Minimum Wage Policy Guide

The four labor codes subsume 29 legislations. The purpose of each of these regulations was varied and hence the definition of wages under many of these regulations was also different. The codes are aimed at unification, simplification, and consolidation of these regulations, and hence have a common approach, which includes having a uniform definition of wages across all these regulations.

This is a significant change, and while the intent of having a singular approach is welcome, it would mean that the industry needs to analyze and understand the impact of the same under each of these subsumed legislations.

The term "wages" as defined under the codes today, envisages that "all remuneration" provided to the employee is to be considered, and is subject to certain specified exclusions, such as statutory bonus, conveyance allowance, travel concessions, housing benefit, or house rent allowance, contributions to PF and pensions, overtime, commission, etc.

The government has come out with a new and universal definition of ‘wages’ to bring in parity amongst the four new Labor Codes as against the varied definitions under the extant laws. The new Labor Codes are likely to be effective from April 1, 2021.

According to tax experts, one of the most pertinent amendments introduced in the four new Labor Codes is the standardization of the definition of ‘wages. Currently, multiple definitions have been specified in the different statutes for calculation of Provident Fund (PF) contribution, gratuity liability, statutory bonus payment, maternity benefit, etc. which has led to practical challenges in the administration of salary structures as well as payments, contributions, and deductions to be made.

Further, the interpretation of the term’s wages/ basic wages etc. has been an ongoing contentious issue for employers. Hence, an attempt seems to have been made for harmonization and simplification in defining the very foundation of calculation of quantum and eligibility of various social security-related benefits.

“The new definition now has three parts to it — an inclusion part, specified exclusions and conditions which limit the quantum of exclusions. The new definition is inclusive and is extremely wide in its coverage. Practically, it could include almost all the components of the compensation mix of an organization. There is an exhaustive list of components which are specifically excluded under the definition. The specified exclusions, however, shall not exceed 50 per cent of all remuneration, and in the event of exceeding, such excess amount shall be deemed as remuneration and will be considered as “wages”. In case an employee is given remuneration in kind, the value of such remuneration up to 15% of total wages payable to him shall also be deemed to form part of wages of such employee,” says Parizad Sirwalla, Partner and Head – Global Mobility Services, Tax, KPMG in India.

Thus, “under the new definition, 50 % of total emoluments will now be regarded as wages even where the specified exclusions, such as HRA, overtime, commission, conveyance, employer contribution to PF, etc., are greater than 50 % of such total. Besides this, the new Code also provides for gender neutrality, early payment of salary, guidance towards working hours, days of rest, payment of overtime, minimum wages, statutory bonus, etc.,” says Sudhakar Sethuraman, Partner, Deloitte India.

It is important to note that some of the wage thresholds for the coverage of employees under existing social security benefit schemes such as Bonus, PF, Employee State Insurance (ESI) have not yet been notified by the Appropriate Government in the new Codes.

Whatever be the case, this change in the definition of wages will have an impact both on employers and employees. This could potentially lead to an increase in the liability of payment of a contribution towards PF, ESI and various other benefits. There may also be an increase in the coverage of employees in the organization and many of the currently excluded employees may now come under the purview of such labour laws/ social security benefits.

Thus, while the Wage Code aims to benefit the worker group at large, the salaried employee class may have mixed feelings with a likely cut in their take-home and increased retirals. Let’s take a sneak peek into some of the aspects of the new Code on Wages that would be of interest to the salaried class:

1. The new definition of wage could expand the base for computing the retiral benefits like gratuity, PF, and other benefits like leave encashment, etc. “As employers are set to rejig the salary structure and factor in the increased retiral costs into the salary package under Cost to Company (CTC) model, the take-home pay could be impacted. While this may reduce take-home pay in the immediate go, it will compensate employees with higher corpus in the retiral funds in the long run.

2. Employees joining an organization during the month will now receive salary by the 7th of succeeding month without having to wait until the next pay cycle. Also, employees leaving an organization would be able to receive a salary within two working days from the date of resignation.

3. Employees are entitled to a substituted rest day in the event they are required or allowed to work on the rest day along with pay calculated at double the regular wages.

4. Employees will be assured of non-discrimination on the ground of gender at the time of recruitment and also for payment for work of the same or similar nature.

5. Deduction from the salary like recovery of housing rent, loans, or towards absence from duty, or fines, etc. cannot exceed 50% of wages.

