to equitability and logically break the total compensation into basic salary and allowances – so the allocation of total compensation into basic salary and allowances based on percentages is quite common as it is an easy way out to avoid these human resources and calculation related complexities.