Thus, as the Wage Code regulates the wages and bonus payments in all employments and has broad-based applicability, both employers and employees need to understand the nuances and impact of the new law.

Tax experts, however, say that although the intent is a simplification as well, there are various aspects even under a new definition of wages (e.g., definition of remuneration in kind, the inclusion of variable pay, valuation rules for remuneration in kind etc.) which need to be clarified and addressed before the implementation of the new codes.

Since the salary is understood in terms of cost to the company (CTC), in the private sector, in which even the employer’s contribution to EPF is also considered to be part of the CTC. Keeping the basic salary to bare minimum level keeps employer and employee both happy without the employee realizing its long-term implications. To simplify and consolidate the various labor legislations, the government has introduced four codes collectively known as labor codes. These codes have put a cap on the quantum of allowance which can form part of salary about the basic salary. This single change in the definition of wages i.e., salary in labor laws will have significant impacts on the employees in the long run. Let us understand the provisions and its implications on the employees.

What will change once the code comes into effect?

For the computation of various benefits to the employee, all four codes have a common definition of wages. To ensure that the various component of the salary of an employee is not arbitrarily structured to minimize the cost of the employer when it comes to providing various retirement-related benefits, the law has put a cap on the various allowances which can form part of the salary. Under the code, salary must be structured in such a way that various allowances shall not be exceeding than 50% of the salary of the employee. Any excess shall be treated as part of the basic salary. In other words, the aggregate of the basic salary and dearness allowance shall not be less than the various allowances. These allowances may be called by any name whether special allowances or any other name. There is no blanket ban on the payment of special allowance but the aggregate of all the allowances shall in no circumstances exceed the amount of basic salary and dearness allowance taken together. The allowances may include commission, HRA, conveyance allowance or travel allowance etc. Even the contribution made by an employer towards EPS and pension account of the employee will be considered while computing the threshold limit.

Your current take-home salary vs your new take-home salary.

Let’s suppose your current salary is Rs 2 lakh a month, and the basic salary is Rs 80,000. That means, your salary reaches 2 lakh by taking into account allowances, etc. So, the employee and the company contributed PF at 12-12 per cent or Rs 9,600. So, your take-home salary before tax is Rs 1,91,400. We are here assuming that there is no other deduction.

When the new wage rule or pay rule comes into force, the basic salary will go up to Rs 1,00,000. Therefore, the total PF contribution will be Rs 12,000. So, the take-home salary before tax will be Rs 1,88,000 a month, which is Rs 3,400 less than the previous salary.

Now, let's say you pay Rs 40,000 as EMIs every month. After the new salary structure, you will be left in your hands Rs 1,48,000, while according to the old salary structure, you will be left with less salary in your hand as compared to your previous salary. 

In such a situation, you cut SIP, PPF or NPS to balance expenses or reduce your daily expenses. SIP is not to be cut but take a decision only after consulting your financial advisor. As for spending cuts, you must control it to some extent. 

The take-home salary of employees working in private companies will reduce from April 2021 because companies must change the salary structure of employees with regards to the new wage rules. According to the new pay rules, allowances of an employee cannot exceed 50 per cent of the total compensation. The basic pay of the employee will be 50 per cent or more from the total salary from April 2021. 

Usually, most companies keep less than 50 per cent of the non-allowance part of the employee's salary so that they must contribute less to EPF and gratuity and reduce their burden. But after the new pay code is implemented, companies will have to increase the basic salary. This will reduce the take-home salary of employees but increase PF contributions and gratuity contributions. Also, the employee's tax liability will be reduced, as the company will add its PF contribution to the employee to its CTC (Cost-To-Company).

 These new pay rules may benefit after retirement but declining the take-home salary of employees may affect their current financial position. They will have lower cash in hand than they did every month. This can worsen the household budget, loans, SIP, etc. Usually, 40 per cent of the salaried class goes into paying EMIs, including home loans, car loan EMIs. It can be difficult to manage if the take-home salary is reduced by 10 per cent according to the new pay rules.

References used:

1. https://www.jobmonkey.com/employer-insights/pay-employees-salary-or-hourly/
2. https://economictimes.indiatimes.com/news/economy/policy/new-wage-rule-may-raise-india-inc-costs-from-april/articleshow/79616790.cms
3. https://www.businesstoday.in/opinion/columns/new-wage-code-expect-a-reduced-take-home-salary-from-april-2021-but-its-not-all-bad-news/story/424626.html